Gas Prices: Are We at the Breaking Point?

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There goes the paycheck (Fred Prouser/Reuters)

Gas stations might want to think about offering direct deposit.

On Wednesday, the government announced the monthly number for retail spending and it included a disturbing figure for those of us who have been hoping for a strong recovery. Excluding gas purchases, consumers spent just 0.1% more in March than they did a month ago. That’s not a recovery. That’s treading water. Compare that to the big gains in December and January and the recovery looks like it has run out of, well, gas.

Here’s the most troubling stat and why you might think you are pumping your paycheck right into your car: In the past month, American’s handed over $0.11 of every dollar they spent at the gas station. That’s the highest that figure has been since the beginning of the recession, and it is nearly 30% more than what we typically have spent on gas and other car-related items. So will the recovery stall at the pump? Well there is more evidence for that. Here’s why:

Gas prices are up. As of last week, gas around the country averaged $3.84 a gallon. That’s up from $3.12 a the beginning of the year. And some are concerned that gas prices above $4 are the breaking point, where consumers will notice how much they are spending at the pump and really cut back on all else. Peter Morici, who teaches economics at the University of Maryland, says that he thinks rising gas prices will soon put a significant dent into the recovery. He predicts that if gas prices get above $4 a gallon and stay there that will lower employment by 600,000 to 700,000 jobs.

The reasons: Americans are spending much more than they typically do at the pump. Relatively high gas prices have made that a problem throughout this recession, but the recent increase has only made it worse. For the past 19 years, (that’s as far back as the Census data, where retail sales come from would let me go) on average Americans have spent about 8% of their overall retail purchases on gas and other gas station related items. The number has generally been around 9% this recession. And in March, for the first time since the beginning of the recession, that number hit 11%. The highest the figure has been in the past 19 years is 12% and that was in March 2008, which is when Bear Stearns collapsed and was really the start of the financial crisis. It stayed at 12% until September 2008, when Lehman went under taking the rest of the economy with it.

But even 11% could be some sort of breaking point. The last time the figure rose to 11% was in November 2007. And that is right around the time when the economy shifted from creating jobs to losing them. What’s more, in past recoveries Americans in general have spent much less of their income on gas. In 1993 and 2003, for instance, Americans spent between 7% and 8% of their purchases at gas stations.

Of course, none of this means gas prices will kill the recovery. First of all, this year’s uptick in prices at the pump is not that unusual. Gas prices always rise in the spring. Prices are up about 24% this year. Gas has had similar price runs in the same period in 5 of the past 7 years. Prices for instance rose 25% in 2005, and back then the economy continued to be very strong.

The real problem has to do with the level – $4. And that is a problem, but not really because of gas, but because of the job market. Jobs have been slow to recover so wages have been mostly flat. And that’s the real reason we are making a greater percentage of our expenditures at the gas station. When incomes and jobs recover it is likely that other consumer expenditures, the non-discretionary ones that you aren’t forced to make when your gas gauge hit E, are likely to rebound. And that may start to make what we are spending at the pump small again. Of course, if job growth doesn’t materialize, then yes rising gas prices could indeed turn out to be one speed bump too many for the economy.