Will Surging Gas Prices Cause a Recession?
Drastic increases in oil prices have preceded recessions for decades, and many worry the current crisis in Ukraine is escalating fears history is due to repeat itself.
Most recently, oil prices soared in 2008 right before the last recession — although the subprime mortgage crisis was more to blame for the fallout than oil prices directly.
Another important economic indicator, the addition of new jobs, had also been steadily decreasing before the onset of the last recession in 2008. This time around, although oil prices have shocked the globe, things are not quite the same.
Payroll processor ADP recently reported that 475,000 private sector jobs were added last month, and economists project that at the worst of it, GDP will only have a few tenths of a percentage point taken from its growth rate as a result of the current crisis in Ukraine, CNN reports.
In fact, GDP, which is the broadest measure of economic activity, had its largest growth rate since 1984 in 2021. With robust growth and a strong labor market, oil prices might not have the same historic effect they have had in the past.
Russia’s current invasion of Ukraine has surged oil futures above $100 a barrel for the first time in 8 years. This means gas prices for customers in the U.S. could soon reach $4 a gallon at the pumps, but it might prove to be more of a nuisance than anything else.
While surging oil prices have preceded recessions in the past, the overall economic condition is different this time around. Inflation sits well above 7%, but has preceded an almost decade-long near-zero interest rate environment. The current labor market is also one of the strongest in decades, continuing the trend of the past year that has — for the first time in a while — seen too many jobs and not enough willing participants to fill them.
Another crucial element in preventing financial meltdown also resulted from the pandemic-era: increased savings. The past two years saw individuals awarded federal stimulus money while largely having nowhere to go, and this scenario produced some of the highest consumer savings rates in history. People have more money saved now, and perhaps more importantly have paid off more debt, than ever before.
“The percentage of disposable income spent on energy by American consumers is lower now,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott, to CNN. “So the price point that applies pressure to pocketbooks is higher.”
Learn: Global Food Prices Reach All-Time High in February, Spurred in Part by Russia-Ukraine War
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For the most part, the economy remains quite solid despite inflationary and geopolitical fears. With the Fed expected to relieve interest rate concerns in the near future, it might help to take some of the pressure off. However, the question going forward will be: How long will the U.S. economy be able to sustain itself if prices are only moving up?
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