Higher gas prices threaten economy if they persist

WASHINGTON (AP) — Inflation remains tame throughout the U.S. economy, with one big exception: gas prices.

Those higher prices haven't derailed a steadily improving economy. But if they surpass $4 or $5 a gallon, experts fear Americans could pull back on spending, and job growth could stall, posing a potentially serious threat to the recovery.

And the longer prices remain high, the more they could imperil President Barack Obama's re-election hopes.

A few weeks ago, economists generally agreed that the economy was in little danger from higher gas prices as long as job growth remained strong. But fears are now mounting that gas prices could begin to weaken consumer confidence.

The average pump price nationwide is $3.83 a gallon. Energy analysts say it's bound to climb higher in the weeks ahead.

"It's a thorn in the side of the consumer and businesses," said Chris Christopher, an economist at IHS Global Insight. The economy this year "would have been better and stronger if we didn't have to deal with this."

So far, higher prices aren't undermining the economic recovery, which is getting a lift from strong job creation. It would take a big jump — to around $5 a gallon — before most economists would worry that growth would halt and the economy would slide into another recession.

That's because an improving economy is somewhat insulated from any threat posed by higher prices at the pump.

The risk is that gas prices could eventually slow growth by causing some people to cut spending on other goods, from appliances and furniture to electronics and vacations. Gasoline purchases provide less benefit for the U.S. economy because about half of the revenue flows to oil-exporting nations, though U.S. oil companies and gasoline retailers also benefit.

Many American businesses suffer, too. They must pay more for fuel and shipping and for materials affected by high oil prices, such as petroleum-based plastics. Profit margins get squeezed.

Even if prices ease after the summer driving season, don't expect gasoline to fall below $3 a gallon. The government estimates that this year's average will be $3.79, followed by $3.72 in 2013.

Most economists accept a rough guideline that a 25-cent rise in gas prices knocks about 0.2 percentage point off economic growth.

Gas prices also have an outsize impact on consumer confidence, Christopher noted. It's a high-frequency purchase. Consumers notice the price whether they're filling up or driving past a gas station.

Along with the unemployment rate and stock market levels, gasoline prices heavily determine how Americans see their financial health.

That effect was evident Friday when a decline was reported in the Thomson Reuters/University of Michigan index of consumer sentiment. The result surprised some economists who had assumed that higher stock prices and lower unemployment would lift consumer sentiment.

The Michigan report showed that "gasoline worries ... are outweighing stock market gains and job growth" when it comes to influencing consumer attitudes, said Michael Hanson, an economist at Bank of America Merrill Lynch.

The price of gasoline has climbed 17 percent since the year began — to a national average of $3.83 a gallon. That's the highest ever for this time of year. A month ago, it was $3.52.

Gasoline prices have followed oil prices up. Oil is rising, in part, because of tensions surrounding Iran's nuclear program. Iranian leaders have threatened to close a shipping route into the Persian Gulf. Experts say the standoff could lead to tighter global oil supplies later this year.

Contributing to higher gas prices is stronger demand from China and other developing economies.

Most economists expect gas prices to top $4 a gallon by May. That would drag on consumer spending and the economy.

"It's like a tax," Hanson said.

Economists note that gas prices tend to hit consumer confidence especially hard once they surpass round numbers, such as $4 a gallon or $5 a gallon. Consumer confidence levels provide a rough guide to what Americans will actually do when at the mall or their favorite store.

A Gallup poll last week found that nearly half of Americans would make "significant" spending cuts in other areas if gas topped $5 a gallon. On average, Americans said gas prices of $5.30 to $5.35 are a "tipping point" that would cause them to make those cutbacks.

Motorists have responded to rising pump prices by driving fewer miles in more efficient vehicles. They've conserved so much fuel this year that they've effectively reduced gasoline spending even though a gallon is an average of 32 cents higher than it was a year ago, said Tom Kloza, chief oil analyst at the Oil Price Information Service.

"Gas prices really choked the consumer in 2008," Kloza said. "This year I'm not so sure."

Retailers have begun to worry that higher gas prices will eventually force many consumers to cut back.

"If gas prices do start (going) upward again and creeping back up to $4 and $5, I think that is going to be a problem for our customer," Charles Holley, Wal-Mart's chief financial officer, said this month.

Some trends in the economy should cushion the impact of higher gas prices. Americans saved more last year. That gives them some leeway to pay for costlier gas out of savings rather than cutting spending in other areas.

Easing the impact further, other energy prices have fallen even as gas costs have soared. The price of natural gas to residential consumers has dropped an average of 8 percent a year since 2009.

Consumers saved more money in January from lower natural gas and electricity prices than they paid in higher gas costs, Christopher said.

The price of gasoline will likely follow developments in Iran. Continued sparring between Iran and the West means prices will keep going up. But if Iran adopts a more conciliatory tone, oil and gasoline prices could tumble.

The outcome will help determine the U.S. elections in November. Obama has been under pressure to do something to ease prices even as the economy is producing its best job growth since the recession ended.

A Washington Post-ABC News poll conducted last week found that 59 percent of voters disapproved of the way Obama has handled the economy. A month ago, the same poll found that 53 percent disapproved.

Obama's Republican opponents have criticized him for blocking efforts to expand drilling in restricted areas of the Gulf of Mexico and in the Alaskan National Wildlife Refuge. In a TV interview this week, front-runner Mitt Romney said Obama should "absolutely" be held responsible for the higher prices because "he has not pursued policies that convince the world that America is going to become energy secure, energy independent."

The Obama administration argues that oil and gas prices are set by global demand and that those who promise a quick fix are lying to voters.

___

Associated Press Business Writers Anne D'Innocenzio and Chris Kahn in New York and Tom Krisher in Detroit contributed to this report.

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