Cheaper crude oil and lower fuel prices at the pump have failed to lift the U.S. economy, according to the most recent federal government statistics.
Rather, there’s mounting evidence that the oil price bust has been a net negative for the economy as a whole as business investment spending and state government revenues and spending have fallen.
Consumer spending is also lagging, meaning people are not using the money saved on gasoline and diesel purchases as much as observers had hoped.
Brett Ryan, an economist with Deutsche Bank, said that although a decline in business expenditures was expected, the lack of any lift to consumer spending from lower oil prices is puzzling.
"It hurts business down in Texas. It hurts capital expenditures on oil and gas. … However, we knew that," Ryan said. Meanwhile, "consumers have saved over $100 billion in energy costs over the past year because of lower gasoline prices … closer to $130 billion."
On Friday, the United States’ Bureau of Economic Analysis released an updated assessment of the U.S. gross domestic product expansion over the first quarter of 2015. BEA now says the nation’s economy shrank during the first three months of the year, by 0.7 percent. Previously, economists there recorded economic growth at a near standstill, growing by only 0.2 percent for the first quarter.
Canada’s economy also shrank during the same period, according to a report by Statistics Canada.
Many blamed bad winter weather for lower economic growth. The West Coast ports strike may have influenced the country’s weak trade performance, though imports have soared in recent months.
BEA instead points to the strong U.S. dollar and the effect it’s having on dragging down U.S. exports, made more expensive by the dollar value’s rise. Analysts there pointed to lower state and local government spending as another culprit.
What is evident is that lower fuel prices have done nothing to give the economy a boost. Retail sales were earlier reported to be flat. Many economists assumed that U.S. consumers would spend a good portion of the money saved by lower gasoline prices, but the evidence suggests they instead parked that cash into savings accounts. Ryan said data indicate that savings rates have increased.
Suffering oil hubs spread the pain
North America’s economic performance may also be dragging due to weakness in Texas and Alberta, the hubs of oil and gas activity that have both taken sharp hits with the decline in oil prices. Those economies have outperformed their respective national economies for years as they rode the benefits of the oil boom.
Last week, Comerica Bank, a major lender in Texas, reported that its Texas Economic Activity Index fell in March by 3.4 percent, pulled down by lower spending by the oil and gas sector. The index has fallen for five months in a row, in tandem with the slide in the value of crude oil that accelerated during the final quarter of 2014.
"The Texas economy has lost momentum due to the reset in oil prices," Comerica Chief Economist Robert Dye said in a release. "We expect to see more declines over the coming months as consolidation in the state’s energy sector continues."
Permitting to drill new wells in Texas has fallen by more than half. Drillers in the United States have idled nearly 1,000 rigs in response to the crude price drop. On Friday, oil field services company Baker Hughes reported that 10 more rigs were pulled from service in the United States, while Canada actually gained 26 active rigs compared with the count a week before.
Ryan expressed confidence that lower oil prices will eventually translate into stronger economic performance in the United States, pointing out that roughly 70 percent of economic activity and growth is driven by consumer spending. He also argued that BEA may be grossly underestimating its GDP growth estimates in the first quarter of every year, given the way it calculates the number.
"You have roughly 3 million more jobs created over the past year, and the unemployment rate is down by a percentage point, and, oh, by the way, consumers have saved over $100 billion in energy costs," Ryan noted. "So that’s a pretty good environment for spending."