Wednesday, January 14, 2009

Separating Energy Prices From Economic Trends

Energy prices are distorting economic statistics and could easily give some people the wrong idea about what is going on. A year ago, between December 2007 and June 2008, spiking energy prices gave economic statistics the appearance of a boom in a time when the U.S. economy was faltering. Now, in the statistics for the last three months, the collapse in energy prices gives the appearance of an economic collapse, when so far, the economy is only pulling back.

In the first half of 2009, energy prices are likely to edge upward, allowing some observers to imagine that an economic recovery is taking hold. Small pieces of the recovery are underway already, of course, but it is not a recovery in the aggregate until the economic measures increase above the level that energy price increases push them to.

Today’s retail sales report shows a decline in sales for December. December retail sales were nearly 10 percent below the levels of a year ago. That sounds like a depression, but it is not as bad as it sounds. Much of the decline reflects lower energy prices. In December 2007, gasoline was $3.00 a gallon. In December 2008, it was $1.70 a gallon.

With energy prices changing so rapidly, it is harder to pick out the economic trends. But it is still possible to do. The decline in gasoline prices is not the only reason gasoline station sales are down. Drivers are also driving 3 percent less, mainly because of the job losses. People can drive to work only when there is a job to go to.

Excluding automobiles and motor fuels, retail sales were still down in December. The holiday shopping season came earlier than in the past, and that too makes the December numbers look worse than they are, but also makes the November numbers look better than they are. Retail totals have declined every month since June, but in that series, November is the month that held up the best, as you would expect with the bump from holiday shopping.

And there is more bad news for retail: it’s January. U.S. retail sales tend to be weak in the first three or four months of every year. If consumers remain cautious, or if job losses keep piling up, the downward trend in retail could easily continue for several more months.