Is recession on its way in 2005?

In the opinion of iProceed, the chances of another recession in 2005 are much higher than they have been in the whole of 2004. The main reason: steady increase in oil prices and no signs of a significant drop in prices anytime soon.



Let us first look at the evidence. Since 1971, every time there has been an unusual oil price increase, there has been a recession as shown in the chart below. The pink bands indicate the duration of the recession. Also note that this chart analyzes data only up to March 2003. As of publication of this article, oil prices was closer to $55.

How can an oil price spike now cause a recession?

1. As price of oil derivatives goes up, it makes everything else expensive even though it may not be a direct user of oil. While prices of fuel, plastics, chemicals, etc. go up roughly in direct proportion, prices of food go up due to the shipping costs. In the colder regions of the country, heating costs go up. All these increases means lower disposable incomes for Americans.
2. The Fed, which is already tightening monetary policy, is likely to raise interest rates further to control inflation. This happened in 1975 and 1979 as well and may have been responsible for the recessions.
3. No matter who the president is in 2005, the taxes will have to go up (Related article: Tax hike in 2005 certain).
4. Rising healthcare costs, lack of salary increases/bonuses, rising property taxes and other fees (as states and local governments have tried to raise their revenues) and poor employment outlook means that Americans are effectively poor (Related article: Reasons for lower income of Americans).
5. The oil prices have risen due to two main reasons (1) huge demand from China; something that is not going away anytime soon (2) supply concerns due to chaos in the Middle East; a region that is not expected to stabilize anytime soon (many experts expect that elections in Iraq may actually start off a civil war).