Economics: Now And The 2008 Recession - The Big Difference

 

(Drivebycuriosity) - Many predict that the coronavirus - and measures against it like quarantines - will cause a recession and might even repeat the 2008 crisis. But there is a big difference: The price of oil. In the first half of 2008, when the recession already started, the oil prices tripled and jumped from around $50 to $147 (chart below).

 (source )

A study by Prof.  Hamilton, University of California, San Diego, shows that the oil price shock from 2008 - from summer 2007 through July 2008 the oil price spiraled from about $50 to $147 -  turned the economic slowdown into a severe recession (econbrowser).: "The oil price increase over 2007:H2-2008:H1 should be regarded as a key development that turned the slowdown in growth into a recession" (archives). Other researchers came to the same results: "Oil prices played a role in eventually bursting the US subprime bubble....In 2003, the average suburban household spent $1,422 a year on gasoline, which rose to $3,196 in 2008 (oilprice). "Rising household energy prices constrained household budgets and increased mortgage delinquency rates" (oilprice). Low income suburban homeowners suffered most from the rising gas prices. 


Oil price hikes also caused recessions in the 1970s - the oil or energy crisis - and in the year 1990. Nine out of ten of the U.S. recessions since World War II were preceded by a spike up in oil prices, writes Prof. Hamilton ( pdf econweb).

 

 (source )

Today we observe the opposite movement. The price of oil dropped from about $60 to around $35. The price of gasoline at US pumps is also falling and gas costs already 3% less than a year ago (aaa.com ). Dropping prices for oil & gasoline work like a tax cut. Consumers worldwide have more money to spend for other goods & services. So cheaper energy prices stimulate consumer spending which accounts about 70% of the US economy. Dropping energy prices also translate into lower transport costs - thanks to cheaper Diesel - which lead to lower prices for food and other goods. They also reduce the cost to produce steel, cement and many other energy intense goods. Many things which are made from oil, like cleaning fluids, laundry detergents, paint, pharmaceuticals, cosmetics, hygiene products, diapers & plastics, also get cheaper.

Because of sharply falling energy prices we will see lower inflation rates in the coming months. This allows the Federal Reserve to cut her interest rates without fueling rising inflation expectations. The twin package of cheaper energy & low interest rates will help to cope with the perilous influences of Sars-CoV-2 and to avoid a recession.