Reply #2: Steve Roach was worrying about this (and oil) just yesterday . . . [View All]

[swag]

http://www.morganstanley.com/GEFdata/digests/20050826-fri.html

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In my view, the American consumer is very much at risk in the current oil shock (see Beneath the Surface, 16 August 2005). First, US households have drawn their saving rates down to “zero.” By contrast, in earlier oil shocks, US consumers had a cushion of saving they could rely on in order to maintain existing lifestyles -- saving rates that averaged 9.5% in the two shocks of the 1970s and 7% in the shock just prior to the Gulf War of early 1991. Today, the only saving backstop is embedded in an increasingly precarious housing bubble.

Second, just prior to the two oil price spikes of the 1970s, discretionary spending of US households had gone to excess -- setting the stage for America’s most severe consumer-led recessions. A similar overhang is evident today: The GDP share of consumer durables and residential construction has averaged 14.3% of GDP over the past year. That’s virtually identical to excesses hit just before the two energy-shock-induced consumption collapses of the 1970s.

Third, mounting pressure from higher energy prices is already more acute than in the past. While US consumers have reduced the portion of their budgets spent on energy-related items to 5.7% of total consumption -- down from readings hit in earlier oil shocks -- these outlays have already increased by 1.6 percentage points of GDP from the early 2002 low. By contrast, this same share had increased by only about 1 percentage point in comparable periods running up to the three previous energy shocks
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