At the Margins

How significant has the rise in energy costs to households been over the past 5 years? 

The answer might surprise you.

New data released by the commerce department shows that Energy costs have risen nearly 50% as a percentage of a household’s spending. That is significant  — its up to more than 6% from 4.2% a few years ago — but its far below prior peaks.

Floyd Norris notes that while the increased fuel costs have a bite, they haven’t derailed the economy:

"The energy cost figures, while up, are far from unprecedented, which may help to explain why the economy has not been more severely affected by the rise in oil prices. Including both household utility costs for electricity and oil, and drivers’ fuel costs, the share for energy use climbed to 6.2 percent of personal consumption expenses.

That is the highest in 15 years, but it is far below the peak of 9.3 percent reached in the first quarter of 1981, during the second oil-price shock. In 1972, before the first oil supply cutoff caused lines at gasoline stations and sent prices soaring, energy costs were also 6.2 percent."

That’s consistent with my overall view — increasingly stretched househoild budget, but by no means exhausted, with short term swings in gasoline prices impacting consumer spending.


On an unrelated note, a Federal Reserve analyst has reviewed the jobless rate, and said it hasn’t been artificially depressed by a failure of many discouraged workers to be counted as unemployed. I’d like to look at this later today . . .

UPDATED March 31, 2006 11:13am

Here’s a chart I whipped up on household energy consumption.


Source:  BEA

4th-Quarter Growth Put at 1.7%
NYT, March 31, 2006


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What's been said:

Discussions found on the web:
  1. me commented on Mar 31

    I don’t know why we are worried about household energy spending – its not included in the core so who pays it?

    Remember that is the same Fed (Boston) that did a study saying it was higher than reported. If the Fed can’t agree, I will sitck with underreported.

    Just today in the FT GE is sending lots of media jobs to India. Instead of paying $140 an hour here they pay $20 an hour in India. One of the largest exports we had left was entertainment and now here it goes to India.

    And for the record, thaanks to Netflix I watch films from all over the workd and by far the worst films are Indian. I don’t even bother to rent them anymore.

  2. B commented on Mar 31

    Not to worry. They can handle it. Along with higher rates on all variable rate debt. And, most have alot of that in some form or another.

    This commodities related stuff is really scary. Really scary for me personally. Phelps Dodge looks like a rocket shot on a linear chart. Overlaid on the 2000 equities bubble, it’s significantly worse. And so is oil. With 2000 still fresh in investor’s minds, if the herd starts running for the door, we might actually wish or hope there is a plunge protection team that will prop up the markets and, paradoxically, oil.

    The cracks are finally starting to show at GM. GM has been denying any chance of bankruptcy for a year. Now, there are mutterings inside of GM about a cash crunch. How much is the derivatives market on GM’s 300 billion in debt? And the third world debt and other weakly rated debt around the globe? Throw in MBS and the housing situation. Yet the credit market isn’t pricing any problems into the equation. Could be some wild action in bonds. Is that what low long term rates have been telling us?

    These are scary times IMO. The second worst in thirty years….right behind the worst in 2000. No one knows what or when something will break and most people seem so unconcerned about anything IMO.

  3. Patrick (G) commented on Mar 31

    the share for energy use climbed to 6.2 percent of personal consumption expenses.

    That is the highest in 15 years, but it is far below the peak of 9.3 percent reached in the first quarter of 1981, during the second oil-price shock.

    The difference between 1981 and 2006 is that in 1981, the savings rate for the country as a whole was near 11%, while today it is 0%.

    Real Income levels have also fallen slightly over the past few years.

    Which means that we’re in a zero-sum-game type situation: Energy companies can capture more income from consumers, …but not without some other part of the economy taking a hit.

  4. CrispE commented on Mar 31

    The increase in costs for food, energy, and housing this year will approach a point where any breakdown in the economy in consumer spending will lead to massive layoffs of American workers which will create IMO a disasterous downward spiral. This began in February and will now continue throughout the spring.

    Sooner or later, the illiquidity of home ownership that many economists now equate with wealth will be seen for what it really is: Smoke and Mirrors.

    Then what?

  5. Brian commented on Mar 31

    Hmmm, sounds a little like a nice piece of rose-colored glasses analysis. I didn’t see the actual data but Energy costs as a % of SPENDING sounds like it could be materially skewed by the large home equity withdrawls that have boosted spending data in recent years.

    Energy as a % of income might for 2005 vs 1981 might be a bit more interesting. Just my 0.02.

  6. Daniel Secrest commented on Mar 31

    Brian — That is an excellent observation…

  7. B commented on Mar 31

    This consumer debt thing really is a ruse IMO. I’ve become quite bored at those who think it is the holy grail touting the end of the American lifestyle as we know it. Anyone who knows how this statistic is calculated, knows of its flaws and inaccuracies. It is a total bastardization. Also, I predict it will be totally useless over time unless it is overhauled.

    There have been quite a few people post on here the irrationality of the measurement and how it can yield extremely inaccurate readings. This isn’t something so simple as summing up the number of homes sold where the statistic provides clarity. Secondly, consumer credit debt is lower than it was five years ago and the same level it was in 1981. In addition, the reading will eventually be negative forever. That’s right. FOREVER. That will be when enough baby boomers retire and live off of their savings. That it will disproportionately hose an already bastardized measurement. In fact, our population demographics are so much different than 1981 that comparing readings from this statistic now and then is like apples and oranges.

