Drowning In Gas With No Life Jacket In Sight

It boggles the mind that US consumers could spend more on gas than they do on cars. But, that is precisely what happened two months ago. Gasoline accounted for about 4.4 percent of spending in June, compared with 3.9 percent for autos and motor parts, according to the U.S. Bureau of Economic Analysis.

Unless auto companies begin to give away free gas to bring in customers, the trend may get worse. Analysts now think the US market may only produce 14.5 milion vehicle sales this year, and if the economy gets worse that number could fall toward 13.5 million in 2009.

Each recessions has its own peculiar characteristics. This one is marked by gas and food prices which drive purchasing power out of the consumer’s financial accounts. Gas replaces the car. Food prices prevent clothing purchases. High interest rates on consumer spending drive down savings.

As the system has collapsed in upon itself, the government has tried to stimulate the economy through tax rebates and easier money from the Fed. The irony of this is that the financial picture has gotten worse and not better. What the actions have done is drive up the deficit and insures that taxes will have to be raised down the road.

The nominal inflation rate is now around 6%. But, the rising prices of oil and agricultural commodities lag as they are passed on to the consumer in the form of finished goods. That mean inflation could rise to 8% in the Fall. The neighbors may be burning leaves for heat instead of amusement.

A car with 100,000 miles on it saves a typical household $25,000 because the purchase of a new vehicle can be deferred another year.

With the exception of food, housing, and heat, almost anything can be deferred, and most things will be.

Douglas A. McIntyre