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Economics: United States
Economics – Markets – Strategy
Higher oil prices are
a burden but it is
paid for in real
time. Oil prices are
not a hammer
waiting to fall on
future growth
everyday nuts and bolts of total expenditure, most of which has to be spent in
good times and bad – is what attenuates, or drags an economy out of recession
when it has fallen into one for some other reason. It is not what pulls an
economy into recession.
The solid straight line of services consumption growth shown in the picture on
the previous page is a good indication of what we’re talking about. Investment
may fall, jobs may fall and, eventually, total consumption may fall. But core
consumption, 60% of GDP, grinds forward. It’s not fast, it’s not sexy but it is big
and reliable and for these reasons it tends to keep growth on track.
Oil
Total consumption is certainly facing some headwinds of late but that has more
to do oil prices and the price of gasoline than anything else. Oil prices have
tripled since January 2005 and vehicle sales have been falling since July of the
same year. The surge in crude (50%) and pump (35%) prices since January has
thrown even more cold water on sales.
Higher oil prices are a burden but they appear compellingly to have been driven
by strong global demand and income growth over the past 5-6 years (see Economic
Overview, “On a clear day”, above). On this time frame, oil prices have grown
fivefold. Growth in most parts of the world ‘survived’ the high oil prices because
it drove the high oil prices.
In this light, US growth faces headwinds from oil prices no greater or less than
it has faced for the past five years. Further rises in oil prices would have further
impacts on things like vehicle sales but it would not lower GDP growth later this
year any more than it already has over the past five years.
To be sure, US growth is not sterling at the moment. And foreign growth is
driving oil prices more than growth in the US, Japan or Europe, where oil consumption
has fallen for the past three years if not the past 12 (see “On a clear day”). Is the
US suffering weak growth because foreigners are pushing up the price of oil?
No. US growth is weak because of the US subprime crisis and the collapse in the
housing market. Foreign demand, as we discussed earlier, is the only thing
keeping US growth alive right now. So if foreigners are pushing up the price of
oil, that is the price of their keeping US growth afloat at the same time.
Global growth
‘survived’ higher oil
prices because it
drove higher oil
prices
US - core inflation
% YoY, core PCE and core CPI
3.0
core CPI
2.8
2.6
2.4
2.2
2.0
Actuals thru April
1.8
core PCE
1.6 Sep06
Aug07
Apr08 Aug08
1.4
Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
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