Monday, June 27, 2011

Economy: Better Times Ahead?

As many experts expected, last month consumer spending cooled. Today the U.S Commerce Department reported that personal spending (expenditures by consumers) stagnated in May, dropping 0.1% adjusted for inflation.

This is mostly a reaction to the rising oil prices. In the first months of the year hedge funds and other speculators pushed up the oil price on the financial markets to $114. The gas price on the pumps followed and climbed to nearly $4 per gallon. Many consumer with small budgets had to react. And they did so by reducing their expenditures on consumer goods to pay for the rising gas prices.

But in the recent weeks the situation turned. Now it seems that the bubble on the oil market is bursting. The oil price dropped around 20% on financial markets to almost $90. The price for gas fell also.

The winners are the consumer who have now more money in their wallets. The probability is high that they react again and return to similar spending behavior prior to the oil price rally this spring. The return of the consumer could restart the now stuttering US economy.

The current situation shows a huge difference to the year 2008. Then a recession had already begun when the oil price on the financial markets climbed to $147. And speculators followed manipulators like Goldman Sachs, who predicted oil pricec would reach $200. The oil price rally was typical herding behavior. Hedge funds and other speculators bought the important commodity just because the price of oil was rising. Therefore they hoped they could sell oil for a higher price. This speculation drove the price of oil even higher and caused a snowball effect, a self-fulfilling prophecy.

In 2008 this oil speculation caused an economic disaster. The high energy costs siphoned too much money out of the economy, which aggravated the recession. Companies & consumers had to cut their budgets because of the rising expenses for oil. Commuters couldn`t pay their mortgages because they spent their money at the gas station, which resulted in the financial crisis.

This year the market for oil reacted much sooner. There is now a high chance that the weak oil price cools the speculation and avoids the dangerous snowball effect we saw in 2008.

History never repeats itself.

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