US “Soft Patch” Only Slightly Slippery

-Oil Price Rise ‘Tiny’ Compared to Nationwide Mortgage Rise
-‘Lead Balloon’ Sighted in CA and NY

(SEATTLE) - 08/18/2004 The popular press, and the Federal Reserve, would have us believe that “oil and gasoline prices are weighing on the consumer” and are leading to a “soft patch”—despite the fact that recent statistics show gasoline prices are well off their peaks of earlier this year. Yes, gas prices have been falling for twelve weeks.

While high energy prices are certainly weighing on certain producers and employers--especially small businesses who are not hedged against price rises—their larger corporate brethren simply treat rising energy prices as one more reason to offshore production and services. This reality is so painfully demonstrated by recent US job statistics. In short, small business can’t afford to expand, while big business simply hires elsewhere. So yes, energy prices are high and troublesome, largely based on demand against limited oil supply—which in turn, is related to low US interest rates.

Nevertheless, entertaining the “oil patch” fantasy for a moment, it’s useful to quantify the rise of gas prices relative to other items in the consumer budget. Assuming that the price of gas has risen about 20 percent in the last year, and based on a reasonable American consumer budget weighted via US BLS (Bureau of Labor Statistics) CPI information, the rise in gas prices over the last year has had about a 250 dollar impact.

What’s more interesting is the far larger cost few are following (and which is somehow exempted from the CPI), but which has a much greater national impact. That is, using the same BLS data and weightings against recent nationwide housing price rises. Specifically, a near ten percent rise in home prices over the last year--given very low but relatively flat interest rates--leads to an increased annual mortgage payment of one thousand dollars; that’s right, four times the impact of the rise in gas prices! And that’s with flat interest rates. Imagine if someday rates go up (or worse yet, imagine more price rises if rates continue to stay low).

So it’s not hard to explain why California had negative job growth last month, while the New York manufacturing index plummeted. To wit, here are two edges of a country, which have something in common--being both on the most tortuously stretched edges of the housing bubble.

You see, what we have in the US is not an ‘oily patch’ slowing down the consumer, but rather, a ‘housing bubble’--which (while not having popped yet) is rapidly turning to a ‘lead balloon’ at the most stretched edges. Therefore, it’s not hard to figure out why the US needs to raise interest rates quickly