Consumer Spending and Gas Prices

Much has been said about employment and housing with regards to economic recovery . However, as important as these items are, one should not forget consumer spending. While it is good for one’s personal economy to cut back on consumer spending, it does tend to cause problems for the wider economy, since 2/3 of our economy is dependent on the spending that you and I do . Gas prices can impact how much we spend in other areas of our lives, and they can impact general feelings about and confidence in the economy. James Surowiecki points this out in The New Yorker about gas prices, consumer spending and the economy :

Although there is no one-to-one correlation between gas prices and consumer confidence, a 2007 study by the economists Paul Edelstein and Lutz Kilian showed that, historically, sharp spikes in oil prices have sent consumer confidence plummeting , and have led to outsized cutbacks in general consumer spending. This makes sense: gasoline prices are the most publicly visible prices in the economy as a whole—no other prices are displayed on the street in bold, two-foot-tall numbers—so it’s not surprising that they have a disproportionate impact on the way people feel.

Gas prices have been relatively low recently, so they have fallen off the map a little bit. But that is changing. A rally in commodities may be underway, and that means higher oil prices. And higher gas prices. The American consumers may soon find themselves pessimistic about the economy. Add rising gas prices to unemployment that is expected to reach 10%, and to still-falling home values (even as mortgage interest rate move higher), and consumers — who have only recently been opening their wallets — may feel as though it is time to close them again.

Image source: Aaron Lawrence via Wikimedia Commons