Cheap oil less of a boon for US growth than in the past

FEB 1, 20162:10 PM

[WASHINGTON] US consumers are cautious about spending their windfall from cheap gasoline and are saving more, according to a Reuters/Ipsos poll and official data, suggesting low oil prices are less of a boon for the US economy than in the past.

Commerce Department data shows that the crude's 70 per cent drop since mid-2014 cut households' annual spending on gasoline and other energy products by US$115 billion, equivalent to roughly 0.5 per cent of gross domestic product.

At the same time, however, savings increased by US$121 billion and while the data gives no indication where the money has come from, the survey suggests the windfall accounted for a significant part of the sum.

The Reuters/Ipsos poll shows 75 per cent of 3,068 Americans who answered questions on gasoline savings said the extra money helped them cover basic needs and the majority have not used their windfall to buy big ticket items. Over 40 per cent of respondents said the savings had helped them pay down debts, according to the Jan 15-27 online poll, which had a credibility interval of plus or minus 1.8 percentage points.

"It obviously hurts less when I go to the grocery store,"said Karen Joines, a recruiting firm product manager from Peachtree City, Georgia. Ms Joines, who participated in the survey, estimates she saves US$30 a week thanks to cheaper gasoline but has no plans for big purchases, in part because she worries low prices will not last.

Some economists say such doubts and the still-fresh scars of the 2007-2009 recession could explain the muted effect of cheap gas on consumption. For example, the economy only in mid-2014 recovered the more than 7 million jobs lost during the downturn. "We don't seem to be getting the benefits from cheaper gasoline that we did when the economy was healthier," said veteran oil economist and independent consultant Phil Verleger.

Dallas Federal Reserve President Robert Kaplan said another reason Americans appeared wary of spending what they saved at the pump could be that more and more of them were approaching retirement. "They are conscious of that (and) they need to save more,"Kaplan told Reuters in an interview.

HALF THE BENEFIT

The Dallas Fed, whose area includes the oil patches of Texas, Louisiana and New Mexico, estimates that a 50 per cent fall in oil prices now adds around 0.5 per centage points to economic growth over a year, half of the impact seen before America's oil boom.

One reason is that the oil sector has grown over the past decade, so spending and job cuts there weigh more on the whole economy. Cheaper oil also helps less because cars and machinery have become more fuel efficient, according to the Dallas Fed.

Thanks to hydraulic fracturing and shale drilling boom that made the United States the world's top oil producer in 2014, the nation also imports less oil than ever.

That goes to explain why in the public eye the modest benefits of cheap energy enjoyed by all get overshadowed by the havoc the oil slump wreaked in the energy sector and the nation's oil patches.

Tumbling prices forced producers and oilfield services companies to slash budgets, driving some into bankruptcy and many deep into the red. Markets have grown so bearish about the sector that when oil producer Hess reported a fourth quarter loss of over US$1.8 billion, its shares have risen because investors had braced for even more damage.

Yet even as job losses and lost tax revenues hit oil-producing states such as Texas or Alaska, the drag on the US economy as a whole has been limited.

The oil-dominated mining sector accounted for just 1.6 per cent of GDP in the third quarter and jobs in oil and gas extraction and services account for 0.3 per cent of US employment, down from 0.4 per cent during the boom years.

The investment in US mining structures, which is dominated by oil and gas exploration and well drilling, has fallen at a US$70 billion annual rate since the fourth quarter of 2014, according to Commerce Department data. Yet as Goldman Sachs estimates the overall drop in energy investment subtracted only about 0.3 percentage points from 2015 economic growth.

Barclays economist Michael Gapen forecasts that a further decline in energy investment could knock another 0.2 per cent from this year's US economic output.

The US job market also appears robust enough to absorb job losses in the energy sector and related industries. Goldman Sachs estimates such losses at 30,000 to 35,000 a month, but that compares with 292,000 jobs US economy as a whole added last month.

REUTERS