Low oil prices have yet to spur consumer spending

OREANDA-NEWS. February 05, 2016. Low oil prices are not spurring enough US consumer spending to offset the negative economic effects of the drop in drilling activity, according to lead economists with major US banks.

"We have had all of the pain and very little of the gain from low energy prices," Northern Trust chief economist Carl Tannenbaum said today at a discussion hosted by the American Bankers Association in Washington, DC.

But Tannenbaum, who chairs the association's economic advisory committee, said that US consumers eventually will start spending their savings from the lower gasoline bill.

"Historically, low gasoline prices have been unambiguously positive for the US, but we have a different reaction in this cycle," Morgan Stanley chief US economist Ellen Zentner told Argus. Energy sector investment has been a key driver of US economic growth in the past decade, so the decline in drilling expenditures is strongly affecting the economy, she said.

North American oil and natural gas firms could cut upstream capital expenditures by as much as 50pc this year if oil prices stay at around \\$30/bl, according to UK bank Barclays.

The decline in prices of oil and other energy commodities contributed to the poor performance of the stock market because energy companies have a disproportionately large influence on the S&P 500 index, Zentner said. Morgan Stanley sees evidence of low and middle income consumers starting to spend their savings from lower gasoline prices but the upper income group does not, so the total effect on consumer spending from low oil prices is muted.

The American Bankers Association economic advisory committee, which includes 15 economists from the largest US banks, forecasts 2.3pc growth in the US economy in 2016, followed by a 2.2pc growth in 2017. It is using a consensus estimate of \\$45/bl for West Texas Intermediate at the end of 2016 and an average of \\$50/bl for 2017.

The projected modest recovery in crude prices will help to keep the Federal Reserve's preferred inflation measure below the long-term inflation objective of 2pc. The bank economists' committee expects that measure — the core personal consumption expenditures index — to reach 1.8pc at the end of 2017. But the economists also expect the Fed to raise its federal funds target rate three times this year, until it reaches a range of 1pc to 1.25pc, from the 0.25pc-0.5pc range at present.

The potential increase in the Fed's interest rate will affect the US shale producers, many of which have loaded their balance sheets with debt. The Federal Reserve in late January cited the decline in US crude oil prices among factors it considered in deciding to hold interest rates steady after raising them modestly in December. The Fed also is concerned about the global outlook, including structural adjustments in China and the effect of the decline in oil prices on commodity exporting nations.

Global economic problems are unlikely to seriously affect the US economy, Tannenbaum said.

But other economists were more bearish in their outlook on the US economy, with the committee as a whole estimating the chances of a recession this year at 20pc. The US economy has expanded for seven consecutive years, besting the average 5?-year expansion period in the past 50 years.

"My take is that the Fed is more worried [about the effect of oil prices] than they are telling us in the speeches," US bank group BBVA chief economist Nathaniel Karp told Argus. The Fed has to take into account that the low oil price is having a small impact on inflation but a huge impact on the economy and on the US dollar, he said.

The bankers' group sees little effect of contagion in the financial system from bank lending to distressed oil producers. Interest rates have been rising faster for high-yield debt issued by the energy companies than for non-energy companies, and the effect is smaller for companies with investment-grade corporate debt rankings, Tannenbaum said. "From the data [distress for high-yield debt issuers] would seem to be a sector issue in energy that will have to work itself out," he said.