Sir, We're Going To Need A Bigger Rabbit

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Memorial Day weekend and the beginning of the summer driving season is barely more than two months away.  Were you planning a road trip? Well, maybe you’re starting to have second thoughts. Gas prices around the country have surged, and at times like this, the pictures from California always get the most attention. While we’ve seen pictures of even higher prices, the one below pretty much encapsulates what you’ll pay in the high gas price capital of the continental US. With prices reaching $6/gallon for the “cheap stuff”, shelling out $100 each time you go to get gas is now the norm. That’s before snacks, drinks, and the obligatory scratch-offs!

Obviously, California is not the norm. On a national basis, the average price of a gallon of gas, according to AAA, is still at $3.91 and will likely tip above $4 by early next week. Since the start of 2005, only two other periods have seen prices top $4. The first was from June to July of 2008, just as the Financial Crisis was accelerating. Then, in April 2022, after Russia invaded Ukraine, prices shot up to near $5 and stayed above $4 through early August.

The US consumer isn’t nearly as exposed to energy in terms of their total spending as they have been in decades past, but $4 still hurts. In 2008, the US economy experienced one of the deepest recessions in its history, and while the economy didn’t tip into a recession in 2022, GDP did turn negative, and stocks were in a bear market.

Besides filling up the tank, rising energy prices are showing up in other areas, notably airfares. So, if you thought the TSA security lines, which are growing longer by the day due to the shutdown, were a slap in the face, now you get to pay much more for the privilege of flying.

Between rising energy prices and a government shutdown that politicians have little urgency to end, if you’re up for re-election this year, good luck. This year, that spells trouble for Republicans. While it’s been widely assumed that Democrats would regain control of the House for some time now, in recent weeks, prediction markets have seen those odds increase to the highest levels since the last Presidential election (lower chart).

The picture in the Senate (top chart) is more interesting. While Republicans have largely been expected to maintain control after the midterms, in the last several days, prediction markets are now a toss-up for the Senate and moving in the wrong direction for the GOP. Whatever your political leanings, if you think that DC has been dysfunctional in terms of getting things done for the last year, just wait until next year if Democrats take control of both chambers of Congress. President Trump has shown an ability to pull rabbits out of his hat in the past, but as the midterms inch closer and gas prices sprint higher, the longer this trend persists, the bigger the bunny he's going to need to pull out of his hat.