History-derived economic models show that the US consumer starts to change behavior as the price of gas approaches $3, and then goes into a more pronounced state of shock when it ranges higher, in the $3 to $4 corridor. The reaction is to cut spending and retrench if the consumer thinks the price is going to stay at the new higher level for a while. When the consumer thinks the price will not stay higher, he keeps on spending and buying on credit.


BUT –

That history is derived, and has been modeled, from a time period when household balance sheets were relatively solid and when credit was flowing easily and when the unemployment rate was close to 5%, not 10%. So that is why I am starting to worry.

There are no solid models of rising gas prices that I can find which give good estimates of what happens to consumers when the unemployment rate is 10% instead of 5% and when many household balance sheets are wrecked, and when the credit mechanism is damaged.

SO –

The issue now is what gasoline price change it takes to impact consumer’s behavior. Does the price have to go as high as previously to hurt? Some retail experts I consulted say yes and that there will be no change in the relationship. Others disagree and say there is a new lower level, but they have insufficient experience to estimate what it is.