U.S. Recession Risk Rises on April Oil Price Jump: Chart of Day

A spike in oil prices in April, which came amid concern that unrest in Libya would spread to other oil-producing countries in the region, has increased the odds of a U.S. recession.

THE CHART OF THE DAY shows that 10 of the last 11 U.S. recessions were preceded by jumps in oil prices, at least four of which were associated with Middle East conflicts and embargoes by the Organization of Petroleum Exporting Countries: the OPEC oil embargo of 1973-74, the Iranian revolution of 1978- 79, the beginning of the Iran-Iraq War in 1980, and the first Persian Gulf War in 1990.

“The probability of a recession has increased to about 50/50 in the U.S. - we were not even close to this level a year ago,” said James Hamilton, a professor at the University of California and Research Associate with the National Bureau of Economic Research, the official arbiter of U.S. recessions.

Historically, the weakest economic growth comes three to four quarters after oil prices rise, meaning the fourth quarter of 2011 and the first quarter of 2012 could be the slowest, Hamilton said.

The disruptions in April affected a relatively small amount of production, and the price of West Texas Intermediate crude oil fell short of the $145-per-barrel level seen during the previous slump in 2008, Hamilton noted, so a double-dip is not a certainty. “It would take another, additional shock to put the economy back into a recession,” he said. “Unfortunately, developments in the European financial sector could turn out to add a significant burden to the world economy.”

To contact the reporters on this story: Ilan Kolet in Ottawa at ikolet@bloomberg.net; Caroline Alexander in London at calexander1@bloomberg.net

To contact the editor responsible for this story: Alexandre Tanzi at atanzi@bloomberg.net

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