Academic journal article ABA Banking Journal

A Little Oil and Vinegar: Two Major Factors Could Derail the Nascent Recovery-But Will They?

Academic journal article ABA Banking Journal

A Little Oil and Vinegar: Two Major Factors Could Derail the Nascent Recovery-But Will They?

Article excerpt

Higher oil prices have raised new concerns about the strength of the recovery. If sustained, the rise in gasoline prices will restrain the pace of economic growth noticeably, but does not appear to be large enough (so far) to derail the expansion.

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As a rule of thumb, a $10 increase in the price of oil corresponds to about a 20 cent increase in the price of gasoline or about a 0.2 percentage point reduction in real GDP growth. However, that estimate does not account for multiplier effects. A large, sustained increase in gasoline prices, will reduce spending on other things, leading to broader job losses (or smaller job gains) than would have occurred otherwise. If sustained, the recent rise in oil prices could shave about 0.5 to 1.0 percentage point from GDP growth--not enough to cause a recession, but not helpful to the recovery. If GDP growth was expected to be 3.5% to 4.0% this year, we may see 2.5% to 3.5% instead.

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Now for the vinegar.

The recession contributed to a sharp drop in tax revenues at all levels of government. …

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