For a Quick-Read on the U.S. Economy, Check Gas Prices

What's one good short-hand for U.S. investors concerning whether the U.S. economic recovery can endure?

Keep an eye on price of gasoline.

And that's not too hard to do, for most Americans, given the abundance of gas stations in most areas. If you're far from one, you can get a snapshot of prices regionally, by visiting gasbuddy.com.

Now, here's the reason: the price of oil (a key component of gasoline) has not dropped, despite ample global oil supplies. For a variety of reasons (asset play, inflation fears, weak dollar hedge) the price of oil has risen about 80 percent early 2009, pushing the average price of unleaded regular to $3.26 per gallon in the U.S. High-cost metro areas, such as New York, Los Angeles, San Francisco, and Boston, are experiencing prices over $3.60 for regular unleaded.

(To be sure gasoline prices are down about 5 percent in the past month, when the average price of regular unleaded was $3.42 per gallon, but the point is that what the U.S. economy really needs is a gasoline price substantially below $3 per gallon, say at/near $2.50 per gallon.)

Now, factor-in what will happen to gas prices when demand starts to pick-up in the Unite States. Assuming flat oil prices, an average unleaded price of $3.50 seems like a done-deal, and a run to $4 per gallon in the spring is possible.

But Where Is Price of Oil Headed?

However, if oil continues to rise toward $110 per barrel, add another 20 to 25 cents to gasoline prices. Oil of late appears to have taken a breather, it's down about $7 in the past two days to trade at/near $93.60 per barrel. Where's the price of oil headed in the year ahead? Good question. One camp, the oil bulls, argue that emerging market demand will be more than sufficient to keep an upward pressure on the world's most vital commodity. The other camp, the oil bears, argue that the smaller U.S. workforce and a possible recession in Europe stemming from its government debt crisis, will place downward pressure on oil's price.

The key to gasoline's impact on U.S. economic performance moving forward will be how long gasoline prices remain at elevated levels.

If gas prices rise above $3.50 per gallon for regular unleaded, U.S. GDP growth will certainly take hit. It's also hard to see how the U.S. economy could grow at an adequate rate amid $3.50 gasoline: already pinched disposable incomes will take another hit, taking another bite out of commercial activity. Every $1 per barrel rise in oil decreases U.S. GDP by $100 billion per year and every 1 cent increase in gasoline decreases U.S. consumer disposable income by $600 million per year.

Further, regarding sky-high gas prices, the 2008 summer spike in gasoline prices to over $4 per gallon is not the best case study because the price soon collapsed as the leveraging bubble ended. Can the U.S. economy zip along at 3.0 percent GDP growth rate in face of $3.50-3.75 gasoline? In theory, if Americans conserve, is it possible, but the calculation here is that, at minimum, GDP growth would slow substantially.

So, to get a quick read on where the U.S. economy is headed in the next 12 months, just look at the price at the gas pump.