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Of the number of factors that have contributed to the slowing of economic growth in the United States over the past few quarters, the one that has received less attention than it clearly merits is the rise in energy prices. In what may or may not be coincidence, at least the last three recession periods in the United States—those of 1990-91, 1980-82, and 1974-75—were preceded by spikes in the price of oil. As a consequence, we at the Federal Reserve are especially attentive to developments in energy markets and their effects on the behavior of households and businesses.

Obviously, caution is required in drawing generalizations from only three observations, and indeed many analysts do not place much credence in the link between oil prices and the business cycle. In part, this skepticism arises because the largely linear models that typically economists rely upon to track the ties between energy prices and gross domestic product do not signal a worrisome linkage. When simulated over periods with observed oil price spikes, the models do not show oil prices consistently having been a decisive factor in the subsequent economic downturns. Our heightened wariness about recent developments, however, reflects the possibility that the responsiveness of U.S. gross domestic product to energy prices may be different when households and businesses are confronted with abnormal price hikes. Because economic models typically are fit over both those periods with price spikes and the more predominant periods of moderate price fluctuation, their estimated statistical relationships would not fully capture the effect of sudden and sizable shifts in oil prices on the economy.