    So, when consumer debt is negative for ten years and the bears are telling us how the end is near and the economy is motoring along, what will be the excuse then?

    The whole premise of this entire argument lies on the housing debt market. So, I guess more people owning a home than at any time in our history compounded with there are more Americans than any time in our history, translates into only a negative outcome? Especially since study after study shows home ownership is the primary driver for wealth creation over time. My neighbor bought his house during a housing bubble in the early 70s and it has appreciated 20x in value. And that is in the midwest. Now, even if it is overvalued by 50%, that’s still a better investment than stocks and bonds. How many people does anyone know who has taken equity out of their house for a cross the world spending binge which did nothing to assist in wealth creation?

    Why is a home equity loan any different than companies, who keep taking out massive amounts of debt at 40 year low interest rates because it makes financial sense to do so? In addition, the majority who have used their housing equity are the ones who are more than able to weather a downturn should it come to pass. It is not the housing “ATM” per se, that people should be worried about IMO. It is the marginal homeowner affected by rising rates. Rising rates to short term credit, adjustable mortgages and the like. Those are not the masses using their home equity for other investments, car purchases, college loans, etc. Housing is potentially worrisome but the Federal government will do anything and everything to ensure the fat tail does not come to pass. And, we should all hope they succeed.

    My point is, people quote statistics that support their case but won’t validate statistics that don’t. There is merit to both sides of any argument.

  8. tw commented on Mar 31

    What might be an interesting addition to this view is how much of household spending has been reduced by buying goods produced in places like China. Every time I go to the store I am surprised at the low cost of so many goods, and the decline in some of the prices over a period of time.
    Perhaps the energy increase is being offset by the reduction in prices for other goods thereby neutralizing the effects of higher energy.

  9. cm commented on Mar 31

    tw: That’s the whole point of “Core CPI”. But there are a lot of “intangibles” as well. I don’t know firsthand what the corporaet world looked before the 90’s, but supposedly aggregate job security and job stress/”pace” were significantly lower. Those thigns are not unrelated to your prices.

  10. thecynic commented on Mar 31

    on your GM point.. have you or anyone seen any quotes on the amount of money lost to GM on the sale of GMAC as interest rates continue to rise? it’s probably a negligible amt but the 10YR note yield is up about 30bps since they announced the potential sale. that has to lower the bid price. i realize that mortgages typically outperform in rising rate environment as prepayments slow but the volatility has to make pricing this deal very difficult. if a private equity firm buys the bank it seems like there could be some disruptions in the swaps market as hedges are tweaked… curious if anyone has any insight to this transaction?

  11. JSchreiber commented on Mar 31

    Showing energy consumption as a percentage of personal income should be more interesting.

  12. Steve commented on Mar 31

    There is constantly debate from the public about the threat of high energy prices. In comparison to the Fed the public has an extremely small amount of information to predict any effects. Also, with interest rates at a historical low in 2002 it caused an excess of borrowing and lending in the US. To curb inflation the Fed was forced to raise interest rates. The Fed decided to do this at a measured pace, 25 basis points, 15 times in a row. This decision was made to give transparency of information to the market and attempt to avoid any disturbance. If this was necessary on the macro side, for large corporations, these 25 basis point increases would tend to have less of an effect on consumers. Is raising gas prices simply a form of raising interest rates to slow spending and curb inflation. If energy is an unavoidable commodity, the price of energy would have an efect on the purchasing ability and decision of every consumer. In a sense the effect of interest rates on big business activity is no different than the effect of energy prices on individual consumers.

  13. Barry Ritholtz commented on Mar 31

    The Personal Consumption data for the was ~35 trillion in 2005; the Mortgage Equity Withdrawal and spending 800 billion the same year.

    Perhaps the number might be skewed lower a bit — but not much.

  14. Get Long Vega commented on Mar 31


    Help me out. I need a little clarification from you.

    1) How are the consumer credit / debt numbers “bastardized” today?

    2) Can you point to a resource that equates consumer debt levels in 1981 to consumer debt levels today?

    3) What do you mean when you say (and I’m paraphrasing): “Consumer debt measures will go negative as Boomers dip into and rely on savings to live.” Negative as in consumers will turn to net lenders? Or negative in relation to what — income levels, GDP…

    You sound pretty confident in your analysis, so I’m wondering if you can go into a little more detail. I’m on the other side of your trade. Thanks.

  15. B commented on Mar 31

    Who said anything about a trade? Economics should never be confused with market action. I have said repeatedly on here I expect a correction. Possibly very severe.

    The data I quoted is readily available at the Federal Reserve web site. Nothing terribly difficult to find. My stats are as a percent obviously not actual dollar amounts. That would be an absurd comparison.

    My point on the negative savings rate is that when enough of the population retires, our savings rate will likely turn negative and stay negative forever the way it is measured. How it is calculated makes it a rather difficult statistic to interpret and prone to error. Just like the wonderful CPI. Government statistics are usually a discombobulation and savings rates are no different. And I am extremely confident just as you are likely extremely confident that the CPI is wrong. Btw, you’d never hear the Fed say it was right. If they actually believed that, we wouldn’t be raising rates.

  16. cm commented on Apr 1

    Premium gasoline over $3/gal today at several SF Bay Area stations today.

  17. Get Long Vega commented on Apr 1


    I understand now: you mean consumer savings, not consumer debt. You say consumer debt and/or credit will go “negative” several times in your prior post.


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