Economy gets little mileage from low prices at pump

WASHINGTON — It has been a truism of the U.S. economy for decades: When oil prices rise, the economy suffers; when they fall, growth improves.

But the decline of oil prices during the last two years has failed to deliver the usual economic benefits.

And as oil prices have fallen to levels not seen since 2003 — sagging below $27 a barrel Wednesday before rebounding to nearly $30 Thursday — many of those experts now say they do not expect lower prices to bolster the domestic economy significantly in 2016.

“We got this wrong,” John Williams, president of the Federal Reserve Bank of San Francisco, told an audience in Santa Barbara, Calif., this month.

Lower oil prices historically were a cause for celebration in the developed world, including the U.S. The effect was akin to a tax cut for consumers who could fill their tanks for less. And since much of that oil was imported, the windfall was generally larger than the damage to domestic oil producers.

Every dollar gained by consumers was a dollar lost by producers, but when the dollars were lost by foreign producers, the U.S. economy should have benefited.

But this time is different. The losses from lower prices are larger and quicker than expected as energy companies cut back on investment and lay off workers, while the

gains are smaller and slower to materialize, as consumers save some of their windfalls.

Economists at JPMorgan Chase, who predicted last January that lower oil prices would add about 0.7 of a percentage point to the economic growth rate in 2015, now estimate that lower prices might have shaved 0.3 of a percentage point off the growth rate.

This year, JPMorgan predicts that lower prices will help expand economic activity by just 0.1 of a percentage point, while economists at Goldman Sachs said they expected an effect “around zero.”

Unlike the rest of the country, Houston’s economic fortunes have traditionally followed the rise and fall of oil. But like the rest of the country, Houston has proven to be somewhat of a contradiction. While many oil and gas companies have suffered during the oil downturn, the city’s continued population growth and a surge of construction is buffering the metro area from deeper trouble, economists say.

The city is harnessing momentum from other booming sectors — petrochemicals, refineries, health care, construction — to offset the losses in energy and energy-related manufacturing.

But the decline of oil prices is raising concerns about the nation’s overall economic health. It has contributed to the correction in global equity markets; the Standard & Poor’s 500 stock index is down 10 percent this year. And lower prices are weighing on inflation, jeopardizing the Federal Reserve’s plans to raise interest rates about 1 percentage point this year.

“I think the Fed has to take seriously the possibility that we could enter into another economic downturn, and it urgently needs to make contingency plans for that scenario,” said Andrew Levin, an economics professor at Dartmouth and a former adviser to the Fed’s chairwoman, Janet Yellen. “There’s a feedback between financial markets and the economy. You might think markets are irrational, but even if they are, that spills over into the real economy.”

Many other economists doubt that the U.S. is on the verge of a recession, as job growth and consumer spending remain healthy. But most now concede that the vast expansion in domestic oil and gas drilling in recent years has changed the way energy prices affect the economy.

“The world has changed and what we saw was different” from the Fed’s predictions, said Williams, the San Francisco Fed president. He said fracturing operations were easier to set up and shut down than other kinds of extraction, so the industry’s response to falling prices was quicker than analysts had expected.

Some analysts see evidence that consumers are saving because they are scared, or still struggling to pay down high levels of debt. Others, however, are more optimistic. They argue that consumers hesitated initially because they were not sure lower prices would last, but that spending will increase as lower gasoline prices endure.

In Houston, some economists project the city could slip into a mild but brief recession during the first half of 2016. Several thousand energy workers have lost their jobs since the oil downturn, and the city could lose as many as 50,000 jobs in manufacturing and oil and gas before oil prices rebound.

But economists note other factors that should soften the blow. Hospitals and medical offices are expanding as they try to keep up with a population boom. Downtown Houston has been revitalized with new office towers and residential construction that sprang up when oil was around $100 a barrel.

Across the country, consumer spending has started to rise more quickly, James Bullard, president of the Federal Reserve Bank of St. Louis, noted in a speech last week, describing it as “mild evidence” that falling prices are lifting domestic growth.

“For the macroeconomy as a whole, the relatively low crude oil prices the U.S. is enjoying today are likely a bullish factor,” Bullard said in Memphis, Tenn.

But he added that lower prices might be causing a longer-term problem by contributing to the erosion of inflation expectations.

The Fed aims to keep prices rising about 2 percent a year. It also seeks to maintain public confidence that it will meet that goal, which it regards as critical because expectations play an important role in determining the pace of inflation.