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JAD MOUAWAD & DAVID LEONHARDT & THE NEW YORK TIMES NEWS SERVICE said:Rising Oil Prices Finally Causing Economic Pinch
Consumers may have to start cutting back
Inflation surged last month, the government reported Tuesday, as the long rise in energy prices finally seemed to be pinching the American economy. After absorbing the burden of oil at $40 a barrel, then at $50 and beyond, consumers have started to react as prices have risen above $60 in recent weeks.
Wal-Mart blamed high oil prices on Tuesday as it reported that its profits had risen at their slowest rate in four years in the most recent quarter. The chief executive, Lee Scott, told investors that expensive oil was worrying him because it seemed to be erasing recent income gains for many customers.
Airlines have already felt the sting of increasing jet fuel costs. Last week, Delta Air Lines, UAL's United Airlines and Continental Airlines raised domestic fares in their latest attempt to stem losses. Delta is struggling to avoid bankruptcy. UPS recently reminded its drivers not to leave their truck engines running when they deliver packages.
Nearly all of the jump in inflation last month came from energy. Overall prices rose 0.5 percent in July and 3.2 percent over the last year after having been flat in June.
Across the country, families are trying to figure out where to cut corners so they can afford gas that now averages $2.55 a gallon nationwide after posting the biggest weekly jump in at least 15 years, according to the latest government statistics.
We spend much less, said Hollie Tubbs, a 32-year-old teacher's assistant in Brooklyn. Instead of going to the movies, watching plays or dining out, she now takes walks in the park with her husband and son and checks the newspaper to see when a nearby Barnes & Noble will be holding a free story hour. Everything is related to gas prices. The more you drive, the more you spend. In order to bring the budget down, we stopped driving.
If consumers are feeling hard-pressed by higher gasoline prices, matters could become worse this winter when their heating oil bill arrives. Some commodity analysts say that that is when the full impact of the higher energy costs will be felt.
Forecasters still expect economic growth to remain healthy for the rest of the year, as companies invest in new factories and the housing boom continues. But the high cost of oil already appears to be curbing growth, translating into unusually modest gains in employment and pay.
If history is any guide, higher prices will hurt consumption, curb the nation's output and shift spending patterns. The risks of a domino effect on the economy are real, economists say.
We can't lose sight of the fact that energy restricts growth, said Anthony Chan, a senior economist at J.P. Morgan Asset Management. It is doing so.
So far, the economy has showed much more resilience to higher energy costs than most analysts had anticipated. Although prices began rising in early 2002, consumers have kept shopping, companies have expanded and inflation has remained under control. At times, it seemed the country had entered a new economic era.
Without question, economists say, rising oil prices cause less economic pain than they once did. It takes half as much energy to produce $1 of gross domestic product today, adjusted for inflation, than it did 30 years ago. Even at today's prices, oil remains cheaper today than it did in the early 1980s, once adjusted for inflation.
The falling cost of other goods, thanks in large part to global competition, has also helped cushion the blow from higher energy costs. While energy prices rose 3.8 percent between June and July, the price of all other goods inched up only 0.2 percent, the Labor Department said Tuesday.
There seems to be a greater tolerance in the economy in terms of what can be withstood, said Doug Leggate, an energy analyst with Citigroup in New York.
But a spike in oil prices still hurts, economists say, even if the pain does not come immediately. In the past, its full effect has not come until a year, or even two years, after prices began rising. Both of the last two recessions in 1990-91 and in 2001 began more than a year after energy prices started a sharp climb.
It is way too soon to be sanguine, said Andrew J. Oswald, an economist at the University of Warwick in England, who has written about oil. The influence of a petroleum shock runs deep and runs slow. My own view is that we will find oil shocks still hurt, and hurt fundamentally.
It was only 13 months ago that the price of a barrel of crude settled above $40. Oil, which closed Tuesday at $66.08 a barrel on the New York Mercantile Exchange, is not likely to become much cheaper anytime soon, analysts say. Nor are natural gas prices, which have gained 73 percent this year. This means that winter heating bills for American households are set to soar.
Higher gasoline prices and heating oil bills are like consumption taxes, said Bob Gillon, a senior analyst with John S. Herold Inc. They will be a hardship on many. People will cut back on some purchases.
