U.S. economic tides

  The price of gasoline passed $4.50 per gallon this weekend.  It isn't much compared to the price in Europe (around $10 per gallon now), but it's up significantly from roughly $2.50 last winter.  Recent articles in the business press have noted that this historic rise has had remarkably little effect on the economy, speculating that the country is more diversified and less dependent on oil than it once was.  Bad new is actually good news.

  However, talking with friends and colleagues here, I think that the potential inflationary effects on large-scale markets and the small-scale impact on individual households are both being understated.  Businesses and people are hurting and worried.

The price of food and gasoline is the main topic of conversation when people talk about jobs and households.  These are basic needs, so we all shift spending to cover these expenses first.  Our incomes are not rising: raises will probably average less than 4% this year, far below the perceived rate of price increases.  Nobody has found a way to generate additional income through savings or investment: the stock market is down, interest rates are low (2-3%), and real estate investments are losing value (down 5% in our area).

  This, in turn, leads to reduced spending on everything else: people are putting off purchases of clothes and home furnishings, delaying home repairs and car replacements, and cutting back on vacation plans and discretionary purchases.  Debt repayment doesn't seem to be a big worry here: I haven't found distress sales or other signs of economic stress around the neighborhood.  Still, there is no opportunity to borrow cheaply against assets such as homes or property to support spending: the cost of loans and credit lines is 6-9%; credit cards are at 9-15%.

  Everyone realizes that if fuel, food, and shipping costs continue to rise, and consumer spending keeps falling, it must put pressure on businesses, on revenue, on margins, on profits.  This will further impact wages and layoffs as companies try to scale down to meet reduced demand, yet still preserve profits.  The potential for a serious downward spiral seems to be there, and few people talk optimistically about their household budgets in the future.

  They are casting about for who is at fault.  Government comes in for its share of blame: everyone feels the weight of taxes and nobody believes that they get value in return.  The cost of the Iraq war, the proliferation of unnecessary federal projects, and perceptions of wasteful spending on transportation improvements are all cited as examples.  People also grumble about speculators: there is a sense that financial and commodity companies are making windfall profits, while brokers and bankers are evading accountability.  Income disparity and executive pay don't seem to be big issues with most people, and transfer payments to the elderly, impoverished, and unemployed are not yet topics outside of talk radio.

  Faced with all of this, everyone seems to be holding their breath, worrying about how bad it might get, while hoping that there will be a natural rebound, yet again.  At some point they will decide, left or right, what direction the future will take. But at the moment, everyone seems to be experiencing watchful anxiety and a maintaining a conservative approach to family spending.