Bloomberg News

Rising Gas Prices Temper Middle-Income Gains Amid Campaign

March 16, 2012

A EXXON service station on March 13, 2012 in Washington. Photographer: Mark Wilson/Getty Images

A EXXON service station on March 13, 2012 in Washington. Photographer: Mark Wilson/Getty Images

Rising gasoline prices threaten to temper a hard-won sense of economic momentum for middle-income families in the U.S. as the election campaign heats up.

Middle-income families have seen their purchasing power drop during most of the economic recovery even as stocks soared. Inflation-adjusted median income only began to climb after bottoming out last August, according to Sentier Research, an economic consulting firm based in Annapolis, Maryland.

The surge in gasoline prices now squeezes middle-income families again as President Barack Obama approaches the election. Gasoline prices are up almost 17 percent, or 54 cents, this year through March 14, according to the American Automobile Association.

“Barring a sharp uptick in the unemployment rate in the next couple months, Obama’s biggest economic problem now is gas prices,” said Dan Schnur, a campaign adviser to Republican presidential candidate John McCain’s first bid for the White House in 2000. “Voters see gas prices up on signs every block when they drive home from work.”

While gasoline accounted for just 3.8 percent of consumer spending in January, fuel prices have a disproportionate impact on both the psychology and actual finances of middle- and lower- income families.

Middle-Income Households

In 2010, when prices at the pump averaged $2.84 during the year, gas purchases consumed 4.8 percent of the budget for middle-income households and 6 percent for lower-middle-income households, according to the most recent data from the Bureau of Labor Statistics’ Consumer Expenditure Survey. Among the bottom fifth, gasoline costs were more than 10 percent of income.

Gasoline accounted for about 80 percent of the 0.4 percent February increase in the U.S. consumer-price index, the Labor Department reported today. It was the biggest jump in the cost of living in 10 months.

Confronted with criticism from Republican opponents who have seized on the run-up in gasoline prices to target White House efforts to develop alternative energy sources, Obama countered yesterday that his detractors are “stuck in the past.”

“They dismiss wind power; they dismiss solar power; they make jokes about biofuels,” Obama told students at Prince George’s Community College in Largo, Maryland, outside Washington. “They were against raising fuel standards. I guess they like gas-guzzlers.”

‘Professional Politicians’

He compared unnamed “professional politicians” to Flat- Earthers who once denied the earth is round and to former President Rutherford B. Hayes, in office 1877 to 1881, whom Obama quoted as having said about the telephone: “It’s a great invention, but who would ever want to use one?”

Obama plans to continue promoting his energy policies next week with a visit to Cushing, Oklahoma, an oil delivery hub, where construction is scheduled to begin in June on a pipeline built by TransCanada Corp., according to an administration official. That segment was originally part of the company’s Keystone XL proposal to bring crude from Canada.

The two-day trip also includes stops at a photovoltaic plant in Nevada and an oil and gas field in New Mexico.

Former House Speaker Newt Gingrich, a Republican presidential candidate who has promised to bring the price of gasoline down to $2.50 per gallon by opening more federal land to oil drilling, dubbed Obama “President Algae” for the incumbent’s support of biofuels.

Retail Prices

The national average retail price of unleaded regular gasoline climbed to $3.821 a gallon on March 14, according to a daily survey by the American Automobile Association. That’s 7.5 percent higher than a year ago, according to AAA’s survey.

Recent polls show public unhappiness with the president over energy costs. Americans by 65 percent to 26 percent disapprove of how Obama is handling the price of gas, according to an ABC News/Washington Post poll conducted March 7-10. The survey of 1,003 adults had a 4 percent margin of error.

Thirty-six percent of Americans say the increase in gasoline prices has been a “serious hardship” and 48 percent of those earning less than $50,000 per year say so, the same poll found.

Not Blaming Obama

A Bloomberg National Poll conducted March 8-11 found that Americans don’t primarily blame Obama for rising gasoline prices. Sixty-six percent place more responsibility on oil companies and Middle East nations taking advantage of tensions with Iran. Only 23 percent say the White House is more at fault.

Middle- and lower-income families often don’t have much savings to cushion the impact of a spike in gas prices, said Isabel Sawhill, a senior fellow at the Brookings Institution in Washington.

“They’ve got a lot of fixed costs,” Sawhill said. “They can’t cut back on mortgage payments or rent. So that means they have to cut back a lot more on items where they have more discretion like clothing, travel, going out to eat, buying gifts for family members.”

The gas-price shock comes on top of slow earnings gains for middle-income families from the economic recovery that officially began in June 2009.

Consumer Dismay

Evelyn Salmern, 43, said today she no longer fills the tank of her General Motors Co. Yukon sports utility vehicle. She paid $3.96 a gallon for regular unleaded at a Citgo service station in midtown Atlanta.

“That car takes a lot of gas,” said Salmern, who said she earns $250 a week baby-sitting part-time. She said she’s had to cut back on purchases of toys for her 10-year-old son. “Sometimes he asked me for video games or toys and I can’t afford them. It is too much money for gas right now.”

Median household income, which is the middle of the middle class, was $50,020 in January, 5.2 percent lower than at the start of the recovery after adjustment for inflation, according to Sentier Research.

After drifting down since the recession began in 2007, real median income had risen four of the five months from last August through January, up a total of 2 percent during the period, according to Sentier.

The run-up in gasoline prices isn’t reflected in the January income figures, said Gordon Green, an economist with Sentier.

“There’s no question that the increase in gas prices is affecting real spending power,” Green said.

Even so, the increase in energy costs probably isn’t enough to derail the economic recovery.

The U.S. economy will strengthen through 2012 as employment gains more than offset rising fuel costs, according to economists surveyed by Bloomberg News.

Growing Economy

Even accounting for higher gasoline prices suggested by futures markets, Macroeconomic Advisers LLC, a forecasting firm in St. Louis, projects growth at 2.1 percent in the first quarter and 2.6 percent in the second quarter, said Ben Herzon, a senior economist. The firm recently subtracted 0.3 percentage points from its growth estimate in the second quarter based on updated projections for fuel costs, he said.

If the economic recovery continues, the political advantage for Republicans may be mostly “short-term”, said Andrew Baumann, a vice president of the Democratic polling firm Greenberg Quinlan Rosner.

The spike in oil prices mostly has been driven by market concerns about tensions with Iraq and the seasonal patterns in gasoline prices will turn to the advantage of the president well before November, he said.

“Unless there is a war with Iran,” Baumann said, “gas prices are likely to decline between now and the election, as they always do after the summer.”

To contact the reporter on this story: Mike Dorning in Washington at mdorning@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net


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