Can economy hold up with gas at 3 bucks?

A sort of economic milestone was reached last week as gas station owners all over L.A. felt comfortable enough to jack up their pump prices to three bucks or more a gallon (one 76 station on Olympic Boulevard was charging $3.35 for premium). Breaking the $3-a-gallon barrier, even in the nation's most expensive gasoline market, has a psychological relevance not unlike the 10,000 Dow.

To economists, it may be just another number (and not even a record high, when inflation is considered). But to the rest of us, it's an expletive.

People are paying, of course, but they're also starting to do the math. Keep shelling out an extra $10 or $20 a week and pretty soon, to paraphrase the late Everett Dirksen, it turns into real money.

So now what? If you believe the experts, prices will start falling after Labor Day, which is the unofficial end of the driving season. They base this on some pretty sound evidence: Demand has been dropping in recent days (fewer family road trips) and refinery production is more or less holding up. That has helped push down prices.

But how long will they fall and to what levels--or more fundamentally, how much longer will gasoline be priced at $3? No one has the first clue, but two forces seem to be converging on each other.

One is the historic connection between sharp rises in energy prices and the onset of recessions. There's no mystery here: When people are forced to shell out more dough each week--and that additional expense isn't made up by a commensurate increase in wages or revenues--the money must come from somewhere.

For consumers, it should mean more debt or less spending. For businesses, it should mean lower profits. "We can't lose sight of the fact that energy restricts growth," J.P. Morgan Senior Economist Anthony Chan told The New York Times.

But the odd thing is that energy prices have been increasing for many months now and the economy shows little sign of caving in. For the April-June period, the nation's gross domestic product grew at a 3.4 percent annual growth rate--a very solid number. During that same time, corporate profits for the 900 companies surveyed by Business Week rose by 20 percent--the tenth consecutive quarter of increased earnings. "The irrepressible, indefatigable corporate profit machine continues to mint money," the magazine's Aug. 22 story opened.

The economists have a theory on why growth is coexisting with higher energy prices. They've concluded that thanks to global competition and the falling prices of other goods, today's economy is better able to withstand $65-a-barrel oil. After all, it takes only half as much energy to produce $1 of GDP than it did during the oil crunch of the 1970s, when gas-guzzling was not offset by energy efficiency.

There's another big difference: rock-bottom interest rates that have allowed homeowners to tap into the proceeds of their refinanced loans. This has created a non-stop orgy of buying--and with it, a generation of consumers who have never been forced to cut back on their spending habits.

All of which is very nervous-making. By definition, economies are supposed go up and go down, manipulated along the way by central banks that keep the machinery running. No economy goes up indefinitely (just as no house price keeps rising indefinitely), and anyone who suggests otherwise hasn't learned a damn thing from the tech meltdown.

To get a handle on where this might all lead, you don't need to scrutinize the latest government report--just keep your eye on the neighborhood gas station. ff that $3 price holds up for much longer, be prepared for a rocky ride.

Mark Lacter is editor of the Business Journal. He can be heard every Tuesday morning at 6:55 and 9:55 on KPCC-FM (89.3).