Limited Damage Seen From Rising Oil Prices

By Rachel Beck AP Business Writer

NEW YORK  — So much for rising oil prices sending US investors and consumers into a lasting state of panic. That hardly seems the case when you see sales of sport utility vehicles surging, the stock market topping multiyear highs, and retail sales increasing.

This isn’t the way anyone expected things to go this summer with oil prices close to $60 a barrel, which is pushing up gasoline prices and eating away at disposable income in the process.

It seems that doomsday predictions about the ravaging effect of higher energy costs may have been a little premature — at least from the look of things right now.

But will that last?

Oil prices topped more than $62 a barrel in early July, and this week were trading around $57, more than 35 percent higher than a year ago. Gasoline prices have been more than $2.30 a gallon (3.8 liters) nationwide this month.

As economists explain it, the big unknown is how much does oil need to cost before it slows consumption and investors lose their buying interest. The problem is using history as a guide might not work.

As Smith Barney’s chief US equity strategist Tobias Levkovich points out, past price spikes that rattled the economy and stock market generally came in a much narrower period, with prices tripling in a matter of months or a year. But a more gradual rise, as seen now, should be less disruptive.

Sure, there have been days that the stock market has been rattled by worries over oil prices, but investors have almost immediately shrugged off such concerns. The Nasdaq composite index and Standard & Poor’s 500 index have vaulted to four-year highs in recent weeks and other major market indexes are also trending higher.

At the same time, retail sales are growing at a faster pace than forecasters had expected. Among the best sellers: gas-guzzling cars. General Motors Corp, for instance, recently reported brisk sales of SUVs during its summer discount promotion.

Of course, that is not to say that the higher oil prices haven’t hit the economy at all. They just haven’t been anywhere near as devastating as had been expected just months ago. While economic growth has slowed from the 4.4 percent pace seen in 2004 to around 3.5 percent expected for this year, some estimates attribute about a half to three-fourths of a percentage point of that decline to oil.

Levkovich suggests that investors and consumers have remained more resilient because the labor market has been improving in recent months. The United States added 2.2 million jobs last year and is on track to add roughly the same amount this year. The unemployment rate also fell last month to 5 percent, the lowest since September 2001.

The strong housing market also is playing a significant role in deflecting the hit from the increasing oil costs. Lower interest rates have knocked down mortgage costs and boosted household wealth. US personal income jumped $527 billion (euro434 billion) last year compared with a roughly $50 billion (euro41 billion) incremental rise in energy costs, according to Citigroup.

There is also the fact that higher energy costs have no’t trickled over into higher prices of other goods and services.

“If people start seeing their favorite products costing more, than maybe then they would be a little more concerned than they are now with just gas prices going up,” said Gary Thayer, chief economist at A.G. Edwards & Sons Inc.

And while consumers haven’t let oil prices shake their sentiment much, neither have investors. And they are buying up stocks that typically aren’t attractive purchases at times when oil prices rise.

For instance, retailing stocks have been sharply higher, but have outperformed the broader market. The Standard & Poor’s 500 stock index gained 6.6 percent in the last 13 weeks, while food retailing stocks have jumped more than 15 percent, general merchandise and department store shares are up nearly 20 percent, and footwear stocks have gained more than 12 percent, according to S&P.

For the time being at least, it’s a positive development that oil isn’t doing a hatchet job on the US economy and stock market. The trouble is that no one really has a clue how long that can last.