DALLAS – The U.S. economy has chugged ahead this year despite soaring energy prices. But are rising gasoline prices about to take their toll on growth?
The nation’s largest retailer thinks it’s possible.
“The only real economic concern I have is that oil prices will erase improvements in employment and real income for … an important portion of our customer base,”‘ said Lee Scott, Wal-Mart Stores Inc.’s chief executive, on a conference call this week. “So I anticipate we will face challenges as the year progresses.”
The Labor Department said this week that its consumer price index rose 0.5 percent in July, the biggest gain since April, fueled largely by a 6.1 percent leap in gasoline prices. Overall energy prices climbed 3.8 percent in July, the largest increase in three months.
Excluding food and energy prices, the core inflation rate rose just 0.1 percent in July, the same percentage increase as in May and June.
As energy prices continue to rise, so does the economic pain. Motorists pay more at the pump. Airlines apply ticket-price surcharges to make up for soaring fuel costs. Manufacturers and retailers face rising shipping costs just as consumers look for ways to pinch pennies.
“My estimates are that the increases in prices that we’ve seen over the last two years will slow down economic growth,” said Stephen Brown, the director of energy economics at the Federal Reserve Bank of Dallas. Higher prices “mean less purchasing power for consumers.”
Brown reckons that rising energy prices have reduced growth rates by as much as half a percentage point since the latter half of 2003.
If oil prices stay at current levels – now over $66 per barrel – they could reduce growth rates by nearly a percentage point between now and the first half of 2007, Brown said.
It’s easy to exaggerate the effect of high energy prices on the economy. After adjusting for the effect of inflation, oil prices in 1981 surpassed $80 per barrel, analysts say. Gasoline prices topped $3 a barrel.
Moreover, the economy uses about half as much oil per dollar of output now as it did then. Oil prices would have to skyrocket above $100 a barrel to stop the economy in its tracks, says the Dallas Fed’s Brown.
But today’s energy prices already hurt.
Fort Worth, Texas-based American Airlines Inc. raised fares on its international flights $10 each way Tuesday to combat rising fuel prices. Airlines have implemented 11 fuel-related price hikes for domestic airfares this year. Even so, those increases haven’t resulted in enough new revenue to keep pace with the rising cost of jet fuel.
Many trucking companies have also resorted to fuel surcharges imposed on retailers to combat rising energy costs, said Ward Mayer, managing director at Morgan Keegan & Co. in Memphis, Tenn.
“Sometimes there’s a lag time, but a lot of that is passed on to the shippers,” he said, adding that the extra cost can squeeze those companies’ already-strained profit margins.
Higher fuel costs have added between $7 million and $10 million so far this year to J.C. Penney Co.’s bill for logistics and distribution, said Mike Ullman, the Plano, Texas-based retailer’s chairman and chief executive, said on a conference call. The bill would have been greater without offsetting savings eked out elsewhere.
Higher gasoline prices could also force consumers to spend less at stores.
“There’s no question that the increase in fuel prices is on the radar screen of our consumer. We’re concerned about it,” Ullman said. “We’ve been surprised so far that it’s been pretty much absorbed by the consumer without any noticeable change in our trend, but we can’t expect that to continue forever if it keeps going up.” Sales of SUVs and other vehicles that consume more fuel could also swoon if gas prices stay high.
July sales were strong, said Jerry Reynolds, managing partner of Prestige Ford in Garland, Texas, and the owner of Prestige Lincoln Mercury and Prestige Mazda in Dallas.
But high gas prices could spell trouble after special employee-pricing discounts end in September.
“If gasoline prices are as high then as they are now, or higher, I would have real concerns about SUV sales,” he said. “Gasoline is definitely a piece of the puzzle, where it hadn’t been a short time ago.”
Staff writers Maria Halkias, Angela Shah and Eric Torbenson contributed to this report.
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