Higher U.S. Gasoline Prices Crimp Miles Driven, and Economic Growth

Do higher prices for something modify behavior? Probably. Do higher relative prices affect demand for something, maybe by a lot? Yes indeed. Consumers will buy less of the affected item or service whose price is rising more than the prices for other goods or services.

Through this past May, retail gasoline prices over the prior twelve months rose 21%. For all other goods and services, prices rose 2.7%. That left the relative price of gasoline up a very significant 17.5%. The increase was especially notable since it followed a year-on-year gain through the twelve months ended last November of 33.3%. That's when retail prices first moved above $3.00 per gallon.

This rise in gasoline prices, along with slower jobs growth, dropped demand growth (the rise in vehicle miles driven) to -1.8% y/y after -0.8% growth last year. Those declines are versus positive growth rates between 1% and 3% during each year back to 1993.The figures on miles driven are available in Haver's USECON database.

By state the results are very diversified. Large year-to-year declines on the order of -3.0% have been logged in California, Florida, Virginia, Michigan, Wisconsin and South Carolina. Still growing were miles driven in Ohio, New Hampshire, New Jersey, Pennsylvania and New York. About unchanged were miles driven in Texas, Colorado, Connecticut, Delaware and Massachusetts. The figures on miles driven by state are available in Haver's REGIONAL database.

Ok, so what is it that consumers shifted their spending to? Here's the rub. It's not clear they could shift anything. Overall consumer spending growth through April, adjusted for inflation, fell to 1.6% y/y after 3.0% growth during the prior several years. And during the last three months the level of real spending was unchanged.

Consumers only can shift their spending pattern if they have money to shift. But there's been not as much of it. During the last year nominal disposable income growth moved lower to a 5.0% rate from roughly 6.0% during 2006 and 2007. Annualized three-month growth through April downshifted even further to 4.3%.

In real terms, disposable income during the last three months ran at a 1.5% annualized rate, half the growth during the prior several years. Much of the that slowdown is due to slower jobs growth. Respectable gains in nominal average hourly earnings helped this growth remain positive, but here again the news is bad. Nominal earnings rose at a 0.9% rate during the last three months and they were down during the last two.

How will all this finally shake out? In a bona fide economic recession. That is the conclusion of many and that certainly is the buzz in the popular press. But so far the Consensus opinion is that a recession will be skirted, but just barely. Positive real GDP growth, of just 0.7% during the last two quarters, generally is expected to extend through yearend '08 at a 1.5% rate according to a Consensus of roughly forty economists (in the Forecasters Club of New York). The range of expectations is, however, wide with roughly -2% as the minimum and +4% as the maximum.

Further increases in energy prices could easily tip that Consensus into negative territory, but so far...

Crude Awakening: Behind the Surge in Oil Prices from the Federal Reserve Bank of Dallas can be found here.