After days of funny outfits and calculated vitriol in the campaign for President, two devastating pieces of economic news were revealed today.
Consumer gasoline prices are catching up with the rising price of crude oil—which has hovered around $100 a barrel for the last few days—and could reach $4 a gallon by summer.
“As of Tuesday, regular gasoline was selling at a nationwide average of $3.14 a gallon, according to AAA, the automobile club, up from $2.35 a year ago. The price has jumped 19 cents a gallon in two weeks,” reports the Times.
The exponential growth of gas prices is concurrent with creeping inflation.
The Labor Department reported that wholesale prices, which exclude taxes and distribution costs, rose 1 percent in January, in contrast to a drop of 0.3 percent in December 2007. Compared with a year ago, prices were up 7.4 percent. Excluding food and energy prices, which are more volatile from month to month, the index increased 2.3 percent from a year ago, up from 2 percent in December.
The latest inflation report appears to corroborate a broader trend of higher prices.
Last week, the Labor Department reported that the Consumer Price Index rose 4.3 percent last month from a year ago, compared with a 4.1 percent increase in December. The core rate of inflation — which excludes food and energy — was 2.5 percent, up from 2.4 percent. The Fed’s target for inflation is 1 percent to 2 percent.
Price increases, however, are not the worst news. Homes, the main asset of most working- and middle-class families, are rapidly losing value. The supply of homes is high while the market for them is uncertain because of chaos in the mortgage industry and all the other problems in the economy, including the consumer price increases described above.
A widely followed index of home prices in 20 metropolitan areas fell by 9.1 percent in December from the month a year ago. Using a three-month moving average, the index, the Standard & Poor’s Case-Shiller, is falling at an annual pace of more than 20 percent. The index tracks repeat sales of single-family homes; it does not include condominiums.
Another index of home prices that covers more of the country but does not track loans above $417,000 fell 0.3 percent in the fourth quarter from the period in 2006. The index, compiled by the Office of Federal Housing Enterprise Oversight, showed prices declining in all states, except Maine.
Even with prices falling, home prices remain out of line with wages in many parts of the country. A report by investment bank Credit Suisse concluded that home prices in some metropolitan areas—including Sunbelt boomtowns Phoenix and Miami—would have to decrease by 20 to 40 percent to be considered affordable.
This all adds up to one thing: people who aren’t rich are going to cut back on their spending. Most of the economic “growth” in this country in the last ten years has been based on this spending. The spending was sustained by two things: cheap consumer credit and illusory home equity. It’s one thing to have a house worth $600,000; it’s quite another to sell the house for that price on the open market. The “growth” was artificial because it did not include a key element of sustained economic growth: increased wages. Price increases have consistently outpaced wage increases. The only things that are becoming cheaper are things people can chose not to buy; probably those things are getting cheaper not because of increased efficiency or for any good reason, but because retailers are looking to dump them off at any price:
“The pressures are too great here,” said Seth B. Plunkett, a bond portfolio manager at American Century Investments, a mutual fund company. “Look at the things that are accelerating: food and energy. What is decelerating? It’s electronics and light trucks. These are not things that people buy every day.”
Reading between the lines
The Times article on gas prices contains two interesting pieces of information not entirely related to the point of the article.
The first is this:
[Phyllis Berry, a 31-year-old factory worker for General Motors in Cleveland] said that she used to take her four children to the movies four or five times a month. But with the cost of gas, tickets, popcorn and soda adding up to $70, they now go only once a month.
Economists rightly don’t like to rely on anecdotes, but this reflects my own experience. The costs of many things Americans routinely do—go to the movies, go to a ballgame, take a trip—are almost prohibitively high. There isn’t a lot of room for rising prices before consumers just cut these activities out. Seventy dollars is way too much for a family trip to the movies. If the big cinema chains and the studios don’t realize this, they are going to end up like the music industry: customers are going to find cheaper substitutes for their products. Consumers become more rational in tight times; they are going to realize they can watch a bunch of movies at home each month by subscribing to Netflix for $5 and cut out the trips to the movie theater unless the theater can offer them a bargain. Therefore, these non-essential industries are going to have to eliminate a lot of overhead if they are to survive a consumer spending slowdown.
And consider that Berry is paying $70 to take her kids to the movies in Cleveland; prices are almost always lower in the interior than on the coasts.
Also:
“An oil crisis is coming in the next 10 years,” John B. Hess, the chairman of the Hess Corporation, said at a recent conference held by Cambridge Energy Research Associates. “It’s not a matter of demand. It’s not a matter of supplies. It’s both.”
I’m familiar with the peak oil argument and the work of scholars who say such a crisis as Hess describes will occur; this, however, is the first time I’ve seen the head of a major American oil corporation say the same thing.
—Douglas Carlucci
