May 11, 2004

Mr. Chairman!

As I have blogged before, I am hoping that Bob McTeer from the Dallas Fed is soon promoted to Fed Chairman (so long, Mr. Greenspan and thanks for all the fish!)

He has a guest editorial in the Wall Street Journal today (paid site) that objectively evaluates the potential of a spike in oil prices causing another recession. He points out that higher oil prices have predicted nine out of the last ten recessions but also warns that there have been four false alarms. And that the economy is moving away from a direct correlation:

Under this scenario, Dallas Fed research suggests GDP would suffer a one-time reduction of 0.9% -- not all at once but spread out over several years. An economy racing forward at 3.5% to 4% annually can weather the loss of several-tenths of a percentage point. A decade or two ago, a similar run-up in oil and natural gas prices would have done more damage to the economy. Three factors explain why we've become less sensitive to energy-price shocks:

* First, shifts in the composition of output and investments in more efficient plants, equipment, homes and vehicles have cut the energy-to-GDP ratio by more than 50% since the early 1980s. In the airline industry, for example, the average fuel per passenger mile has fallen by about 25%.

* Second, today's price hikes aren't as severe as many of the past episodes. Adjusted for inflation, for example, today's crude prices would have to rise to $75 to $80 a barrel to get where they were in 1981, which would mean gasoline prices of $3.50 per gallon or higher.

* Third, the economy benefits from experience gained over the years in dealing with higher energy prices. Companies that survived past episodes are less likely to misjudge the impact of expensive oil and natural gas on their own businesses and on others with whom they trade.

Posted by jk at May 11, 2004 09:26 AM
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