Can $50 oil make the US economy great again?

5 months ago Comments Off on Can $50 oil make the US economy great again?

Happy days are here again, sort of.

On Friday, oil dipped back below $50 a barrel after it passed that key milestone on Thursday for the first time in six months, according to the CME Group.

The rally in oil prices over the past several months sounds like great news. Ever since last summer, stock-market declines have been routinely blamed on weak oil prices.

The argument was always a bit counterintuitive. Cheap oil should be a stimulus for the global economy, as lower energy prices give businesses and consumers more money to spend on other things. But falling oil prices can also signal collapsing demand. Indeed, the fact that stock prices have stayed flat for the past 18 months suggests investors were interpreting the drop in crude as a sign of weak demand in the wealthy world and of a flagging economy in China.

So now that oil prices are on the way up, should we expect that to be good news for the market and the American economy?

When it comes to stocks, the latest data says, “Maybe not.” Take a look at this chart from strategist Jim Bianco of Bianco Research, which studies the correlation between stocks and the S&P 500:


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As you can see, oil and stocks were pretty heavily correlated during the early part of 2016, but otherwise are not. So what’s going on?

Bianco says that it’s all about credit risk. “Oil prices below $35 lead to concerns of a credit event in the energy patch impairing banks and the overall market,” Bianco writes in a note to clients. “In these times the correlation between stocks and oil is high.”

Therefore, as oil prices climb farther away from that critical $35 threshold, we should expect the price of oil to matter less to stock prices.

But what about the overall economy?

In certain regions of the country, it may matter a lot. Recent data from the Federal Reserve, for instance, showed that delinquencies on auto loans had risen in first quarter of 2016 for the first time in three years. If you parse the data, however, you’ll find that the increase was almost all concentrated in oil-producing counties, where more than 6% of employment was dependent on energy extraction. Rising prices will surely provide relief in these areas, as higher prices encourage energy explorers to produce more.

But otherwise, there’s been little evidence during over the past near year and a half that the U.S. economy is affected much by swings in energy prices. As oil dropped precipitously, consumer spending levels didn’t change significantly.”The big drop in gasoline prices did not, as some expected, provide a big lift to the overall economy or the consumer sector, which continues to struggle in this recovery, nor did it change the overall tepid pace of consumer spending,” writes John Canally, economist with LPL Financial. “In fact, since the end of the Great Recession 27 quarters ago (the second quarter of 2009),consumer spending has only increased by a cumulative 16%, well under the 30% gain in the first 27 quarters of the last three economic recoveries, which are the most comparable to today’s recovery.”

Much more important than oil, it seems, is job and wage growth. Luckily, job growth has remained strong throughout the recent drama in oil markets. Significant wage gains? Americans are still waiting for those. But rising oil prices won’t delay the raises any longer.

Can $50 oil make the US economy great again?