Posted on 11/15/2005 2:52:45 AM PST by RWR8189
IT IS FINALLY HAPPENING--the much-predicted bursting of the bubble. Surprise: It is the gasoline price bubble that has burst, not the house price bubble. Prices of regular unleaded last week averaged about $2.34 per gallon, below the levels prevailing immediately before Katrina struck, and well below the $3.04 peak reached in early September. Crude prices also headed down from the $70 per barrel level to $57, a six-month low.
That did not stop indignant senators from hauling the CEOs of the major oil companies to public hearings, at which they were excoriated for "price gouging" and for failing to reinvest their record earnings in new production and refining capacity. (No matter that among the principle constraints on such investment are the laws these same legislators have passed, limiting drilling offshore and on federal lands, and turning the process for permitting new refineries into a bureaucratic nightmare.) The industry's leaders pointed out that it takes twice as long--eight years as compared with four--to get a refinery built in the United States as it does in China and other countries.
The temporary spurt in gasoline prices may be past, but its consequences linger. To the undoubted glee of America's critics, who argue that our gas-guzzling vehicles contribute to global warming, sales of full-sized pick-up trucks have plummeted, dropping 26.4 percent in September and 31.8 percent in October, compared with those months last year. Worse still for automakers, sales of highly profitable sport-utility vehicles have declined even more.
It will be some time before we know whether the fall-off in sales of these large vehicles is part of a permanent reaction to the higher gas prices that followed Katrina, or to the decision of automakers to reduce the massive discounts that have brought buyers trooping into showrooms. General Motors, which some analysts now give only a 50:50 chance of avoiding bankruptcy, has cut its average discount by almost $1,000 per vehicle, and is hoping that the robust job market will result in a company-saving sales rise at profitable prices.
THAT WILL DEPEND very much on what happens in the housing market. Last year, Americans "cashed out" some $600 billion of equity from their homes, funding almost 8 percent of their spending at the malls, shops, spas, and on vacations. If house prices decline, or even stop increasing, such equity withdrawals could fall sharply, and with them consumer spending. Worse still, if the housing market slows, the jobs market is likely to weaken. Xiuyue Zhu, a researcher at the Hudson Institute, estimates that almost 5 million workers are involved in the building, financing, and other aspects of the housing industry. That's one out of every 28 jobs in America.
That's why there were shudders among economy-watchers when Toll Brothers, a leading builder, reported that contracts for the purchase of its new homes (average price $679,000) failed to increase in its most recent quarter. As with sales of pick-up trucks and SUVs, it is difficult to tell whether this is a temporary blip in response to the pressure recent gas prices put on family budgets or a permanent reaction to higher interest rates and what Goldman Sachs' economists call a sharp worsening in "housing affordability."
Market data are not much help. The prices of new homes are declining in the face of rising inventories of unsold houses, and the need of highly leveraged builders to meet rising interest payments. The Washington, D.C. area is particularly hard hit, with listings up and sales down, according to Metropolitan Regional Information Systems, Inc. Some builders around the country are offering inducements such as free golf-club memberships to persuade hesitating buyers to sign on the dotted line. But prices of existing homes are firmer, as owners are in a position to sit tight rather than accept offers they consider too low.
Using the quite sensible economic proposition that "no tree grows to the sky," we can assume that the days of double-digit increases in house prices are over. But that does not mean that the housing market is likely to collapse.
Toll Brothers attributed its non-growth in good part to higher energy prices and a decline in consumer confidence. A few days after the company's announcement, gasoline prices turned down, as did natural gas prices, and the University of Michigan announced a rise in consumer confidence, although not to pre-Katrina levels.
That's the good news. The less good is that it is reasonable to assume that consumers will not tap into the value of their homes next year to the extent they have in the past. That means we have to count on business investment to pick up the slack. The business sector is clearly in a position to do just that. Corporate profits have been "on a five-year tear" according to Goldman Sachs. They grew at a double-digit rate in the first three quarters of this year, according to Thomson Financial, and will continue to do so into 2006, according to Banc America Securities. With unit labor costs rising at historically modest rates, and corporate "pricing power" on the rise, healthy bottom lines are the order of the day.
But companies are cautious. Fuel costs remain high. Interest rates are rising. Tightening labor markets may drive compensation up too fast to be offset by productivity gains. Debt-ridden consumers may finally rein in spending and start saving, especially when the shock of higher heating bills hits. The political situation is unsettling, with President Bush's waning strength threatening his ability to persuade Congress to make his tax cuts permanent. Most important, the Fed is determined to slow real growth, and few businessmen are prepared to bet against the Fed.
So the increase in business investment has slowed from the 12 percent to 14 percent range to the 8 percent to 9 percent range--not enough to make up for a sharp fall in consumer spending should consumers decide to refrain from tapping into the still-substantial equity in their homes as freely as in the recent past.
Confused? You're not alone. So for now stick with the Fed and assume that the economy will continue to grow at a rate of around 3.5 percent.
Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.
Crude up again this morning
Prices range in Milwaukee range from 2.17 to 2.43. Gas is higher in Wisconsin due to one of the highest gas prices in the nation, and an automatic gas tax increase EVERY April !! Thanks to our Legislature (both houses under GOP control!) for continuing this legal abomination.
Wisconsin gas prices at
http://www.milwaukeegasprices.com/
Not from Wisconsin ? Go to
http://www.GasBuddy.com
Bingo!
$2.29 per gallon here this am in LonG Island, NY.
Wisconsin gas prices at
http://www.wisconsingasprices.com/
Senses are dulled due to high gas taxes.
$2.45 for full service (yeah, I'm lazy).
Same plan I use, with gasoline ranging between 1.99 - 2.02 for Unleaded Regular in and around Hudson OH
Some crude tankers leave refineries now with crude still onboard (no room at the inn).
So much for "not enough refining capacity" propaganda.
So much for "not enough refining capacity" propaganda.
If tankers are being turned away, then that supports the idea that there isn't enough refinery capacity. If there was enough capacity, they'd take all the crude they could get, unless they were intentionally limiting stockpiles of refined product.
In this case, stockpiles of refined products going unsold(warm weather & less travel) has slowed production.
There's only so much storage space available.
There's no shortage of refining capacity, never was, never will be, . . . but don't tell anybody.
Of course I think I know the next big trend in cars as well. High performance luxury sedan/coupes with something like displacement on demand technology.
The damage to SUV's is done. Time to look to the next automotive trend.
Paid 79 bucks yesterday to fill up my gas guzzlin 15 passenger van.
Gloom-and-doomers, meet Adam Smith.
I cut back considerably when the price hit close to $3 a gallon. I’m thinking of taking a drive just for the heck of it again.
I promise I'll keep pleasure trips to a minimum - until gas drops to $1.
Heck, in that case I'll buy some shares and try to get you voted in as CEO of ExxonMobil!
CEO ... would I have to actually work?
I doubt it - and your gas would probably be free too. ;)
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