Via Brad DeLong, I see Jim Hamilton attempting to answer a question I've been wondering about: why didn't the year's oil shocks do more damage to the economy?
Historically, the big economic effects of oil price shocks seem to come when there are sudden shifts in the pattern of spending, for example, if consumers stop buying the kinds of cars that the U.S. auto manufacturers are relying on for sales. This response by consumers involves not just the price of gasoline, but also their overall perceptions of the source and likely persistence of the price changes along with expectations about the consumers' own income prospects.
I argued that the nature of the response of American consumers to gasoline prices changed in the late summer and early fall, when we saw a dramatic decline in consumer confidence and profound shifts in American vehicle purchases. The loss in consumer confidence has fortunately proven to be relatively short-lived. The University of Michigan's index of consumer sentiment was up to 91.5 for December, back to the value of August, and the Conference Board's related measure shows a similar strong improvement.
And how about autos? As the graph below shows, American SUV's had done quite well in June and July in terms of number of units sold thanks to company incentives, though this came at an enormous financial loss to GM and Ford. The intertemporal effects of these incentives makes it difficult to judge just how dismal were the September through November sales figures. December sales were back to mediocre (a distinct improvement over "dismal"), though sales at GM were still down 10% compared with the previous year. Light truck sales for all domestic manufacturers were down slightly for 2005 as a whole compared with the previous year.
It's of course unclear whether we've totally dodged the bullet, or whether the bullet hit and GM's just staggering for longer than expected before they fall. And that burst of optimism doesn't even touch on oil dangers in the new year. Nevertheless, we had a pretty serious shock to the system in 2005 and the economy proved rather resilient. Lucky stuff, though the underlying weakness we saw -- GM and Ford relying on the class of automobiles most vulnerable to increases in oil prices -- deserves some serious thought given the trend lines in crude prices.
