If low oil prices are a gift to U.S. consumers, why isn’t the U.S. economy growing faster?
After all, cheap crude pumps money into consumers’ pockets much the same way a tax cut would. The drop in oil prices this year has been like a $290 billion tax cut, roughly equal to a 1 to 2 percentage point across-the-board cut in federal income and payroll taxes.
Federal Reserve Chairman Janet Yellen seems to have had greater expectations too. In July, she said that the economy might “snap back more quickly” particularly as “the boost to consumer spending from low oil prices shows through more definitively.”
But the economy has not snapped back. And consumers aren’t responding to falling gasoline prices with the usual shopping gusto. Instead, the economy has slowed to a lackluster annual rate of 2 percent in the third quarter, confounding the Federal Reserve and souring Americans on the recovery that President Obama has tried to portray as one of his principal achievements.
“You’d have thought that $2 gasoline would be much more important than low interest rates and fiscal stimulus, and yet it seems to have had no impact,” said Edward C. Chow, a senior fellow and energy expert at the Center for Strategic and International Studies. “There’s something else going on. There’s some anxiety out there that is not comforted by low oil prices.”
So what’s wrong? Kathy A. Jones, Schwab’s chief strategist on credit markets, said that consumers have increased their savings as oil prices have dropped. And as the savings rate has gradually edged higher, Jones said, the use of credit cards has declined. According to the Bureau of Economic Analysis, the personal savings rate climbed to 5.6 and 5.5 percent respectively in October and November, the highest rates in three years.
“So consumers are saving much of the extra money from lower oil prices,” Jones said. “That’s smart but it also means less robust economic growth than if they had spent it all on other goods.”
In addition, some of the benefits of cheap oil are flowing to businesses, many of which are boosting profits rather than lowering consumer prices, said Rob Shapiro, chairman of the consulting firm Sonecon and former under secretary of commerce for economic affairs during the Clinton administration.
All the same, without lower oil prices, the economy would look substantially worse. Excluding gasoline, retail sales are up about 3.7 percent this year, Jones noted. Although that’s down from last year’s 4.9 percent pace, it’s still higher than wage growth of about 2.3 percent. One thing consumers are still buying: new cars. Fueled in part by lower gasoline prices, auto sales are on track for a banner year.
In addition to having a mixed effect on consumers, cheap oil has also dented the nation’s overall business investment levels by putting a crimp in the oil industry’s capital spending plans.
Chevron announced Dec. 9 that it would slash capital spending plans by 24 percent to $26.6 billion next year. Royal Dutch Shell shaved its capital spending plans by $2 billion for next year. One of the big independent oil companies, Devon Energy, said it would spend $2 billion to $2.5 billion in 2016, down from about $4 billion this year.
That in turn has slowed industrial production, which includes outlays on oil drilling. Industrial production has fallen in eight of the past 11 months and the overall index is at its lowest level in more than a year, Jones said.
“Investment in energy production continues to fall with prices and that is likely to remain a drag on economic growth going forward unless oil prices rebound,” she said, adding that she does not expect such a rebound.
Jason Furman, chairman of President Obama’s Council of Economic Advisers, also notes that in November the economy lost about 11,000 jobs in mining and logging, which includes oil extraction.
In the past, blows to the oil and natural gas industry have sent economies in places such as Texas, North Dakota, Oklahoma and Louisiana into tailspins. That’s what happened in Houston in the 1980s, when a housing and oil boom turned to bust. Major regional banks, such as Texas Commerce Bancshares, suffered heavy losses in both energy and real estate. Chemical bank ended up taking over Texas Commerce.
Yet many American regions are more diversified today than they once were. Texas has seen hiring increases in nine of 11 sectors of the economy, including professional and business services, trade, transportation and utilities, leisure and hospitality, education and health services, construction, government and financial services.
“Comparing the situation today to the 1980s is really comparing apples to oranges,” Richard W. Evans, the soon-to-retire chief executive of San Antonio-based Cullen/Frost Bankers, said in an interview published by the Federal Reserve Bank of Dallas.
“In the ’80s, oil prices dropped but in an environment where most people were expecting them to continue to rise. So the drop was not expected and not planned for,” Evans said. “In the most recent oil price decline, lenders’ expectations were much more rational, and when oil was at $100 a barrel, most anticipated a downward slide to $70 or $80. So, while the magnitude of the recent price crash was larger than expected, both borrowers and lenders were better prepared.”
The result has been greater stability. The Texas unemployment rate in November stood at 4.6 percent, unchanged over the previous year. Total non-farm employment rose by 179,300 jobs, or 1.5 percent over November 2014.
Although tax collections on oil and gas production in the first quarter of fiscal 2016 plunged 50 percent from the same period of 2015, overall sales taxes in the state were only down 2 to 3 percent, according to “The Texas Economy” website of the Texas Comptroller.
Housing in the state has been strong too. The only sign of weakness was a 1.8 percent drop in the sales of existing single-family homes compared to a year ago, the comptroller’s site said.
Back in the 1980s, “real estate was chasing oil” Evans said. Moreover changes in real estate tax rules drove passive investors out of the market “and sent real estate crashing,” Evans said. “Neither of these factors has been an issue this time around.”