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Trivia Tidbit Of The Day: Part 154 -- Consumer Confidence Index.

Consumer Confidence Resilient-

The experts believe that higher gasoline prices necessarily lead to lower consumer spending. But consumer spending has remained strong as the price of a barrel of oil has surged near/above $70. And the Conference Board's Consumer Confidence Index actually rose in August:

Interestingly, the August Consumer Confidence Index survey pointed to an important milestone:

The employment picture was also upbeat. Consumers saying jobs are “hard to get” decreased to 23.2 percent from 23.8 percent, while those claiming jobs are “plentiful” rose to 23.5 percent from 22.9 percent. For the first time since October 2001, consumers claiming jobs are plentiful outnumber those claiming jobs are hard to get.

Hurricane Katrina, however, could pound away at more than lives and property. It could negatively affect consumer confidence, as well, if energy supplies are disrupted by the storm.

But the Consumer Confidence Index has remained stoic thus far in the face of record after record close for the price of oil. Why?

The partial explanation is that oil prices are still far below true inflation-adjusted records. Second, energy prices were unusually low for much of the past several years. Third, even if oil prices do reach inflation-adjusted record highs, our economy is far less dependent on oil than it was in the 1970s.

Contrast that with some of the emerging economies in Asia, which are now facing rationing and long lines at the gas pump:

Asia is a land of artificially cheap energy. With few exceptions (most notably Japan and South Korea), the region's manufacturers and households aren't paying full fare for the fuels needed to cook their meals, cool their homes, power their cars or run their factories. Instead, those costs are now borne by governments or state enterprises mandated to sell power on the cheap. But the logic of this largesse could easily backfire, and magnify rather than dampen the energy shock.

Take India. Oil subsidies could backfire in a big way:

The government, which draws critical support from anti-free-market leftist parties, has raised energy prices just 20 percent since June 2004, but the cost of importing crude oil has jumped 60 percent over the same period. The result: state-run oil companies incurred losses of more than $281 million during the first quarter of fiscal 2005-06. Today India relies on imports for 70 percent of its crude, and unless the global price falls, the cost that subsidies impose on Indian oil companies is forecast to hit $9.15 billion this year. Economist D. H. Pai Panandiker calcu—lates that for every $10-a-barrel increase in global crude-oil prices, India's gross domestic product shrinks by 0.5 percent.

Then, there's Indonesia, which faces the prospect of getting kicked out of OPEC, despite its vast oil resources:

Despite huge energy reserves, the sprawling island nation is now a net importer, due to inefficient efforts to exploit its resource, and the fact that subsidized prices artificially increase demand. Jakarta buys oil at the global market price and sells it domestically at the equivalent of $30 a barrel. The cost of subsidizing oil is expected to reach $14 billion, or 2.4 percent of GDP this year, up from 1.3 percent last year—sparking fears of a broader financial impact.

Thus far, the American economy has responded well to higher energy prices, running against the conventional wisdom. It will be interesting to see how oil-dependent economies respond to persistent elevated energy prices.

Previous Trivia Tidbit: Unemployment and Government Spending.

Posted by Will Franklin · 30 August 2005 11:00 AM

Comments

Posted by: PBrady at August 30, 2005 11:23 AM

Posted by: Will Franklin at August 30, 2005 01:30 PM