There is a lot of optimism about US economic growth in 2015. The consensus is expecting the economy to expand at a real rate in excess of 3%, which would be its best performance in a decade. Helping to fuel this optimism was the Commerce Department's most recent revision to its third-quarter GDP estimate. Economic growth was revised upward from 3.9% to 5.0%. In combination with its estimate that the economy grew at an annualized rate of 4.6% in the second quarter, this upward revision marks the strongest six-month period since 2003. Economists and strategists are now promoting the idea that the US economy is finally kicking into a higher gear, and the decline in oil prices is noted as what will be a major catalyst moving forward.
Lower gasoline prices, should they remain at current levels, will save the average household approximately $550 during the course of next year, according to the US Energy Information Administration (EIA). These savings in combination with the reported gains in employment and income to date will boost confidence and consumption, so the storyline goes, which will lead to further gains in employment and economic growth.
The prediction depicted below by IHS Global Insights is fairly consistent with the consensus view. Lower oil prices will lead to increased rates of growth in employment, consumer spending and economic activity. Higher oil prices will result in lower rates of growth.
In my view, to infer that the rate of economic growth will strengthen due to the recent decline in oil prices that followed accelerating rates of growth in previous quarters is nonsensical. It completely disregards what has been the principal driver of growth since the Great Recession ended-the oil and gas boom.
Wall Street pundits and government officials have been opining for months about how the jobs numbers indicate broad-based growth in the US economy. This simply isn't so. During the first two years of recovery that followed the Great Recession, the state of Texas was responsible for half of all the new jobs created in the US. The vast majority were directly or indirectly related to the state's oil and gas production. The leadership role Texas has played in employment growth continues to this day. The state has 1.3 million more jobs today than it did at the onset of the Great Recession in December 2007, while the remaining 49 states are still approximately one million jobs short of the level maintained in December 2007.
Listed below are nine other states that lead in the creation of jobs directly related to the oil and gas industry. It is important to note that for every well-paid job directly related to the energy industry, there are several additional jobs created in support of that job in unrelated industries. These jobs do not necessarily have to be in the same state.
So when we consider the fact that there are approximately two million more jobs today than there were at the onset of the Great Recession, as depicted below, it is logical to assume that the vast majority of those jobs are directly or indirectly related to the oil and gas industry.
Therefore, it is ludicrous to conclude that the recent decline in oil prices will lead to a continuation of the current trend in job creation. To the contrary, we are now beginning to see job cuts in the states that were leading in job creation. Even if all of the money projected to be saved at the gas pump by the EIA was spent by consumers on other goods and services, it would not supplant the economic growth that resulted from the job creation in the energy industry to date. Nor would it begin to offset the economic impact of the job losses that will result should oil prices remain at current levels.
The recovery in housing has been a critical component of the overall economic recovery. The table below depicts the eight cities in which home prices are setting new record highs out of the forty largest cities in the US. What is notable is that the majority of these cities have been major beneficiaries of the oil and gas boom over the past several years. Meanwhile, prices nationwide are still down more than 10% from their 2006 highs. It is obvious that the strength in new home construction and increase in home prices is directly related to the employment gains and economic growth derived from the oil and gas boom. The decline in oil prices will obvious have an adverse impact on housing in these cities as we move forward.
It is too early to tell how significant an impact lower oil prices will have on US economic growth, but in aggregate, it is difficult to conclude that it will be a positive one based on the data. The degree of the decline in oil prices is not as significant as how long prices remain at current or lower levels. Assuming that a large percentage of the gains we have seen in employment and income over the past five years are either directly or indirectly related to the oil and gas boom, it is probable that a sustained period of lower oil prices will negatively impact the rate of consumer spending growth.
New home sales fell for a second consecutive month in November and have now fallen on a year-over-year basis as well. Existing home sales also fell in November to a six-month low. New orders for durable goods fell .7% in November and capital spending was flat after declining in September and October. This data is not consistent with the Commerce Department's upward revision to third-quarter GDP. It is possible that these weak data points are directly related to the oil price decline that began in earnest three months ago.
From an investment standpoint, understanding the energy industry's impact on overall US economic growth is critical in developing a market outlook for 2015. The bullish consensus on Wall Street has targets for the S&P 500 (NYSEARCA:SPY) in 2015 that are based on earnings estimates. These earnings estimates are highly correlated with US economic growth projections. At the moment, the consensus views the oil price decline as a net positive to economic growth. I view it as the exact opposite.
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