Not Big Enough (Yet)
While Wall Street is buzzing with recession talk, Fed officials have been stressing how resilient the economy and American consumers have been - and are likely to remain - in the face of the most recent oil price shock. They have a point: while the poorest consumers are facing a painful jump in the cost of essentials (food, energy, housing) the current energy shock pales by comparison with the 1970s or 2008 – as we document in the charts below.
One takeaway: so far the energy shock just isn’t big enough to send the economy into a downward spiral. For that to happen oil prices might need to rise another 40-60% from here.
The recent peak in the real oil price was 38% below the all time highs reached just before the GFC in 2008.
US Consumers are less exposed to oil shocks relative to decades past. The proportion of the typical American budget being spent on energy costs has halved.
The proportion of disposable income Americans spend on a basket of essentials including energy, housing and food has fallen by a fifth since 1980.
Today each unit of industrial production uses 40% less oil compared to 1990.
Bottom line: US consumers spend a much smaller fraction of their budget on energy or indeed on basic essentials (energy, food and housing) than they did during previous oil shocks. This suggests oil prices would need to be 60-80% higher from today's levels to pose a similar threat to consumption and growth. While that could happen this winter, it has not happened yet.