Gasoline Prices Weigh on Americans’ View of Economy

This post was written by James Coan, Research Associate at the Baker Institute Energy Forum.

Oil prices nosedived by the largest amount in two years on increasing concerns about the U.S. economy. Slower U.S. recovery means lower oil demand and with no additional negative news coming from the Middle East, oil traders have begun to focus instead on recently released reports that U.S. gasoline use is once again falling. The fall in crude oil prices would be good news for U.S. consumers since historical patterns would suggest that $90 to $100 oil would translate into retail gasoline prices under $4.00 a gallon, at around $3.30 to $3.65 cents a gallon.

Views of the fate of the U.S. economy and gasoline prices seem to have become inexorably linked, so these recent declines will hopefully correspond with more optimistic views of the direction of the economy.

The graph shows it all: rising gas prices are often accompanied by worsening views of the economy. According to Gallup polling seen in the graph above, early in the year, the country was roughly divided between those saying the economy was getting better and those saying it was getting worse. Yet when gas prices started skyrocketing in the wake of the tumult in Libya, the percentage of Americans saying the economy was getting better plummeted by 10 percentage points, and it has continued to worsen when gas prices once again began rising in April.

We at the Baker Institute have previously analyzed other tight linkages between gas prices and the attitudes of Americans. Along with the Brookings Institution, we tracked the effect of gasoline prices that rose to over $4/gal in 2008 before the financial crisis on Americans’ views of their own well-being and found – surprisingly – that a $70/month increase in gasoline costs corresponded to a decline in well-being of about $530/month in income-equivalent terms.

Of course, when dealing with this most recent Gallup polling, we must take to heart the nostrum that correlation does not imply causation. We cannot absolutely guarantee that gas prices are at the heart of all of the changing perceptions of the economy, even if the timing between gas price increases and Americans’ views of the economy are uncanny mirror images of each other.  Broader indications of the economy’s performance are surely troubling: the GDP for the first quarter of the year only grew at an estimated annual rate of 1.8%, and weekly unemployment insurance claims also rose last week.

Yet we’re sure Americans are fretting about gas prices. Gallup in March found that Americans are more likely to think gas prices will rise by large amounts this year, Reuters/U. of Michigan found in their April Consumer Sentiment poll that inflation expectations for the year run at a high 4.6%, and early reports from Mastercard SpendingPulse suggests that gasoline demand has fallen in five of the past six weeks.