Is Oil's Drag on U.S. Growth Finally Over?
One of the biggest surprises in economics has been how the world has responded to a period of lower energy prices.
In 2015, economists were nearly of one mind in declaring that lower energy prices were a net positive for the U.S. economy. After the downturn in mining equipment and structures—which encompasses energy-related capital expenditures—served as a major drag on growth without much in the way of a positive offset, they were forced to revisit this thesis.
Households, whether still scarred and looking to repair their balance sheets from the lingering damage of the financial crisis or unconvinced as to the durability of these windfall gains, largely socked the savings away rather than boosted their discretionary spending.
But oil's drag on real activity "in terms of it influencing the economic fundamentals—could very well be over," according to RBC Capital Markets Chief U.S. Economist Tom Porcelli and Senior U.S. Economist Jacob Oubina.
January's Philadelphia Fed regional manufacturing report, which includes firms that support activity in the Marcellus shale formation, proved disappointing on the surface, but the details showed signs of progress, the economists note. Shipments rebounded from contraction to expansion, while new orders posted a much smaller rate of decline relative to the previous reading.
"Though this metric obviously remains plagued by the goings on in the commodity space—a major shale play cuts right through the region—what was surprising is that we did not get a worse outcome given that negativity in the markets has reached a nearby high," RBC's duo wrote. "Again, we will not be so bold as to call the bottom in the manufacturing pain, but the guts of the Philly report suggest the 'rate of change' in terms of pessimism has slowed significantly."
Further bolstering their assessment of oil's waning negative impact on the U.S. economy is the lack of Texans filing for unemployment benefits.
"One of the near-term trends we have found interesting in the state claims data is that Texas—which is obviously the largest of the states most acutely challenged by the oil decline—has witnessed a discernible turn lower," they wrote. "Indeed, initial jobless claims in Texas are now at the lowest year-over-year rate since oil really began to plumb the depths."
Such an appraisal, however, may prove to be optimistic.
North Dakota, arguably the biggest beneficiary of the shale revolution in the U.S., continues to see initial jobless claims rise on an annual basis. And with oil production in the lower 48 states up 0.5 percent year-over-year for the week ended Jan. 15, any supply curtailment will mark a fresh drag on economic activity.
Hui Shan and Marty Young, vice presidents at Goldman Sachs, liken the current oil slump to that of the mid-1980s. In a recent report, the pair notes that Texas has seen little in the way of economic pain during this episode—and indicate that some may be in the offing.
Bankruptcy filings haven't surged, vacancy rates have edged higher without soaring, and foreclosure inventory has declined. All metrics show the economy is performing much better now than it was during the last stretch of depressed oil prices.
Households and businesses have better weathered the storm on this occasion in part due to the state's more diversified economy, Goldman Sachs suggests, observing that oil and gas extraction as a share of gross domestic product has fallen to 12 percent in 2013 from 19 percent in 1981.
"We expect the vacancy rate to climb further over the next few quarters, posing downside risk to loans backed by Houston commercial properties. But we do not think default rates will match the 1980s experience," wrote Shan and Young. "We expect financial stress in Texas to pick up, but remain below 1980s levels."
Ultimately, however, the direct impact on employment will prove to be limited. The number of Americans working in oil and gas extraction at the end of 2015 was 185,400. While the shale boom certainly spurred jobs in oil-producing regions not directly involved with natural resource production, nearly five times as many Americans work at gas stations than in oil and gas extraction.
The correlation between oil and other asset prices has been particularly strong over the past 12 months, and the S&P 500 has moved in near-lockstep with crude in 2016. But these financial market stresses are not necessarily indicative of an enduring U.S. economic malaise.
Depending on whom you believe, the ill economic effects of lower crude will remain muted, confined to certain regions, or disappear entirely. And that's to say nothing of the benefits, namely the potential pent-up boom in consumer spending should this boost to discretionary income be deployed.