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Oil Price Declines Should Boost Economic Growth This Summer

Bubbles inflate. Bubbles burst. When the last major bubble – housing – exploded, it crashed the financial sector and ultimately the economy. This time, the piercing of the oil balloon should remove one of the major hurdles to stronger economic growth. If money that consumers were being forced to spend on gas returns to their pockets, it may be just the tonic that cures the sluggish recovery ills and allows activity to really accelerate.

Believe it or not, the economy is in pretty good shape. If you judge growth by how many jobs are being created, then conditions are quite solid. In April, private sector companies added a robust 268,000 new employees to their payrolls. The gains were spread across the entire economy, with even the lethargic construction sector showing some energy. OK, the increases were modest, but when the weakest link starts to gain strength, that says something. And the three-month private sector average of 253,000 new jobs is eye-catching.

The employment increases, however, were not enough to keep the unemployment rate from rising back up to 9%. That would normally be a cause for alarm, but it isn’t. The improving labor market picture is doing what was expected all along – attracting people back into the workforce. Since it normally takes a long time to find a position, the unemployment rate rose. That is a typical trend at this point in the recovery. Going forward, if private sector increases are sustained, the rate should fall as we move through the second half of this year.

With gasoline prices likely to decline and jobs becoming more available, consumer confidence has begun to rebound. Nothing says the future is brighter more than the possibility of a new job and an easing in the pain at the pump. With optimism rising, consumer spending is likely to improve and that would trigger a new round of hiring.

If the tea leaves seem to argue for better growth going forward, why did we have such soft activity early in the year? The economy grew at a mediocre 1.8% pace in the first three months of 2011. But this was a case where the summary number is truly misleading. While consumer demand slowed from its rapid pace at the end of 2010, it was still solid. Business investment was strong and we sold an awful lot of goods to the rest of the world. What kept the economic growth pace from being decent was a weird large decline in defense spending and the expected drag from cutbacks at the state and local levels. Look for national defense to add to economic growth in the future.

Looking forward, the drag from the high gasoline costs will likely weigh on the economy for a while. Second quarter growth may be in the same mediocre range as the first quarter. But as energy prices ease through the early summer, the additional money left in households’ wallets will get spent. And businesses have a $2 trillion war chest which they will make use of. As we move through the second half of the year, the economy should begin shifting into higher gear. We could finally move out of the long, drawn-out recovery stage into a full-blown economic expansion.

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Posted in Industry News.

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