Psychology and Sentiment Starting to Turn South

James Hamilton:

In my opinion, the reason that the oil price increases of the last two years have not caused a recession yet is that they have built up gradually, and resulted not from a drop in supply but instead from strong global demand. Faced with a gradual price increase and rising incomes, most people have been able to adapt to the higher prices and make adjustments in an orderly way that does not cause serious economic dislocations.

On the other hand, just within the last couple of weeks, I've been hearing a lot more expressions of anxiety and concern-- the sort of psychological factors that produce abrupt spending changes. That is to some degree a purely subjective judgment on my part. Quantitatively, I suppose I could point to the drop in the University of Michigan's index of consumer sentiment from 96.5 in July to 92.7 in August, or the spike in phone calls I've been getting this last week from worried reporters.

Is there a rational basis for new anxiety? The price of gasoline in much of the U.S. has gone up 30 cents a gallon over the last month. For somebody who plans on driving a 15 mpg gas-guzzler 12,000 miles over the next year, that's $240 they thought they had available to spend but now realize they don't. It's more than twice as bad if you want to make the comparison with a point earlier this year rather than just the last month, and of course would only get worse if gas prices keep climbing. That's more than enough to make somebody on a tight budget anxious, particularly if they've already stretched with an adjustable rate mortgage on a house and now see those monthly payments about to shoot up.