With all the discussion of food and energy it helps sometimes to look at the data and put things in perspective. One reason that the rise in food and energy is having a smaller impact than in the 1970s is that they now account for a much smaller share of consumption. Food and energy fell from 30% of nominal consumption at the peak in 1980 to only 18% at the bottom in 2001. They still only accounted for 20.1%, of consumption in the fourth quarter, compared to 27.1% at the bottom in 1973. So the adjustment to higher food and energy prices still does not have to be as large as in the 1970s.
Second, the rise in energy’s share of consumption has been much more gradual this cycle as it rose from 4.2% of consumption in 2002 to 6.4% last quarter. From 1978 to 1980 energy’s share jumped two percentage points in two years compared to the five years it has taken this cycle. In the two 1970s cycles the rise in food prices was concurrent with the rise in energy prices. But this cycle, food costs are just now starting to squeeze the consumer as food’s share was still at near record lows at the end of 2007.
As this chart shows one of the ways consumers adjust to higher food and energy prices is putting off purchasing new cars and parts. We are seeing this adjustment this cycle just as we did in the 1970s. But again, it is being much more gradual. In 1970s cycles auto spending fell two percentage points in one year in 1974 and two years in 1978-80. So far auto sales have fallen just sort of two percentage points this cycle, but it has been spread out over six years since 2001.
This much more gradual emergence of the consumer squeeze is one of the reasons that we are not seeing a sharp jump in involuntary inventory accumulation this time and why higher energy and food prices are not generating a major recession as in the 1970s. A major recession may still emerge, but the situation this cycle is sufficiently different from the 1970s that one can not simply use the 1970s as a good guide of what to expect.