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May 3, 2006
Energy
Written by Jeff Thredgold, CSP, President, Thredgold Economic Associates
The following is condensed from an article titled "Energy prices could drain energy out of the economy" by Barbara Hagenbaugh of USA TODAY. The article appeared on the front page of USA TODAY's Money section last Thursday, April 27.
The U.S. economy has digested surging energy costs in the past few years with little more than a hiccup.
But now, some economists are warning, energy prices have gotten so high that the economy could lose steam. Not helping is the fact that the latest gains are coming as some economic cushions for consumers that have been in place for several years, such as a strong housing market, are slipping.
In a USA TODAY survey of economists taken April 20 to 25, 40% said higher energy prices are the No. 1 risk for the economy. While other risks were cited, such as a decline in the housing market and terrorism, energy was the top concern.
Timing could spell trouble
Some economists, such as Richard DeKaser of National City and Tim McGee of U.S. Trust, say they’re concerned. It’s not just the level of energy costs that matters. The timing of the latest oil surge could spell trouble, particularly for consumers.
•Pre-summer. Rising gasoline prices are coming ahead of the busy summer driving season, not after, as they did last year, potentially causing more trouble for consumers and for the economy.
•Housing. The housing market is slowing, reducing the so-called wealth effect from housing. Wealth effects can lead consumers to spend more, because they feel better financially when they see their neighbors’ homes sell for a bundle — even if they don’t plan to move.
•Interest rates. The Federal Reserve has raised interest rates 15 times since June 2004 to the highest level in five years. That means consumers with adjustable-rate mortgages that are due to change, those with home equity lines of credit that are tied to the prime rate, and people with credit card debt are seeing their monthly bills rise. That makes it harder to pay for higher energy costs and to continue other spending.
Healthy economic growth
In the last three years, oil prices have nearly tripled, and gasoline costs have nearly doubled. At the same time, the economy has grown at a healthy clip, and consumers, the lifeblood of the U.S. economy, have spent strongly.
That doesn’t mean higher energy costs are having no impact. In a recent survey of 1,000 adults conducted for ICSC and UBS Securities last week, more than half said they were decreasing their discretionary spending.
Less energy intensive
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“For many people, it’s just one of those minor irritations that we’ve come to expect.”
—Jeff Thredgold
Thredgold Economic Associates
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One of the main reasons higher energy prices have so far had only a minor impact is that the U.S. economy has become much less energy-intensive. It takes about half as much energy to produce a dollar of U.S. gross domestic product today as it did 50 years ago.
Plus, adjusted for inflation, oil prices are still $10 below the record high hit in January 1981, according to the Energy Department.
Helping consumers face higher energy prices now is a strong job market. The unemployment rate is the lowest in 4½ years. With the labor market so tight, wages are on the upswing, helping to offset the increase in energy costs, says Jeff Thredgold of Thredgold Economic Associates.
“For a certain portion of the workforce, they do have to make discretionary choices if they are spending more on gas,” Thredgold says. But, “for many people, it’s just one of those minor irritations that we’ve come to expect.”
Gains for some boost economy
While it’s well-known that oil companies are raking in record profits, other companies are also benefiting from higher energy prices.
Caterpillar, for example, reported record profits Monday for the first quarter. Profit-per-share rose 48% as demand for heavy equipment from a number of industries, including energy, rose.
An investor who bought shares of U.S. Global Investors Global Resources Fund in 2002 would have enjoyed annual gains of 17.8% in 2002, 99.6% in 2003, 30.4% in 2004, 49.0% in 2005 and almost 30% so far this year.
“Energy stocks have been on fire, and the big gains they’ve posted will more than offset what people (who own these stocks) have been paying at the pump,” says Andy Brooks, head trader at money management firm T. Rowe Price.
“There is a circular flow to all this extra spending on energy,” ClearView Economics President Ken Mayland says. “I tell people that if you worry about energy prices, buy some energy stocks.”
Quarterly Economic Survey
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The USA TODAY survey of 51 top economists was conducted April 20-25. Their median forecasts:
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USA TODAY • THURSDAY, APRIL 27, 2006
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Survey participants: Scott Anderson, Wells Fargo; Nariman Behravesh, Global Insight; Richard Berner, Morgan Stanley; David Berson, Fannie Mae; J. Dewey Daane, Vanderbilt University; Richard DeKaser, National City; Rajeev Dhawan, Georgia State University; Douglas Duncan, Mortgage Bankers Association of America; William Dunkelberg, National Federation of Independent Business; Mike Englund, Action Economics; Gail Fosler, The Conference Board; Lyle Gramley, Stanford Washington Research Group; Ethan Harris, Lehman Brothers; Maury Harris, UBS; Stuart Hoffman, PNC Financial Services Group; David Huether, National Association of Manufacturers; William Hummer, Wayne Hummer Investments; Saul Hymans, University of Michigan; Bruce Kasman, JPMorgan Chase; Paul Kasriel, Northern Trust; Irwin Kellner, Kellner Economic Advisers; David Kelly, Putnam Investments; David Lereah, National Association of Realtors; Timothy Martin, Bank of America; Ken Mayland, ClearView Economics; Tim McGee, US Trust; Ed McKelvey, Goldman Sachs; Dan Meckstroth, Manufacturers Alliance/MAPI; Jim Meil, Eaton; Joel Naroff, Naroff Economic Advisors; Joel Prakken, Macroeconomic Advisers; Maria Ramirez, MFR, Inc.; Donald Ratajczak, Consulting economist for Morgan Keegan; Martin Regalia, U.S. Chamber of Commerce; David Resler, Nomura Securities International; Timothy Rogers, Briefing.com; David Rosenberg, Merrill Lynch; Christopher Rupkey, The Bank of Tokyo-Mitsubishi UFJ; John Ryding, Bear, Stearns; David Seiders, National Association of Home Builders; Robert Shrouds, DuPont; Allen Sinai, Decision Economics; James Smith, Parsec Financial Management; Sean Snaith, University of the Pacific Eberhardt School of Business; Diane Swonk, Mesirow Financial; Gary Thayer, A.G. Edwards; Jeff Thredgold, Thredgold Economic Associates; Brian Wesbury, First Trust Advisors; David Wyss, Standard & Poor’s; Rich Yamarone, Argus Research; Mark Zandi, Moody’s Economy.com
“Tea”ser
Be thankful we’re not getting all the government we’re paying for.
—Will Rogers
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