Investing.com – A sustained surge in oil prices could push the U.S. economy into recession if it significantly weakens consumer spending and tightens financial conditions, according to a report from Wells Fargo.
Economists said a downturn is not their base case, but risks have increased as oil prices rise sharply amid geopolitical tensions and supply disruptions. The U.S. economy is entering the current energy shock from a relatively fragile position, with soft payroll growth, slowing income gains and inflation expected to climb back above 3% in the near term.
Higher oil prices typically weigh on household purchasing power because energy costs are difficult to cut back on. Wells Fargo’s modeling suggests that a sustained 50% increase in oil prices could reduce real personal consumption expenditures growth by about one percentage point, potentially offsetting the benefits from recent tax cuts aimed at boosting consumer spending.
Economists said oil shocks become recessionary when they trigger a broader and persistent decline in economic activity. This usually occurs when falling real incomes slow consumption, investment weakens, hiring slows and income growth deteriorates further.
The report outlines several conditions that could turn an oil price spike into a recession. First, oil prices would need to rise enough to cause real incomes to decline. Second, the shock would need to persist for several months, forcing households and businesses to adjust spending and investment decisions. Third, the surge in energy prices would have to tighten financial conditions, damaging confidence and reducing investment and consumption.
Wells Fargo estimates that sustained oil prices near $130 per barrel, roughly double pre-conflict levels, could lead to consecutive quarterly contractions in consumer spending, a pattern typically associated with recessions.
The U.S. may be somewhat more resilient than other economies because it is a net energy exporter. However, economists warned that prolonged high oil prices could still materially raise the probability of a downturn.
Moderate increases in oil prices may not immediately cause a recession because they can also boost energy sector investment. Higher crude prices improve profitability for producers and encourage additional drilling and infrastructure spending.
Still, that offset tends to be incomplete and slower to develop than the immediate hit to household purchasing power, meaning sustained energy shocks could eventually overwhelm the economy’s ability to absorb the impact.
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