Rising gas prices will hammer already fragile consumers

I went to get gas on Sunday at my local place. I go there all the time so I know the attendants, too (this might require a bit of explanation: I live in New Jersey. We have a law that prohibits you from pumping your own gas. So all our stations have attendants.)

As he was filling up the tank, he started complaining about the price of gas. How much it's gone up, how much diesel costs, how crazy it all is. When the people selling you the product are complaining about the price of the product, something is wrong.

The price of gas is climbing back to its 2026 highs. I paid a bit under $4.50 over the weekend, which is roughly the national average right now and only about a dime under the May highs. That was right around the time I wondered if there was a price that could break the economy. I do think that is still a concern.

The wrinkle now is it might not be the price of gas, but of diesel. Diesel prices have for the first time ever topped $6, which particularly vexed my station attendant, and is leading to global shortages. The problem with that is diesel has heavy industrial uses. Companies being forced to overpay for diesel, if they can get it at all, could turn into a real problem for the rest of the economy.

People are especially sensitive to the price of gas. It's something everybody pays (except all you EV drivers), it's plastered on digital displays all over every town, it generates news whenever it goes up. And, right now of course, because of its importance to consumer health, it is the fulcrum through which the entire Iran war is being measured (at least here in the U.S.; overseas the conflict is counted in both oil and lives.)

Right now the economy is still growing and the economy is still growing, as our Allissa Kline reports. Despite all the turmoil, growth is right about at its average rate, according to the Chicago Federal Reserve's National Activity Index. The index, which measures not growth the way GDP does but rather momentum, came out on Monday and showed a slight deceleration, but also showed that the economy is largely still chugging along at  its usual speed.

If all you looked at was GDP, you might conclude the economy doesn't have any problems. If all you looked at was the nonfarm payrolls report — the official unemployment rate is only about 4% — you might conclude the economy doesn't have any problems. But if you look at the economy through other lenses, you can see the problems. And it's then that the price of gas and diesel becomes a much larger issue.

And all of that, ultimately, translates into the demand for credit.

"The economic situation for low- and middle-income Americans is more precarious than headline statistics would suggest — situations some have characterized as 'hanging on by their fingertips,'" Eugene Ludwig, the former Comptroller of the Currency, wrote in a BankThink essay on these pages. 

Ludwig runs a research shop called the Ludwig Institute for Shared Economic Prosperity, which contends that the rate of "functional unemployment" is 24%. What that means is that 24% of the population either is unemployed or working only part-time or is employed in a job that doesn't pay a living wage. You can dissect his numbers all you want, but that number does seem to jibe a lot more with the current foul mood than the official unemployment rate.

Another report finds that the number of "financially vulnerable" households — meaning broadly households that are struggling to manage their finances  — rose to 17% this year, the highest level since 2018, according to the nonprofit Financial Health Network. Our Kate Berry covered the report and its implications. These are all the kinds of people who feel acutely the rising price of gas and groceries and whatever else they need to buy. 

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As long as people are spending, you will continue to get paeans to the mythical resilient consumer. But what keeps consumer spending going isn't the can-buy spirit of the average American. It's credit. Few people live on cash; most need loans of some sort to get buy. So consumer credit demand is a key barometer of health. Right now, the level of serious delinquencies, meaning 90 or more days, is pretty low, only about 2.6% according to the New York Federal Reserve. I suppose that's not the whole picture, but it is a good sign for banks.

But, like Ludwig said, a lot of people seem to be just holding on. And the one thing that could send them all spiraling is the price of gas.