Oil Drop Lifts U.S. Consumers as Companies on Guard: Economy

The plunge in oil prices is proving to be an unmistakable boon for U.S. households. The benefits for companies are less evident.

Consumer confidence soared in January to the highest level in more than seven years as Americans took heart in an improving labor market, prospects for higher earnings and falling gasoline prices, according to figures from the New-York based Conference Board Tuesday. Orders for durable goods unexpectedly fell 3.4 percent in December, signaling a global growth slowdown is weighing on manufacturers, another report showed, amid a decline in some company earnings triggered by a surging dollar .

The share of workers saying that jobs were plentiful and incomes would rise were the highest of the current expansion, brightening the outlook for consumer spending. At the same time, the slump in fuel prices is probably curbing demand for oil-drilling equipment, hurting companies such as Caterpillar Inc. just as slackening demand from overseas and a firming dollar also take a toll.

“This whole drop in oil prices is a transfer of income from companies to consumers,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York, whose projection for a 3 percent drop in goods orders was among the closest in a Bloomberg survey. “The most important trend is that the labor market is improving and unemployment is coming down. A drop in oil price should be a net plus for the U.S. economy.”

Stocks tumbled on the drop in durable-goods orders and as disappointing results from Caterpillar to Microsoft Corp. heightened concern about the economy’s strength. The Dow fell 1.7 percent to 17,387.21 at the close in New York.

Bond Yields

Treasury yields rose from record lows as Federal Reserve officials gathered to decide on the pace of future interest-rate increases. Policy makers meet Tuesday and Wednesday to gauge the economic outlook.

The Conference Board’s consumer confidence index jumped to 102.9 this month, the highest since August 2007, from a December reading of 93.1, according to data from the private research group. The gain reflected advances in both current conditions and the future outlook.

The share of Americans who said jobs were plentiful rose to the highest level since February 2008, while the proportion expecting more jobs to become available in the next six months advanced to a five-month high.

The share of respondents saying they expected their incomes to rise in the next half year rose to 20 percent this month, the most since December 2007.

Buying Plans

More people said they planned to purchase an automobile within the next six months, while buying plans for homes were little changed. The share looking for a new appliance retreated after reaching a record in December according to data going back to 2010.

Another report from the Commerce Department on Tuesday showed home builders were among those benefiting from the recent drop in mortgage rates and increases in hiring.

Purchases of new homes jumped 11.6 percent in December to a 481,000 annualized pace, exceeding all estimates in a Bloomberg survey of economists and the most since June 2008, a sign the industry is poised to keep expanding this year.

For all of 2014, builders sold 435,000 new houses, the most since 2008. The market peaked at a record 1.28 million in 2005 and slumped to 306,000 in 2011 after the housing bubble burst, the lowest in data going back to 1963.

Home Sales

“New-home sales are on an upward trend and we expect it to continue into 2015,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “It’s largely in response to falling mortgage rates, easing bank lending and a strong job market. That’s all good for housing.”

Manufacturers haven’t been as fortunate. Bookings for non-military capital goods excluding aircraft, considered a proxy for future business investment, dropped 0.6 percent in December for a second month, the Commerce Department’s durable goods report showed.

Slackening demand from Europe and some emerging markets and the strongest dollar in more than a decade are probably weighing on orders, making companies less willing to invest in new equipment. At the same time, brightening American consumer attitudes are leading to gains in purchases of big-ticket items such as automobiles and appliances that can ripple through the economy and underpin manufacturing.

“It’s a broad-range weakness,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida, who is the second-best forecaster of capital goods orders for the past two years, according to data compiled by Bloomberg. “It likely reflects some of the weakness in some other parts of the world.”

Goods Orders

Bookings dropped last month for machinery, computers and commercial aircraft, Tuesday’s report showed. Demand for automobiles was one of the few bright spots.

The median forecast of 80 economists surveyed by Bloomberg estimated total durable goods orders would rise 0.3 percent, with projections ranging from a 3.5 percent drop to a 2 percent gain. Orders for non-defense capital equipment excluding aircraft were projected to rise 0.9 percent.

Shipments of non-military capital goods excluding aircraft, used in calculating gross domestic product, decreased 0.2 percent in December after falling 0.6 percent the prior month.

This morning’s data are the latest hint at the trend in business investment before fourth-quarter gross domestic product figures are released Jan. 30 from the Commerce Department.

GDP Forecast

GDP will show whether the consumer spending gains were enough to keep the economic expansion advancing even as global demand wanes.

The U.S. economy expanded 3 percent in the last three months of 2014 after a 5 percent increase in the third quarter, according to Bloomberg survey estimates. Growth rates have averaged a 2.3 percent pace in the economic expansion that began in June 2009.

Companies such as Deere & Co., the largest manufacturer of agricultural machinery, are preparing to let go staff in Iowa and Illinois as the outlook for global orders weakens. The Moline, Illinois-based company plans to dismiss about 910 workers, according to a statement issued last week.

Falling oil and copper prices are weighing on Caterpillar. The world’s largest mining-equipment maker, announced on Tuesday that earnings in 2015 probably will be $4.75 a share excluding restructuring costs, compared with the average Bloomberg survey estimate of $6.69. Revenue for the Peoria, Illinois-based company this year will be about $50 billion, short of the $55.2 billion survey estimate.

Auto Demand

At the same time, some assembly lines still are humming with demand for automobiles hovering at post-recession highs. Cars and light trucks sold at a 16.8 million annualized pace in December, making last year’s 16.4 million monthly average the best annual performance since 2006, according to figures from Ward’s Automotive Group.

Today’s report showed orders for motor vehicles and parts climbed 2.7 percent after a 0.4 percent gain a month earlier.

A sustained drop in fuel prices and steady job gains also are providing a cushion for households and propelling demand.

The cost of a gallon of regular gasoline was $2.04 on Jan. 26, hovering around the lowest since March 2009, according to data from auto group AAA.

That will help drive consumer spending and the economy, said Raymond James’ Brown.

“You really haven’t seen the domestic economic strength being reflected yet,” Brown said. “We’re going to see better consumer spending numbers in the first half of this year. That should be more than enough to offset the weakness we’re seeing elsewhere in the world.”

Also bolstering the consumer is a labor market coming off its best year since 1999. Almost 3 million jobs were added in 2014 as the jobless rate declined to 5.6 percent, a more than six-year low.

Before it's here, it's on the Bloomberg Terminal.