Markets remain volatile with attention focused on the uncertainty created by the Ukrainian crisis and the impact this is having on key commodity prices, especially oil.

Here in the U.S., consumer concerns had already been centered on high inflation, which is being magnified by the current spike in oil prices. While we have been experiencing above-trend economic growth since the economic reopening in the summer of 2020, the question now becomes: How big of an oil price spike can the U.S. economy and consumer withstand before tipping into a recession?

Impact on Consumption

Consumer spending makes up about two-thirds of the U.S. economy and is obviously very important to economic growth. Throughout the last decade, which saw consistent economic growth without a recession, consumer spending growth ranged between 1% and over 3%. Consumer spending rose 2.1% this January, and it is a reasonable assumption to expect consumer spending to fall within the historical range for 2022, barring a major energy shock. This is supported by a healthy consumer with pent-up demand (more on this below).

Of important note, energy’s share of consumption is down by nearly 60% over the last 40 years, implying oil price shocks are far less damaging today. However, the move in oil prices from $75 in the fourth quarter of 2021 to around $120 today is large enough to have a noticeable impact on spending.

Estimates show that for every $10 increase in oil, consumer spending is cut by about 0.15%. So, oil’s increase from roughly $75 in the fourth quarter of 2021 to about $115 as of this writing, if sustained, could cut consumer spending by about 0.6% this year. While this would be a noticeable drag, we believe the U.S. economy could handle it, especially given its healthy underpinnings.

Unfortunately, the impact of higher energy prices is hardest on the low-end consumer. The lowest 10% income cohort would see about a 1.8% decrease in consumer spending while the highest 10% would only see about a 0.2% decrease. Obviously, a move to $150 or $200 would be enough to cause real damage to the U.S. economy. In addition, consumer confidence has already suffered from inflation that has accompanied the reopening of the economy, with inflation now the major consumer concern. Given the importance consumer confidence plays in purchasing decisions, a further spike in oil prices would inevitably have secondary impacts on economic activity.

Consumer Coming from Position of Strength

We emphasize that recessions are typically associated with major imbalances in the economy, which we are not seeing today. 2008’s oil spike to about $150 was accompanied by highly indebted consumers and undercapitalized banks. Consumers and banks spent the last decade repairing their balance sheets and are both healthy heading into the current oil spike.

Consumers still have significant excess pandemic savings and pent-up demand for housing and autos—unlike 2008 when housing was way overbuilt. The labor market is very healthy today with 11 million job openings while the Omicron wave is rapidly fading, which is allowing economic activity to normalize.

Importance of Energy Independence

Historically, major oil price spikes were accompanied by a recession. Importantly, this relationship has been fundamentally altered by the energy renaissance. The U.S. has essentially become energy independent over the last decade due to the success of shale oil and gas drilling.

This has reshaped the dynamics of the U.S. economy. From 1970 until 2007 (prior to the energy renaissance), corporate capital spending typically fell when energy prices spiked—magnifying the impact on the consumer. However, since 2010, corporate capital spending has shown a positive relationship with higher energy prices. This has been caused by increased U.S. oil and gas shale drilling activity incentivized by higher energy prices. This activity has a multiplier effect with positive impacts on other industries.

Today, we are seeing energy capital spending increase in response to higher prices which should help offset the drag on the consumer.

Additional Observations

Other economies are more exposed to an energy price spike. Europe is heavily dependent on energy imports, especially Russian oil and gas. European banks also have significant exposure to Russian debt, which could cause stress on European banks. All of this implies Europe’s economy will feel a greater impact from the Ukrainian crisis and energy price spike than the U.S.

European and other global economic weakness could increase global financial stresses and have negative impacts on U.S. corporate confidence. This could result in additional impacts on the U.S. economy, especially with the Federal Reserve about to hike interest rates in response to inflation.

Given the unpredictable nature of the Ukrainian crisis and oil price spike, we have neutralized our sector exposure with our favorable stance on the cyclical Energy sector matched by the more defensive Health Care sector. We also continue to suggest staying the course with long-term investment plans, despite the volatility caused by today’s uncertainty.



This report is provided for informational and educational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities or a recommendation for any strategy or to buy, sell, or hold any product. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed here. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published by any person for any purpose without Janney’s prior written consent. This presentation has been prepared by Janney Investment Strategy Group (ISG) and is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to purchase or sell a security. Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment. For additional information or questions, please consult with your Financial Advisor.


About the author

For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

To learn about the professional background, business practices, and conduct of FINRA member firms or their financial professionals, visit FINRA’s BrokerCheck website: