Posted on 08/14/2005 12:02:13 PM PDT by Tumbleweed_Connection
Oil prices are surging, but they are not rattling the largest economy in the world -- at least as long the real estate market remains strong, analysts say.
Oil prices shot up here over the past several days from 63 dollars a barrel on Monday to just under 67 dollars a barrel Friday.
The market has moved far from prices averaging about 30 dollars a barrel registered just two years ago.
Analysts say the price increase has undoubtedly put the brakes on economic growth somewhat, shaving between 0.4 percent and 0.5 percent off the leading economic indicator, according to Brian Hilliard of Societe Generale.
However, many remain unfazed.
"I'm not terribly concerned because it doesn't appear to be curbing US demand significantly," said Sal Guatieri, senior economist at BMO financial group.
In fact, retail sales were strong both in June and in July, growing 1.7 percent and 1.8 percent respectively, fueled by promotional deals put forward by the nation's leading automakers.
And what were Americans buying amid reports of climbing gas prices? Mainly 4x4 vehicles known as leading gas guzzlers.
The explanation of this phenomenon lies in the fact that current gasoline prices remain acceptable for the majority of the population.
"There are definitely segments of the US population that are suffering from the approach of three dollars a gallon for gasoline but it's not a big enough segment to thus far materially slow consumer spending," argued John Lonski of Moody's Investor Services.
For others, the economy resists high oil prices because it is kept afloat by several positive factors such as capital investments and the rising value of real estate.
Real estate owners survey the growing value of their holdings and as a result spend more.
"House prices are accelerating, and maybe you can say that's a bubble or not and there will be some correction down the road," insisted Guatieri. "But until the market corrects it, housing price wealth creation will provide a powerful offset to the impact of higher oil prices on US consumer spending."
With a three-room apartment fetching about one million dollars in Manhattan and housing prices going up on average 14 percent in June in the country, real estate remains a powerful economic engine.
As US home values rise many consumers, feeling more prosperous, spend more using credit cards; others take spending money out of home equity loans; and still more take cash-out options on home mortgage renegotiations, which are not limited in the US financial system. All of these factors inject more cash into the economy.
Moreover, this system soothes the hearts of homeowners.
"It suppose there's a psychological effectY you say to yourself, 'Well look, the price of gasoline is going up from 1.75 to nearly three dollars a gallon, but on the other hand the price of my home is going up from 100,000 to 250,000 dollars -- why do I care?'" said Lonski. "I think it provides a psychological boost to consumer views."
But the balance is fragile.
Speculators have invaded the market in large numbers. And many take out increasingly more sophisticated and risky mortgages to get the home of their dreams.
Prices are not expected to rise indefinitely.
"While households can temporarily ignore higher energy prices by borrowing more and extracting equity from their homes, the process is finite," warned Joseph Abate, an economist with Lehman Brothers.
For now, analysts see little reason to fret.
Revenues from loans continue to grow and remain a strong counterweight to rising energy prices.
Wishful thinking in this cheery piece. We've cut back on eating out etc. since gas has shot up and our electric bill was $100 higher than we've ever paid before. Wait till the heating bills hit in another couple of months. The economy will be going down as inflation on every product trucked to us goes up. Sell your Walmart stock because the lower income people will be very hard strapped in the coming months, and things don't look good for middle income folks with a lot of debt either as credit card minimum payments are due to double. Better pay off the plastic as soon as you can.
Makes sense to me. Why worry if you can pay for the gas at the pump with money from your HELOC ;-)
Megadittos! Prices aren't anywhere near where they were in the seventies taking inflation into account. People need to quit whining just because they have to pay a couple of bucks extra to fill up. The economy is fine, despite the MSM trying to talk us into a recession.
The prices really haven't filtered through to the costs of food, transportation, plastic manufacturing, shipping, etc. yet.
That is coming.
I don't know if you remember the 70's. I do. I remember it very well.
And I'm certainly tired of the crapola shoveled out by this administration that there is no inflation and that we should be happy with some hedonic happy talk.
And as always, this is IMHO.
The real estate market reminds me so much of the stock market a few years ago right now.
I can't get over all the high property taxes people are paying with the new high cost of homes.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.