Economy: Hanging in There

Higher oil prices slowed the economy in the first half of this year. But I don’t expect things to get a whole lot worse.

Data source:

One of the first places that higher oil prices can affect the economy is through auto sales. The number of light vehicles sold in the United States in June was 6.9% higher than June of last year. But June 2010 was weak relative to 2010:Q2-Q3, and the last two months clearly signal some softness in auto sales, with oil prices likely one contributing factor.

Source: Calculated Risk

However, this is quite different from the rapid flight from domestically manufactured vehicles that we saw in 2008. Hardest hit at the moment are Toyota, Honda, and Isuzu, whose year-over-year U.S. sales were down more than 20%. Supply problems in Japan are presumably an important factor.

Furthermore, the recent declines in oil prices should make the third quarter a little easier than the second. It’s worth emphasizing, however, that the lower gasoline prices that consumers are currently enjoying have nothing at all to do with the strategic petroleum reserve drawdown announced two weeks ago. In fact, crude prices at the moment are back about where they were before the SPR announcement. Amazingly (but I suppose predictably), some commentators are claiming this proves the market is all driven by speculation.

Price of WTI and Brent in dollars per barrel. Vertical line drawn for closing June 22 price (day before SPR announcement)

Americans are now seeing lower gasoline prices not because of the SPR release, but instead as the result of more fundamental developments I commented on two months ago, whose implications have finally worked their way through to retail gasoline prices.

And so if nothing else goes wrong– quite a big if, I know– the economy should do better in the second half than the first.

Hanging in there

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About James D. Hamilton 244 Articles

James D. Hamilton is Professor of Economics at the University of California, San Diego.

Visit: Econbrowser

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