Stalled recovery? Gas prices, optimism on collision course

April 6, 2012

Hoosier business owners’ optimism is rising, but so are gas prices, prompting some economists to predict a repeat of 2011’s mid-year stallout.

Nearly two-thirds of Hoosier business owners polled in a Pittsburgh-based PNC Bank survey said they are optimistic or moderately optimistic about the Indiana economy over the next six months, according to results released Thursday. Six months ago, 58 percent of business owners said they were optimistic or moderately so.

The sentiments of the small- and medium-sized business owners nearly match those of one year ago—before supply disruptions caused by the earthquake and tsunami in Japan, as well as spiking gas prices and threats of debt crises in the United States and Europe spooked entrepreneurs and consumers alike.

Friday’s announcement by the U.S. Bureau of Labor Statistics that the nation added just 120,000 jobs in March—compared with three previous monthly gains each topping 220,000—only added to concerns that recent economic growth is slowing.

"The March numbers are half or less of what we'd seen in the preceding months," Ball State University economist Michael Hicks, said in a prepared statement. "Though a single month of data is not enough to draw broad inference, this has all the hallmarks of a repeat of last year when rising gas prices stalled the recovery.”

Gas prices averaged $3.94 per gallon across the nation on Thursday, up 17 percent since the first of the year. In Indiana, prices are even a touch higher at $4 per gallon, also up about 17 percent.

Gas prices typically don’t shoot up until May, when federal rules require refineries to make a variety of blends to reduce emissions in major urban markets. So expectations are for gas prices to keep going up into the summer months.

Hicks argues that Indiana’s economy—given its heavy reliance on ground-ransportation businesses and auto manufacturing—feels an economic pinch from high gas prices sooner than the rest of the nation.

However, higher gas prices may be helping Indiana’s auto and auto parts makers, as auto sales in March rose 13 percent to the fastest pace in four years. Consumers during the recession let their cars on the road age, to a record 11 years on average, but are now increasingly buying new cars, especially fuel-efficient cars.

And it’s not just gas prices that are rising. Spikes in a wide range of commodities, including metals, have raised costs for many businesses. Of Hoosier business owners surveyed in the PNC study, 73 percent expect prices to rise over the next six months. An equal percentage said they intended to raise their own prices to avoid a profit squeeze.

Kurt Rankin, a PNC economist who follows the Indianapolis and Indiana economies, said it took more than high gas prices last year to stall the recovery, and the same is true this year.

“Last year, they were not the primary story,” Rankin said of high gas prices in an interview on Tuesday. “The earthquake in Japan, which caused a disruption to U.S. supply lines, that stalled out what was really the only healthy part of the U.S. economy—manufacturing.”

Then came the summer’s nasty fight in Congress over the federal government’s debt ceiling, which led to Standard & Poor’s unprecedented downgrading of its ratings on U.S. Treasury bills.

“That took what was already fragile consumer confidence and shot itself right in the foot,” Rankin said. But, he added, “There’s more health to the economy this year, and therefore more potential for the economy to keep growing, even with high gas prices.”

Employment in Indiana dipped slightly last year in April, May and June but has been growing steadily since July, adding nearly 40,000 jobs as of February, according to Bureau of Labor Statistics data.


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