Rising Gas Prices and the Economic Recovery

As many of you have probably noticed this week, gas prices have risen substantially in just a few days. Here in Madison, I went to work on Wednesday with prices at $3.33 per gallon, and they had reached $3.59 by midday. We have since added another dime as of Thursday evening. This is the case nationally as well, with gas prices up eleven percent since the start of the year and six percent just this month. Oil prices continue to rise due to uncertainty and increasing concerns about the situation in Iran, who has recently stopped exporting to France and the United Kingdom.

Aside from our personal concerns about how this will affect our individual wallets, this trend is also deeply problematic for our economy. Gas prices have already reached $4 per gallon in some areas, and prices are widely expected to approach the $5 range this summer. This could be a serious detriment to an economy that is finally showing some signs of life after a lengthy and painful downturn. As consumers pay more at the pump, they have less money left for discretionary items like TV’s, entertainment, and vacations. Some families are already stretched thin; especially those that have had one or more earners lose their jobs or income.

If consumers stop spending, the economy is at risk for another slowdown. If people are not buying goods, industries have little reason to produce them- and consequently, no reason to hire people in order to produce them. If families can’t make their payments, defaults may again rise.

We have been fortunate enough to have some stability and signs of growth in both the U.S. Economy and in the markets over the past few months, with the S&P 500 up over eight percent so far in 2012 as of Thursday. The rapid increase in the price of oil and gas are something that could hinder our recovery and cause volatility going forward. It is definitely an item worth watching going forward in 2012.

As always, please feel free to contact us with any questions, concerns, or feedback.

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