Below is a chart and brief excerpt from today's Early Look written by Director of Research Daryl Jones.
|
The major issue with rapidly increasing commodity prices is that they serve as their own form of tightening. Consider that the average American uses roughly 60 barrels of oil per year. Meanwhile the average U.S. income is about $63,000 per year. From a year ago, the price of oil is up some 70% or around $60 per barrel. So all else being equal, the average consumer will be paying $3,600 more per year on oil consumption, which is just under 6% of the average pre-tax income. You don't need a PHD in economics to realize that unless incomes also increase commensurately (which they are not), a rapid increase in commodity prices is going to be a headwind to discretionary income and spending. As my colleague Josh Steiner wrote last week: "There have been 12 recessions since 1946. 8 have followed major oil price shocks, while a further three have occurred immediately following more modest, but still notable, oil price run-ups." The combination of rapidly increasing commodity prices and rapidly increasing interest are a toxic combination for growth. Can the Fed land the economic ship this time without pushing the U.S. into a recession? As usual, anything is possible, though economic history isn't on their side. |
