Shouldn’t Cheaper Oil Help the U.S. Economy?

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The first-quarter gross domestic product report surprised Wall Street economists once again. At one time, economists had been predicting a 3 percent growth rate. The Wall Street consensus was an optimistic 1.0 percent heading into Wednesday morning’s data release. The end result was an anemic .02 percent overall gain in first quarter GDP growth.

Worst among current economic misconceptions was the notion that the big savings at the gas pump would propel U.S. GDP to higher levels. Rather than spend the savings at the pump, consumers have been saving that money and actually pulled back on their spending pace.

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Actual spending increased just 1.9 percent in the first quarter, a steep drop-off from the 4.4 percent gain in 2014’s fourth quarter and the worst rate by a fairly wide margin since the same period a year ago.

The spending slide was “particularly disappointing given that the decline in energy prices generated a massive 6.2 percent annualized jump in real disposable income,” said Paul Ashworth, chief U.S. economist at Capital Economics, in a report for clients.

Personal savings jumped to 5.5 percent from 4.6 percent. If consumers didn’t spend their savings while oil was falling, it’s hard to imagine them parting with their cash now that gasoline prices are rising again. The price for a gallon of regular has jumped 15 cents just over the past two weeks, according to AAA. That has happened as benchmark West Texas crude prices have surged about 28 percent over the past three months.

With the winter fading away, albeit slowly, “we would expect to see signs of a pickup in consumption growth emerging soon,” Ashworth added, expressing widely held hopes among economists!

Wall Street economists are sticking  to the story line that higher levels of consumer confidence will translate to stronger growth ahead. They expect to have a bounce back in GDP growth in Q2 and are hoping for a full year 3 percent growth rate.

The weak first quarter economic numbers points to a delay in the Fed raising interest rates any time soon. The March’s payrolls number fell off sharply from their previous strong trend with just 126,000 new jobs.

The Federal Open Market Committee on Wednesday offered no changes to its zero interest rate policy. Not only did it not hike rates, it also removed all hints for what may lie ahead. Calendar references were deleted completely from the post-meeting statement.

The challenge for investors is to what  extent  should they look past first quarter weakness. Usually growth that is not recorded in the first quarter  appears in the second quarter where growth runs above normal. Investors do not like uncertainty, both stocks & bonds have shown signs of weakness this past week.

I am cautiously optimistic that the U.S. economy will get back on track. First quarter data since 2010 has been especially depressed, averaging a paltry 0.62 percent while the economy grew 2.3 percent. The average is heavily affected by two quarters of negative growth, including a 2.1 percent decline last year.

That being said, I have increased my cash position in my investment accounts waiting for some stock market bargains to appear.

 

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