Photo: Flickr – Kansas Poetry
You hear a lot about the magic $4/gallon level for gasoline, and how consumers bug out at that level, but there’s actually very little data to go on, as Goldman’s Alec Phillips explains in a new note:The idea that consumers might respond to a psychologically important price level seems intuitive enough, but it is difficult to test the importance of the effect of the $4.00/gallon threshold since it has only been crossed once, for six weeks in June and July 2008 (on a national basis it has not been crossed since, though it came close in May 2011 and some areas did see prices over $4.00/gallon). A dummy variable signifying whether the gasoline price is above $4.00 is statistically insignificant and inconclusive. This is not surprising in light of the fact that there was only one brief sustained period in which prices were above this level and that it directly preceded the most acute phase of the financial crisis. Still, we believe the $4.00 threshold was important in light of anecdotal evidence and other survey measures that indicated large changes in reported behaviour based on gasoline prices.
On the other hand, the fact that we’ve been at this level before might be mitigating…
An additional question is whether the effect of crossing a given price threshold is important after it has already been crossed once or twice before. Using monthly data, we find eliminating the first crossing of the $3.00 threshold from the series and starting with the second occurrence still has a negative effect on the Michigan survey, but less than when the first occurrence is included. Eliminating the first two occurrences and starting with the third mostly eliminates the effect of crossing the $3.00/gallon threshold on the Michigan index. Using the same process with the weekly gasoline price data and the Rasmussen index does not noticeably weaken the effect until the first four occurrences have been removed.
So what does this imply for confidence in the near future? First, it obviously implies that rising gasoline prices, particularly if they cross $4.00/gallon in more areas, are likely to put pressure on sentiment, other things being equal. It also implies that while we may have already “been there and done that” regarding $4.00/gallon gasoline, reaching this threshold a second time may still have a psychological effect on consumers beyond the tangible effect on their finances.
There’s one other thing to note here, which is that 2008 was already in the middle of a recession, characterised by two years of slowing car sales, falling home construction, sputtering jobs and so on. Right now, all of those things are going in the exact opposite direction.