Higher gas prices threaten economy

Associated Press

WASHINGTON

Inflation remains tame throughout the U.S. economy, with one big exception: gas prices.

Those higher prices haven’t derailed a steadily improving economy. But if they surpass $4 or $5 a gallon, experts fear Americans could pull back on spending, and job growth could stall, posing a potentially serious threat to the recovery.

And the longer prices remain high, the more they could imperil President Barack Obama’s hopes for re-election.

A few weeks ago, economists generally agreed that the economy was in little danger from higher gas prices as long as job growth remained strong. But fears are mounting that gas prices could begin to weaken consumer confidence.

The average pump price nationwide is $3.83 a gallon. Energy analysts say it’s bound to climb higher in the weeks ahead.

“It’s a thorn in the side of the consumer and businesses,” said Chris Christopher, an economist at IHS Global Insight. The economy this year “would have been better and stronger if we didn’t have to deal with this.”

So far, higher prices aren’t undermining the economic recovery, which is getting a lift from strong job creation. It would take a big jump — to around $5 a gallon — before most economists would worry that growth would halt and the economy would slide into another recession.

That’s because an improving economy is somewhat insulated from any threat posed by higher prices at the pump.

The risk is that gas prices eventually could slow growth by causing some people to cut spending on other goods, from appliances and furniture to electronics and vacations. Gasoline purchases provide less benefit for the U.S. economy because about half of the revenue flows to oil-exporting nations, though U.S. oil companies and gasoline retailers also benefit.

Many American businesses suffer, too. They must pay more for fuel and shipping and for materials affected by high oil prices, such as petroleum-based plastics. Profit margins get squeezed.

Even if prices ease after the summer driving season, don’t expect gasoline to fall below $3 a gallon. The government estimates that this year’s average will be $3.79, followed by $3.72 in 2013.

Most economists accept a rough guideline that a 25-cent rise in gas prices knocks about 0.2 percentage point off economic growth.

Gas prices also have an outsize impact on consumer confidence, Christopher noted. It’s a high-frequency purchase. Consumers notice the price whether they’re filling up or driving past a gas station.

Along with the unemployment rate and stock market levels, gasoline prices heavily determine how Americans see their financial health.

That effect was evident Friday when a decline was reported in the Thomson Reuters/University of Michigan index of consumer sentiment. The result surprised some economists who had assumed that higher stock prices and lower unemployment would lift consumer sentiment.

The Michigan report showed that “gasoline worries ... are outweighing stock market gains and job growth” when it comes to influencing consumer attitudes, said Michael Hanson, an economist at Bank of America Merrill Lynch.

The price of gasoline has climbed 17 percent since the year began — to a national average of $3.83 a gallon. That’s the highest ever for this time of year. A month ago, it was $3.52.

Gasoline prices have followed oil prices up. Oil is rising, in part, because of tensions surrounding Iran’s nuclear program. Iranian leaders have threatened to close a shipping route into the Persian Gulf. Experts say the standoff could lead to tighter global oil supplies later this year.

Contributing to higher gas prices is stronger demand from China and other developing economies.

Most economists expect gas prices to top $4 a gallon by May. That would drag on consumer spending and the economy.