This is the first in what I'm planning will be a series of posts discussing the contribution that the energy price spike of 2008 made to our present economic difficulties. In this first installment, I revisit a very interesting research paper on the response of consumer spending to energy price increases written by Lutz Kilian (Professor of Economics at the University of Michigan), and Paul Edelstein (Senior Economist for Decision Economics). I first brought this paper to the attention of Econbrowser readers in the spring of 2007. I thought now would be a good time to take a look at how well the equations in Edelstein and Kilian's paper can describe what we saw happen in the later part of 2007 and first half of 2008.

Edelstein and Kilian summarized the historical correlations between energy prices and economic activity in terms of

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Falling gasoline prices will provide some stimulus to the economy. But how much?

Americans consumed 142 billion gallons of gasoline last year. That means that when gasoline prices rose $1/gallon last spring, if consumers and fuel-using businesses had not reduced the quantity of gas they purchased, they would have had to reduce other expenditures by $142 billion. That's a bigger negative shock to spending power than the $90 billion that the federal government was trying to put back into consumers' hands through last spring's fiscal stimulus.

The run-up in gasoline prices hurt the economy not just by reducing consumers' spending power. The abrupt drops in spending on key sectors of the economy exerted significant effects of their own. As higher gas prices caused consumers to shun Detroit's gas guzzlers, U.S. production of motor vehicles and parts fell by 15% between 2007:Q4 and 2008:Q3 (BEA

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August auto sales were less dismal than July. But don't uncork the champagne quite yet.

The New York Times reports:

Domestic sales declined by 15.5 percent in August compared with the previous year, the fifth consecutive month of double-digit declines, despite some relief in recent weeks on gas prices.

I like to look at these data using graphs like the ones below, to help distinguish seasonal and cyclical factors from trend. (By the way, Econbrowser remains the only site on the web, to my knowledge, where you will find the auto data displayed this way.) You can make year-on-year comparisons by looking across entries within any given set of columns, and see month-to-month changes by looking across groups of columns.

Data source: Wardsauto.com

Sales of light trucks (which includes SUVs) manufactured in North America were clobbered this summer, and August 2008 was down

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Article Source Unfortunately, this seems to be unfolding according to script. The dramatic abandonment of gas guzzlers by American consumers continues, with last month's sales of domestically manufactured light trucks (which includes the once almighty SUV category) down 28% from June 2007. The dramatic abandonment of gas guzzlers by American consumers continues, with last month's sales of domestically manufactured light trucks (which includes the once almighty SUV category) down 28% from June 2007. Data source: Wardsauto.com Sales of imported SUVs, which had been holding up better, plunged even more dramatically. Data source: Wardsauto.com For the lighter car category, sales of domestics fell 13%, Data source: Wardsauto.com while imported cars, which tend to get better mileage, eked out a 4% gain: Data source: Wardsauto.com...

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The housing downturn and rising gasoline prices are each exerting a significant contractionary influence on U.S. GDP. There is also an interactive effect between the two. Temecula, CA. Source: Los Angeles Times. Temecula is a community in southern California some 60 miles from downtown San Diego and not a whole lot closer to anywhere else. And yet I've known people who commute to work here from Temecula, having been willing to trade driving time for more affordable housing. The population of Temecula doubled over the last decade. But with gas now nearing $4.50 a gallon in San Diego, the housing-commuting tradeoff is looking a lot less favorable for these exurban communities. Via Calculated Risk, the Los Angeles Times reports that as many as 15% of the homes in Temecula are ...

Article Source Time to reassess the potential for recent oil price increases to contribute to an economic downturn. The sharp spikes in oil prices associated with the 1973-74 oil embargo, the 1978 Iranian Revolution, the Iran-Iraq War in 1980, and the first Persian Gulf War in 1990 were each followed by an economic recession. However, when oil prices started to rise again five years ago, many of us suggested that things would be different this time, in part because the price was rising much more gradually and so should be less disruptive of consumer spending patterns. Others emphasized that, despite the price increases, oil was still cheaper than it had been historically if you took into account inflation. However, once you include the most recent data, neither of those claims would still be true. Average monthly dollar price of West Texas Intermediate (from FRED divided by ratio ...