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By Jason Stipp | 03-28-2012 01:00 PM

3 Economic Worries That Needn't Be

Higher gas prices, a moderate slowdown in China, or a tick up in interest rates don't spell doom for the U.S. economy, says Morningstar's Bob Johnson.

Jason Stipp: I'm Jason Stipp for Morningstar. As the immediate crisis in Europe has abated a bit, market watchers have had to look elsewhere for reasons to wring their hands, but Morningstar's Bob Johnson says at least three of those handwringing reasons might not be so much to worry about, at least right now. He is here with me to explain.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: There are three things that, over the last few weeks, have caused the market some worry, and I'd like to take them one by one.

The first one, especially domestically, that has caused a lot of worry, are gas prices, and we know that high gas prices can take a chunk out of consumers' wallets. But you say maybe this isn't such a huge thing to worry about, but you also talk a lot about the consumer's spending power, too. So why shouldn't we be horribly worried about gas prices at their current levels?

Johnson: Gasoline overall for consumers represents about 3.7% of their spending. So it's not huge, but it's a much big portion obviously the further you go down the income scale, because everybody uses about the same amount of gasoline. So it's is a much higher proportion of lower-income people's income. So that's clearly a concern, but at 3.7%, it's not a huge number.

And actually as prices have gone up, consumers have actually voted with their feet, so to speak. They are walking more, they're doing something more, because gasoline consumption has been way down on a per-capita basis over the last three or four years as prices have risen. So, as prices move up, they are avoiding gas, and there is some talk today even in The Wall Street Journal that maybe some of the refiners are leaving the market because they are afraid they can't raise prices high enough to compensate for doing the refining process.

Stipp: And you mentioned that the percentage of income that gas takes obviously is a bigger percentage for lower income folks, but not so much of a percentage of the higher income folks' household income. Does that also play into the fact that the higher income folks have been driving a lot of the consumer recovery in your mind?

Johnson: They sure have. You have seen the high-end really driving things, and with the stock market being up the last two quarters in the 5%-10% range, that's certainly made them do better, and we have seen a couple of the luxury goods manufacturers report better-than-expected numbers. So, after some fears last summer that the high end was through when the market was so weak, I think now the high-end consumer is looking good again.

And just to add something on the numbers with the gasoline: I think that what does matter, and matters a lot, is inflation. It is what kills every last [recovery], and the danger point is 4% year-over-year inflation. And last year, we got deadly close to that, and it did slow consumer spending. Gasoline last year was part of that, but last year we [also] had food prices going through the roof at the same time. And because of the tsunami, the carmakers were running prices through the roof, and used car prices were going very high.

So, you had that combination of three different things causing inflation to spike. So, people might say, "I remember gasoline prices were high last spring, therefore we're dead," but really, there were three things going on last year, not just one.

Stipp: So, inflation definitely very important, but you have to look at the overall inflation picture. Don't necessarily get too worried about one of those inflation components going up a bit.

The second thing, Bob, that has also caused a lot of worry over the last few weeks is China potentially slowing down. We have seen some data out of China that shows some moderation there, but you say that we shouldn't, at least as an economy, be too horribly worried about China slowing down, and maybe we should be a little happy about it. Why is that?

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