Questions and Answers   

How have higher energy prices affected the U.S. economy? 

The U.S. economy has been growing at an impressive rate in recent years.  Real gross domestic product (GDP) increased at an annual rate of 4.1 percent during the third quarter of 2005, and had been growing roughly between 3.5 and 4 percent since early in 2003.  The strength of economic growth has been particularly notable in recent quarters as it came at a time when rising energy prices and interest rates could have been expected to dampen economic growth.  

 Indeed, despite many forces working to perhaps slow consumer spending and the economy, total personal consumption expenditures continue to rise as a percent of total GDP.  During the late 1990s, consumption was accounting for roughly 67 percent of GDP.  Recently, consumption has been accounting for more than 70 percent of total GDP.  The U.S. economy is growing rapidly, and is relying even more heavily on consumer spending as a driving force, despite pressures on household budgets. 

Recent trends in a few indicators appear to shed some light on the recent strength of consumer spending during a period of surging energy prices, rising interest rates, and rising health care costs, among other factors.  In particular, the personal savings rate – the percentage of disposable personal income not used for consumption – has been falling for years, but dropped sharply throughout 2005.  Indeed, the personal savings rate in the U.S. has been negative in recent months.  Meanwhile, household debt service payments as a percentage of disposable income climbed during 2005.  Early in 2004, monthly debt service payments were about 13 percent of household income.  By the third quarter of 2005, debt service payments had risen to about 13.75 percent of monthly income. 

Low savings and high debt payments in and of themselves are not necessarily bad – there can be productive reasons draw down savings and incur more debt.  Yet, they are likely unsustainable approaches by households to deal with rising costs of key items such as energy and health care.  Indeed, more recent data appear to suggest a slowdown in economic growth for the U.S.  During the fourth quarter of 2005, real GDP grew at an annual rate of just 1.1 percent.  This was the slowest growth rate since the fourth quarter of 2002.  Perhaps, households began to realize that higher prices could not continue to be absorbed by drawing down savings or incurring more debt. 
 

Return to Questions