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Oil, Sky Falling


Lower crude may spell recession ahead.

The good news: Oil recently fetched $119.60 a barrel on the New York Mercantile Exchange, down almost 19% from a record high of $147.27 set July 11.

Tropical Storm Edouard, which some feared would disrupt Gulf Coast fuel production, seems to have had little effect: Chevron (CVX), Shell (RDS.A) and BP (BP) have returned workers to evacuated offshore platforms. The storm also appears unlikely to impact the east Texas refining hubs of Port Arthur and Beaumont, Texas, where Edouard came ashore on Tuesday morning.

This will provide some relief at the pump. Regular gasoline now sells at an average price of $3.88 a gallon.

But before you break into a rousing round of "Happy Days Are Here Again," here's the bad news: Oil prices are falling on decreased demand. That may signal recession ahead.

Consumers battered by falling home prices have cut back on the discretionary spending that drives economic growth. The U.S. Commerce Department said inflation-adjusted consumer spending fell by 0.2% in June. It was the worst showing since February.

General Motors (GM) and Ford (F) are cutting production of SUVs and trucks to refocus on smaller, more fuel-efficient cars. During the retooling, thousands of workers have been laid off. In Japan, Toyota (TM) laid off about 800 Lexus workers, or 10% of its workforce, due to slumping sales in the United States.

The Commerce Department reports that the unemployment rate rose to 5.7% in July - a four-year high, employers slashed payrolls for the seventh month in a row and 51,000 workers received pink slips last month.

The Institute for Supply Management, a private organization, says its manufacturing gauge was 50 in July, down from 50.2 in June; new orders fell, but production rose. A reading of 50 or more points to expansion, while anything below 50 suggests contraction.

This plays out against a backdrop of rising unemployment and, when adjusted for inflation, flat or declining wages. The failure of IndyMac hit a small percentage of households nationwide, but added to the general dread created by the subprime mortgage mess and a continued sense of insecurity. This hurts spending.

The U.S. Highway Administration says the number of miles driven in the United States in May fell for the seventh month in a row. Driving is down about 4% from a year ago; energy use is down about 2%.

What's clear is that falling oil prices will give consumers a breather, but won't create a rebound in consumer confidence - let alone a surge in hiring. If falling prices signal a sour economy, that's likely to mean more layoffs and reduced spending in the immediate future.
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