Fueling Fears
Can the economy withstand $3-a-gallon gasoline?
Like millions of Americans, J. C. Calcote is stuck between a rock and a hard place when it comes to rising gas prices. Well, in his case, it's more like being caught between a pile of bricks and a hard place.
Calcote runs a brick-supply company in Amarillo, Texas, providing building materials for the booming construction industry. The problem: With fuel prices soaring, his small business now pays more than twice what it once did to have a 150-pound shipment of bricks delivered from the manufacturer. Besides that, keeping his forklifts gassed up cost $2,600 in June, up from just $1,352 a year earlier. Of course, Calcote's employees can't haul the bricks by hand. So what choice does he have but to grin and bear it?
Ditto for Monica Shane. Recently, the 28-year-old attorney has been taking numerous weekend trips between her home in Washington, D.C., and New York City. It costs Shane roughly $40 in gas to make the 500-mile round trip. But because she's preparing for a permanent move to the Big Apple, "I don't have a choice," she says. "I just try and find the cheapest prices."
Gut check. What was once an irritating pinch at the pumps has turned into a painful punch in the gut for Americans, as last week the average price of regular unleaded rose 18.2 cents to $2.55 a gallon. That was the largest weekly jump in 15 years, and in some places, the price has already passed $3 a gallon.
So far, skyrocketing gas prices haven't dealt the economy a knockout blow. Far from it. Consumers, whose spending accounts for roughly two thirds of the economy, aren't even close to getting a standing eight count. In fact, the closely followed index of leading economic indicators rose slightly in July. "The impact of record gas prices so far has been shockingly small," says Mark Zandi, chief economist for Economy.com.
Nevertheless, the unexpected surge in prices at the pump has certainly dealt a body blow to households--just in time for the critical back-to-school sales shopping season. Those sales are expected to drop as much as 8 percent this year.
Up until now, consumers have been able to deal with rising gas prices thanks to soaring home values and record-low interest rates, which have reduced the cost of financing debt. "Low rates buoyed growth and offset the drag caused by high gas prices," says Richard DeKaser, chief economist for National City Corp. But now that rates are on the rise, "at some point, the gas price drag will no longer be offset," he says.
Households have had more money to spend on gas because they've continued to pull equity out of their homes through refinancing ($59 billion in the second quarter and $43 billion in the first). But now the rise in gas prices means the economy, which is already reliant on the housing sector--70 percent of the rise in household net worth since 2001 has come from real-estate gains--will need home prices to continue to boom.
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