Oil Prices Are Breaking an Old Recession Tradition

You don't have to look far these days for evidence of a looming recession: The housing market is slumping, the bond market's yield curve has inverted , and the Federal Reserve is projecting that the unemployment rate will rise in 2023. But another noteworthy factor that was part of that gloomy picture just a few months ago has disappeared: the price of oil.

In the three most recent recessions before the pandemic, oil soared in the run-up to the downturn. We saw prices rise earlier in the year, only to cool off over the past six months. This is one of the more promising developments for people who are hoping the overheated US economy will be able to achieve a soft landing. It also raises questions about whether oil is as salient an economic indicator as it has been in the past.

Historically, soaring oil prices have been bad for the US economy because they squeeze US consumers and producers, and often are happening when the Federal Reserve is raising interest rates to rein in inflation. The 1990 recession began at the onset of the Gulf War when oil prices doubled. Again, prices surged to $33 a barrel from $12 a barrel before the economy tipped into recession in early 2001. And the 2008 recession was even worse because oil prices were still surging after the economic contraction had begun, so consumers were hit by a slumping housing market and higher energy costs.