Here it comes: the oil shock....

Link

Forecasters still expect economic growth to remain healthy for the rest of the year, as companies invest in new factories and the 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 the nation's 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 showed much more resilience in the face of higher energy costs than most analysts had anticipated. Although prices began rising in early 2002, consumers have kept shopping, companies have expanded and inflation has remained under control. At times, it seemed a new economic era had dawned.

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 today, adjusted for inflation, than it did 30 years ago. Even at today's prices, oil is cheaper than it was in the early 1980's, once adjusted for inflation.

The falling costs of other goods, thanks in large part to global competition, have also helped cushion the blow from higher 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 yesterday.

"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 in New York.

But a spike in oil prices still hurts, economists say, even if the pain does not come immediately. In the past, the full effect was not felt 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 a sharp climb.

"It is way too soon to be sanguine," said Andrew J. Oswald, an economist at the University of Warwick in England, who has written about oil. "The influence of a petroleum shock runs deep and runs slow. My own view is that we will find oil shocks still hurt, and hurt fundamentally."

It was only 13 months ago that the price of a barrel of crude settled above $40. Oil, which closed yesterday at $66.08 a barrel on the New York Mercantile Exchange, is not likely to become much cheaper anytime soon, analysts say. Nor are natural gas prices, which have gained 73 percent this year. This means that winter heating bills for American households are set to soar.