How rising oil prices, crisis in Japan may affect the U.S. economy

Recently the economy has shown signs of strength. With consumer spending on the rise and the stock market’s continued resurgence as of late, many industry experts and economists have believed that the recovery will continue. However, with the recent tragedies in Japan and unrest in Libya, our economy and more importantly the recovery sits at an important crossroads.

Many are worried that destruction in Japan will have a lasting effect on our economy and the continued recovery. However, most economists believe that, barring a nuclear disaster with Fukushima Daiichi nuclear power plant, the more relevant problems lies with rising oil prices.


Here is the bottom line: According to William Alden of the Huffington Post, for each $10.00 increase in price per barrel of oil, the price at the gas pumps in the U.S. rises about $0.25. With the possibility of some of the highest energy prices our nation has ever seen looming on the horizon, consumer spending could be on the way back down again in the near future.

The future outcome of potentially higher energy prices remains to be seen at this point. On March 18, the price of a barrel of oil cleared $116. Gus Faucher, the director for macroeconomics at Moody’s said, “A spike in energy prices to $125 or $150 a barrel is the primary threat to the recovery at this point.” Oil prices of this magnitude have not been achieved since 2008.

More importantly, a lengthy stay at prices of this level could have a large impact on our economy in the visible future. As long as explosions and a war-like state continue in the Mideast, we can expect the threat on U.S. growth to continue.

Sandra Pianalto, the president of the Federal Reserve Bank of Cleveland said in a recent Wall Street Journal article that housing will continue to remain a drag on growth. She described unemployment as a “lingering problem” in our nation. A large spike in energy prices could turbo-charge inflation. Couple inflation with the possibility of decreased consumer spending and lagging housing market, and our economy could be heading for another downturn.

In a recent study released by Fannie Mae’s Economics and Mortgage Market Analysis Group, projected economic growth for the year was lowered. The unpredictability of the oil price hike as well as the duration any price spike may last is enlisting new doubts and fears on economic growth.

In the days and months to come, the situation overseas will have a large effect on what happens with the U.S. recovery. Here we are, now more than 2 years after the start of one of our nation’s longest recessions to date, and we are still bleeding. However, we now have new wounds to go with the injuries we are still nursing from the housing and real estate collapse of 2008-2009.

What can you do? For retirees, it is important to remember to focus on the right thing when planning your lifestyle in retirement. You may be thinking about how inflation may affect your nest egg, or future market volatility, or even slower growth in our economic recovery.

However, you should be focusing on protecting your assets first. More importantly, protect the amount of money that you need to make it through retirement. Retirees should develop an income plan with safe and reliable income. Once you develop an investment plan that guarantees yours income, then you can take some risk on the money that is left over.http://www.blogger.com/img/blank.gifhttp://www.blogger.com/img/blank.gif

William “Bill” Smith

Bill Smith is a RFC and the president and founder of Great Lakes Retirement Group, a Registered Investment Advisory firm located in Sandusky, OH, and Sheffield Village, OH.

For further educational information or to attend one of Bill’s educational classes, please email ContactUs@GreatLakesRetirement.com with the subject line “Blog”, or you may visit his website, www.GreatLakesRetirement.com .