The U.S. economy is a dynamic $30 trillion beast that can absorb large shocks—think the shutdown of global supply chains and the quick recovery during the pandemic era.
This resilience suggests there is plenty of runway before the economy begins to hit pain points that result in a change in household and business consumption, investment and hiring.
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Those pain points will not kick in until oil hits approximately $125 a barrel. At that level it would extract a drag of between 80 and 100 basis points on gross domestic product and an increase of 160 basis points in inflation from 2.4% to 4% in the consumer price index.
In our estimation we need to see a move toward those levels before one considers broader downside risks to growth, inflation, unemployment and the continuation of the business cycle.
In plain terms, a move to $125 per barrel translates to an increase of $1.25 per gallon in the price of gasoline, which would result in a price of $4.25 per gallon compared to the pre-conflict price.
In the aftermath of the Russian invasion of Ukraine, gasoline surged to a national average of $5.01 per gallon on June 13, 2022, which led households to pull back on spending.
Today, with the price of gas at $3.10, we are still well below levels where one should begin talking about larger risks to the economic expansion.
The increase in inflation during 2022 is an apt comparison that shows just how much behavior would have to change before the economy slows down, much less enter a recession.
Although it is clear that many lower-income households will pull back before those points arrive, the risk to the current economic expansion appears to be a slowing in growth below 1.5% and inflation rising above 4% with the cost of gasoline hitting $4.25 per gallon.
On an industry basis, the most energy-sensitive industries are agricultural, manufacturing, mining, and select construction activities. Other areas include chemicals, petrochemicals, petroleum, paper, primary metals, non-metallic minerals, as well as food and beverage. All will most likely pass along price increases to consumers in the near term.
It may make some sense for policymakers to quickly provide direct relief for those firms being hit by tariffs.
