As per usual I wanted to give both of these things more attention but its to the point that something is better than nothing.
First, this chart from Calculated Risk
Nothing had or has me doubting the basics of the Smith/Yglesias growth thesis than this chart.
That smack down looks awful structural. It looks like something happened to driving big time. The only reason I persisted in making aggressive calls on auto sales was because I just couldn’t think of a convincing narrative about this as permanent structural. There were many candidates, I don’t have time to go through, but none of them really convinced me.
This has to be temporary I thought – even if its an age of driving shift thing – that’s not permanent.
If its just cash constrained households economizing on trips and businesses economizing on shipping then we are going to see a roar back and that means huge auto sales. Depending on the speed of convergence 20 Million SAAR would not be crazy. Note we are at 14.2 now.
The thing is a roar back will also mean very rapid increases in gasoline consumption which in turn means much higher prices. What does that mean for the recovery. Three very quick factors
1) Higher gas prices shunt consumer funds towards Oil Producing countries who then send the funds to US Treasuries. This is effectively a monetary contraction because lending does not increase– no change in interest on reserves. Yet, Treasury buying increases, this implies that excess reserves go up. This is contractionary for the economy.
Importantly this does not require the Fed to tighten. No action on the Feds part is passive tightening in the face of higher gas prices because the funds go straight to T-Bills. Its as if consumers are just saving more.
2) Higher gas prices cause effective depreciation rate of cars to go up. Old cars now even more costly to maintain. Natural rate of interest rises. Unconstrained consumers willing to dig deeper to buy new more fuel efficient cars. This is expansionary for the economy.
3) Higher gas prices cause more investment in oil and gas exploration, a change over from heating oil to natural gas in some plants, major oil and gas infrastructure projects. Think of it as raising the marginal productivity of energy extraction, distillation and distribution capital. Natural rate rises. This is expansionary.
Now I am not sure how these three shake out. I really have no handle on (2) and though I am reading up on (3) I cannot yet give an opinion on the size of the energy sector expansion we could see.
So, its hard to say even if higher gas prices are contractionary or expansionary. However, unless something odd happens, they are coming.