Long rise in oil prices finally takes toll in U.S.

NEW YORK

A long rise in energy prices finally seems to be pinching the U.S. economy. After absorbing the burden of oil at $40 a barrel, then at $50 and beyond, American consumers have started to react as prices have risen above $60 in recent weeks.

Wal-Mart Stores on Tuesday blamed high oil prices as it reported that its profit had risen at the slowest rate in four years in its most recent quarter. The chief executive, Lee Scott, told investors that expensive oil was worrying him because it seemed to be erasing recent income gains among many customers. Airlines have already felt the sting of increasing jet fuel costs. Last week, Delta Air Lines, UAL's United Airlines and Continental Airlines raised domestic fares in an attempt to stem losses. Delta is struggling to avoid bankruptcy, which UAL has yet to exit. UPS recently reminded its drivers not to leave their truck engines running when they deliver packages. Meanwhile, the government reported on Tuesday that inflation surged last month. Nearly all of the rise in inflation came from energy prices. Overall prices rose 0.5 percent in July - and 3.2 percent from a year earlier - after having been flat in June. If consumers are feeling pressed now by higher gasoline prices, matters could become worse this winter when their heating-oil bills arrive. Some commodity analysts say that is when the full impact of the higher energy costs will be felt. Forecasters still expect U.S. economic growth to remain healthy for the rest of the year as companies invest in new factories and a housing boom continues. But the high cost of oil already appears to be curbing growth, translating into unusually modest gains in employment and pay. If history is any guide, higher prices will hurt consumption, curb national economic output and shift spending patterns. The risks of a domino effect on the economy are real, economists say. "We can't lose sight of the fact that energy restricts growth," said Anthony Chan, a senior economist at J.P. Morgan Asset Management. "It is doing so." So far, the economy has shown much more resilience to higher energy costs than most analysts had expected. Although prices began rising in early 2002, consumers have kept shopping, companies have expanded and inflation has remained under control. At times, it seemed that the country had entered a new economic era. Without question, economists say, rising oil prices cause less economic pain than they once did. It takes half as much energy to produce $1 of gross domestic product, adjusted for inflation, as it did 30 years ago. Even at current prices, oil is cheaper than it was in the early 1980s, once adjusted for inflation. The falling cost of other goods, in large part the result of global competition, has helped cushion the blow of energy costs. While energy prices rose 3.8 percent from June to July, the price of all other goods inched up only 0.2 percent, the Labor Department said Tuesday. "There seems to be a greater tolerance in the economy in terms of what can be withstood," said Doug Leggate, an energy analyst with Citigroup. But a spike in oil prices still hurts, economists say, even if the pain does not come immediately. In the past, its full effect has not come until a year, or even two years, after prices began rising. Both of the last two recessions - in 1990-91 and in 2001 - began more than a year after energy prices started to climb. It was only 13 months ago that the price of a barrel of crude went above $40 to stay. And oil, which was trading above $66 a barrel Wednesday on the New York Mercantile Exchange, is not likely to become much cheaper soon, analysts say - and neither is natural gas, which has climbed 73 percent in price this year. This means that winter heating bills for American households are set to soar. "Consumers have held up the economy," said Andrew Oswald, an economist at the University of Warwick in England who has written about oil. "But, of course, that kind of behavior cannot be sustained in the long run. Eventually, reality dawns, and high energy prices come back to bite you."