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Oil Prices and the Economy: What Do Lower Prices Mean for Economic Growth?
Although consumers can benefit from lower oil prices, the recent price declines aren't necessarily unqualified good news for everyone. Laurel Graefe, director of the Atlanta Fed's Regional Economic Information Network, recently discussed the varying impact on consumers and businesses.
Transcript
The U.S. is both a major producer and a major consumer of oil, so the impact of lower prices can have varying impacts on different portions of the economy. On the production side, lower prices can really hurt the economics of some of the more capital-intensive production projects going on in the U.S. So we've already seen announcements of major layoffs as well as postponement and cancellations of investment projects in future oil exploration and production, and that certainly has already shown up in economic growth here in the U.S., where business investment and structures took away about three-quarters of a percentage point from GDP growth in the first quarter, almost entirely due to declines in investment in the oil and gas industry.
But the economic impacts of lower oil prices are certainly not a zero sum game, where we're seeing dramatic margin improvements as input costs are lower from the other side of the economy, where we have downstream users of oil for transportation or for other manufacturing inputs. [They] are really benefiting from this lower oil price scenario. That seems to be helping to feed into consumers as well, where lower gasoline prices have helped to boost consumer sentiment significantly. We recently saw the strongest sentiment reading since before the recession. I suspect gasoline prices are playing a very large role as well in improved savings rates, improved real wealth, and other measures of consumer well-being. It seems like one of the conundrums right now is that we haven't seen this increased savings pass through into spending so far. However, there does seem to be reason to believe that this may end up showing up in stronger consumer numbers as the year progresses.