Thursday, March 8, 2012

Crude Oil and Recessions

US Gas and Fuel Oil Expenditure/Total Personal Consumption

Earlier I wrote a short note on the relationship between crude oil prices and recessions. US Gas and Fuel Oil Expenditure (as a percentage of Total Personal Consumption) gives an even clearer picture of the relationship.

Every spike in Gas and Fuel Oil Expenditure over the last 40 years has been followed by a recession — even the twin spikes in 1980 and 1981. One possible exception is the 2002-2006 rise which was only followed by recession in late 2007. This was the era of the "Greenspan bubble" when interest rates were held at low levels for an inordinate length of time, fueling the global financial crisis in 2007/2008. I guess most of us would have settled for a milder recession in 2005.

The weight of evidence favors another recession following the latest oil price spike, though the Fed should have sufficient ammunition to postpone this until after the election.