Correlating the Price of Gas and the Unemployment Rate

We were intrigued by a chart Robert Zubrin posted illustrating that spikes in the inflation-adjusted price of oil have often preceded changes in the U.S. unemployment rate. So much so that we wondered if a similar pattern might emerge if we substituted the average price of gasoline at the pump instead.

There are two big reasons why we are so curious to see if that kind of pattern exists. The first reason has to do with the much greater visibility of motor gasoline prices in the United States as compared to the price of a barrel of oil. It’s really the only commodity whose price you can see prominently advertised in every community in the nation and one that nearly every driving American can tell you off the top of their head.

The second reason has to do with the strong, negative correlation of gasoline prices and presidential approval ratings, where rising gas prices coincide with falling approval levels and falling prices correlate with improving approval ratings in public polling.

If the real price of gasoline at the pump really is correlated with changes in the unemployment rate, that relationship would go a long way to both justifying Americans’ use of the price of gas as a measure of a President’s performance in office!

Let’s get to it then! Our first chart takes monthly unemployment rate data from the Bureau of Labor Statistics and matches it up with the average, inflation-adjusted U.S. city price of motor gasoline from the U.S. Energy Information Agency from January 1976 onward. We selected this starting date because it coincides with the earliest data available from the EIA regarding the price of unleaded motor gasoline, which has been continuously available in the U.S. since.

What we see is that spikes in the real price of gasoline at the pump tend to lead spikes in the U.S. unemployment rate by roughly two years. We next shifted the unemployment rate data leftward (earlier) by 24 months to better show that apparent correlation.

While the correlation is far from a perfect match, what we do see suggests that Americans can indeed use the real price of gas at the pump to reasonably anticipate how the unemployment rate will change two years down the road. We next determined the overall strength of this correlation.

With an R2 coefficient of determination of 0.545, which suggests that the price of oil can “explain” some 54.5% of the variation in the U.S. unemployment rate two years later, we find that there is a positive, but only medium-strength correlation between the two.

It’s far from perfect, but that correlation means that Americans can indeed use their personal perceptions of the cost of gas at the pump as a measure of how well the President is doing their job overall, because how they’ll be doing economically two years from now will very likely be impacted!

Data Sources

U.S. Bureau of Labor Statistics. Labor Force Statistics from the Current Population Survey. Seasonally-adjusted Unemployment Rate, 16 Years and Over. Accessed 9 February 2011.

U.S. Energy Information Administration. Short-Term Energy Outlook – Real Energy Prices (Excel Spreadsheet). Accessed 9 February 2011.

Image Credit: Scoreboards.net

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