Thursday, July 28, 2005

Economy seems to suffer little from higher oil prices

By Rachel Beck

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So much for rising oil prices sending investors and consumers into a lasting state of panic. That hardly seems the case when you see sales of sport utility vehicles surging, the stock market topping multi-year highs and retail sales increasing.

This isn't the way anyone expected things to go this summer with oil prices close to $60 a barrel, which is pushing up gasoline prices and eating away at disposable income in the process.

It seems that doomsday predictions about the ravaging effect of higher energy costs may have been a little premature -- at least for now.

But will that last?

Oil prices topped more than $62 a barrel in early July, and were recently trading around $57, more than 35 percent higher than a year ago. Gasoline prices have been more than $2.30 a gallon nationwide this month.

As economists explain it, the big unknown is how much does oil need to cost before it slows consumption and investors lose their buying interest. The problem is using history as a guide might not work.

As Smith Barney's chief U.S. equity strategist Tobias Levkovich says, past price spikes that rattled the economy and stock market generally came in a much narrower period -- with prices tripling in a matter of months or a year. But a more gradual rise, as seen now, should be less disruptive.

Sure, there have been days that the stock market has been rattled by worries over oil prices, but investors have almost immediately shrugged off such concerns. The Nasdaq composite index and Standard & Poor's 500 index have vaulted to four-year highs in recent weeks.

Of course, that isn't to say that the higher oil prices haven't hit the economy at all. They just haven't been anywhere near as devastating as had been expected just months ago. While economic growth has slowed from the 4.4 percent pace seen in 2004 to around 3.5 percent expected for this year, some estimates attribute about a half to three-fourths of a percentage point of that decline to oil.

Levkovich suggests that investors and consumers have remained more resilient because the labor market has been improving in recent months.

The strong housing market also is playing a significant role in deflecting the hit from the increasing oil costs. Lower interest rates have knocked down mortgage costs and boosted household wealth.

There is also the fact that higher energy costs haven't trickled over into higher prices of other goods and services.

"If people start seeing their favorite products costing more, then maybe then they would be a little more concerned," said Gary Thayer, chief economist at A.G. Edwards & Sons Inc.

While consumers haven't let oil prices shake their sentiment much, investors are buying up stocks that typically aren't attractive purchases at times when oil prices rise.

For the time being at least, it's a positive development that oil isn't doing a hatchet job on the economy and stock market. The trouble is that no one really has a clue how long that can last.

Rachel Beck is the national business columnist for the Associated Press.