The blow has been softened in recent years by falling long-term interest rates, which have allowed homeowners to refinance their mortgages and cut their monthly payments, and by rising house values.
You don't have to take a couple hundred bucks and stick it in the bank each month because your home price is going up, said Lakshman R. Achuthan, managing director of the Economic Cycle Research Institute in New York. You might even withdraw some money.
Despite some scattered signs of a slowdown, like Wal-Mart's announcement on Tuesday, consumer spending has continued to increase. Home Depot and J.C. Penney both reported Tuesday that their profits had risen in the most recent quarter.
But the portion of income that Americans save each month, on average, has now fallen to zero, according to the government. That leaves families with scant cushion; if the savings rate were higher, people could cover rising energy costs by cutting back on the amount of money they set aside.
Most workers have received only a tiny raise in their hourly pay since 2001, according to inflation-adjusted figures from the Labor Department.
Consumers have held up the economy, Oswald, the economist, said. But, of course, that kind of behavior cannot be sustained in the long run. Eventually, reality dawns, and high energy prices come back to bite you.
The biggest reason to think that the economy could avoid another downturn is that today's high prices are to a large extent a by-product of robust economic growth. During previous oil shocks in 1973 and from 1979 to 1981 prices rose because supplies were cut off. Today's surge in oil prices is the result of demand from consumers in the United States and China, leading to a sustained rally that began sometime at the end of 2003.
So, high prices may be able to do only so much damage to economic growth, some economists say. If the economy starts to stall, energy prices will probably come down, too.
Among the worst-hit by the high oil prices are airlines, whose woes over the past few years have been accelerated by the oil rally. With fuel bills expected to reach $83 billion this year, a 36 percent jump from last year, airlines are finding it increasingly difficult to hedge against higher prices. This year, their losses are expected to reach $6 billion, up from last year's $4.2 billion in losses, according to the International Air Transportation Association.
UPS, which operates the world's ninth-largest airline, as well as a fleet of 88,000 trucks, has seen its energy bill soar 45 percent in the second quarter this year, after a 30 percent jump in the first quarter and a 35 percent increase in 2004 compared with 2003.
Oil prices have risen more suddenly than we had anticipated, said Susan Rosenberg, a UPS spokeswoman.
Beside asking drivers not to leave their truck engines running when delivering packages, the company is counting on new technology to help its drivers determine the best delivery routes, saving an anticipated 14 million gallons of fuel. It has also passed on some of the added energy costs as a fuel surcharge.
The effect of higher prices has had an uneven impact on companies. It's a mixed bag, said Neil Elliott, a director at the American Council for an Energy-Efficient Economy, a nonprofit research organization. The industries most affected tend to be a slow or declining part of the American manufacturing base.
Some companies have simply shut down factories or moved them to countries where energy and other costs are less expensive.
Dow Chemical, for example, has closed dozens of plants in the United States, including two major ones in 2002 and 2003, as natural gas prices started to soar. Last year, the run-up in energy prices cost the company an extra $3.4 billion.
We can pass on some of the costs, and we have, and we try as hard as we can, said Gordon Slack, the director for the company's energy policy. At the same time, it has planned expansions in Kuwait and investments in Oman, where natural gas is cheaper.
Instead of passing on the costs, carmakers have slashed prices to attract buyers. For much of the year, sales of gas-thirsty sport utility vehicles and pickup trucks have declined. Then in July, the first month all three American automakers offered their employee-discount promotions, sales shot up dramatically. Some industry experts said the discounts allowed consumers to shrug off the high gas prices.
That $30,000 SUV became $27,000 or $26,000, said Walter McManus, a scientist at the University of Michigan's Transportation Research Institute. Consumers, he said, are willing to overlook the extra money they will have to spend on fuel because they believe it is offset thanks to the deep discount.
In the end, much will depend on consumers.
It wasn't nearly as bad last year, said Tina M. Leshowitz, a 42-year-old bookkeeper from Lodi, N.J. She said that she expected energy prices to keep rising through the winter and that she would probably have to cancel her planned Christmas trip because of rising ticket prices.
It's out of control now. I've got to cut back on everything.
Until now, consumers have not made good on such threats. But executives at the world's largest retailer, Wal-Mart, and some economists say that more families might be starting to do so.
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Be prepared for the hike in gas prices
(I had to put that in there because of the XCL 
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