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Economic Recovery Is On Course, Despite Spiking Gasoline Prices

If you have filled up recently you know full well the pain we are all feeling from the surge in oil and gasoline prices. Pumping all that money into our gas tanks instead of having it available to buy the things we really want is a major problem for the economy. But, coming into April, the economic upturn was gaining momentum. We should weather this storm, though the return to stronger growth may be delayed.

The last thing we needed was a speed bump to slow things down but that is what oil is doing to the economy. Still, if you consider that gasoline prices have been rising sharply for the past six months, the economy has remained in remarkably good shape. Indeed, the key part of the economy, the labor market, has actually improved sharply during the first three months of the year.

Job growth has been quite impressive. The private sector added 230,000 new positions in March and a total of 470,000 over the past two months.  Hiring was spread across most sectors of the economy.  The unemployment rate also continues to decline, dropping to 8.8% – the lowest rate in two years. In addition, there appears to be a growing number of job openings. The number of available positions was the largest in nearly 2 1/2 years, while layoffs are disappearing. Firms may not be hiring rapidly, but at least they are no longer sharp cutbacks.

However, some dark clouds have gathered on the horizon. Consumers and small businesses have become concerned that the rising cost of other goods will derail the recovery. Confidence had only recently started to climb back toward more normal levels but it is still well below where it should be if we are to get a truly strong upturn.

The question we face is: Will firms become more cautious in their hiring as long as gasoline prices continue to rise?  That is likely to be the case. However, as long as consumers keep spending – and retail sales data for the first part of this year have been decent – companies that had put off adding workers for the past couple years will still need to grow their payrolls. While I would be surprised if we keep seeing monthly private sector job increases remain above the solid 200,000 level, I still expect moderate additions to the workforce. That should keep the unemployment rate reasonably stable, even if it bobs up and down for a while.

In spite of everything, there is every reason to believe we can weather this storm. The last time gasoline prices broke the dreaded $4.00 a gallon barrier, the economy was already in a tailspin. The recession had already started and burning up all that money only made a bad thing worse.

Now, things are different. Here’s why:

Then: Job growth was fading. Now: It has been accelerating.

Then: The unemployment rate was rising. Now: The rate is falling.

Then: Industrial production was soft. Now: Manufacturing output is robust.

As long as households and businesses recognize those changes and continue to spend as they have recently, the economy will move forward. By the fall, a true economic upturn could appear.

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Posted in Industry News.

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