What Would Happen If There Was an Oil Crisis and No One Came?

The standout feature of the current U.S. economy is its remarkable resilience.

With oil prices spiking after Iran managed to disrupt traffic in the Strait of Hormuz, it was only natural to be concerned about the economic fallout from rising gasoline prices. There’s a real risk here—skyrocketing gas prices could hinder demand in other sectors. In a worst-case scenario, declining sales might trigger layoffs, climbing unemployment, and a downward economic spiral.

It didn’t help that the outlook seemed dim. Spring arrived with an economy that felt somewhat sluggish. On paper, GDP only grew at an annual rate of 0.5% in the last quarter of the previous year, partly affected by an extended government shutdown. Up until now, the first-quarter GDP growth seemed weak too, with the latest revision showing just 1.6%.

However, despite these figures, it appears the U.S. economy managed to navigate the Iranian oil crisis. Americans increased their spending by 0.7% in May. Real spending even rose by 0.3% in April, having previously increased 0.4%. Instead of cutting back elsewhere, Americans adjusted to rising gas prices by spending more overall.

Household Spending Withstood Soaring Gas Prices

This trend becomes clearer when examining May’s inflation-adjusted personal spending data released last Thursday. Americans upped their spending — from vehicles, furniture, and appliances, to outdoor gear. We bought more groceries and clothing, and even entertainment wasn’t left behind. Excluding food, energy, and housing, consumer spending rose by 0.4% over the month.

Last week’s retail sales figures echoed this sentiment. Overall, sales (seasonally adjusted but inflation-adjusted) grew by 0.9%. And when excluding gas stations, sales rose by 0.7%. This increase spanned various sectors, with notable growth in auto dealerships, health and personal care stores, furniture shops, and online retailers.

That said, there were indicators of strain. Restaurant and bar sales appeared weak in May, showing a nominal 0.1% decline. The personal consumption expenditure data indicated that food service and accommodation spending decreased by 0.3%, while transportation expenses, including airfares, also declined by 0.3% for the third month straight. Surprisingly, real spending on gasoline and energy dropped by 2.4% in May, indicating that households shifted their demand away from gas amid rising prices.

Strong Labor Market Explains Resilience

So, why were households able to weather the oil crisis comparatively well? For starters, many Americans felt this shock was likely transient. When economic shifts seem temporary, households typically make fewer adjustments, as they don’t alter their long-term outlook regarding income or prices. It’s possible that people overlooked this rise in gas prices, reasoning that the spike was driven by a war in Iran that wouldn’t last forever.

Tax cuts from last year’s legislation certainly bolstered household budgets. As gas prices climbed, many Americans found themselves with larger-than-expected refund checks, affecting the incomes of overtime workers, those who earn tips, and retirees through increased deductions.

Then there’s the robustness of the labor market. Over the last three months, the economy added an average of 188,000 jobs monthly, with layoffs remaining unusually low as indicated by unemployment insurance applications. This stability contributed to a significant income boost, with gross income rising 0.7% nominally, and 0.3% after inflation in May. Wages and salaries went up by 0.4% in May. Nominally, that translates to greater purchasing power for workers, helping offset some of the higher gas prices.

With gas prices now trending downward (the national average was around $3.92 per gallon on Thursday), these rising revenues and job security will likely drive growth in the coming months. Inflation is expected to decline swiftly and might even turn negative from month to month, enhancing the real purchasing power of households. This could be enough to boost consumer confidence out of the awkward recession that has lingered for several months.

A critical measure of economic policy effectiveness is how well the economy can endure negative shocks. This spring, the U.S. economy certainly seemed to pass that test with distinction.