The Post--Econ by John Berry: "Basis Point" + "Economy Is Weathering Increase in Oil Prices"...
"Basis Point"
washingtonpost.com
"Economy Is Weathering Increase in Oil Prices"
washingtonpost.com
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Edited for ease of reading.
>>> BASIS POINTS
By John M. Berry
Sunday , September 17, 2000 ; H02
Prospects for a soft landing for the economy still looked pretty good last week. Business inventories are rising more slowly than in the spring, manufacturing production gains have slowed to a crawl, initial claims for unemployment benefits touched their highest level since January 1999 and inflation remained subdued.
Ironically, while world oil prices reached a 10-year high, declines in the cost of crude in June and July pushed the consumer price index down by 0.1 percent last month, the first such drop since 1986.
Higher prices for gasoline and home heating oil so far haven't dented consumer confidence, so there seems little danger of a consumer-led recession, as occurred in 1990 after Iraq invaded Kuwait and prices spiked.
Some senior Fed officials said they doubted oil was going to cause significant problems for the economy.
Unfortunately for bond holders, that only reinforced the notion that the Fed won't raise rates again anytime soon--and that sentiment has apparently been a driving force behind trades that have lifted long-term yields in recent days. "Disinversion trades" pushed yields on 30-year Treasuries up 20 basis points, to 5.90 percent.
Tomorrow Treasury will sell $9.5 billion in three-month bills and $8.5 billion in six-month bills, which yielded 6.13 percent and 6.2 percent, respectively, in when-issued trading Friday.
© 2000 The Washington Post Company <<<
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>>> Economy Is Weathering Increase in Oil Prices
By John M. Berry
Washington Post Staff Writer
Saturday , September 16, 2000 ; A01
The big run-up in world oil prices is taking a toll on the U.S. economy in terms of slower growth and somewhat higher inflation, but consumer confidence hasn't suffered and neither economists nor government policymakers see any sign that the bigger oil bill will tip the nation into a recession.
Prices of crude oil to be delivered next month hit a 10-year high of $36 a barrel yesterday after the president of the Organization of Petroleum Exporting Countries, Ali Rodriguez of Venezuela, said the price might temporarily reach $40 this winter. A flare-up between Iraq and Kuwait over the latter drilling close to their common border added to concerns about the adequacy of future supplies.
Each of the three prior big oil price spikes over the last 30 years triggered a surge in inflation and sooner or later caused the economy to slump. In New York last week, President Clinton raised the possibility that rising oil prices might trigger a recession somewhere in the world, but yesterday he told reporters that isn't very likely to happen in the United States.
Asked at the White House if Americans should be worried about a recession, Clinton replied, "Well, I think in the short to medium term, the answer . . . is 'no.' We have worked very hard over the last 25 years to be a more diverse economy and a less energy-intensive economy in a lot of our production. So we have withstood this oil price fight very much better than we did when it happened before."
Federal Reserve Vice Chairman Roger Ferguson told reporters that so far the impact of higher oil prices has not spilled over into the prices of non-energy goods and services, though that remains a risk. And it hasn't had a significant effect on consumer spending either, he said.
"There's obviously a potential for a price impact, which thus far has been contained," Ferguson said. "There is also the potential for it to have the equivalent of a tax impact [by reducing consumer spending]. But again, I'm not sure we're seeing any of that showing up just yet."
And J. Alfred Broaddus, president of the Richmond Federal Reserve Bank, said the recent energy price rise presented a "manageable risk" to the U.S. economy.
Economists regard higher prices for imported oil as the equivalent of an income tax increase because it reduces the purchasing power of consumers. But each $10-per-barrel increase--if it is sustained--raises the total spent for imported crude and refined products by only $36 billion a year--a very small amount relative to the size of the U.S. economy. According to the federal Energy Information Administration, the average price of imported crude is likely to be about $10 a barrel higher this year than it was last year.
Over the past 12 months, the prices consumers pay for energy in all forms are up 13 percent. Gasoline prices at the pump are up 19 percent and home heating oil costs have skyrocketed by more than 35 percent, according to yesterday's Labor Department report on the August consumer price index.
Over the past year, the CPI increased 3.4 percent, with higher energy prices directly contributing 0.8 percentage points to that rise. However, higher oil prices have indirectly affected some prices, such as those for air fares.
Economist Ethan S. Harris of Lehman Brothers in New York drew a sharp distinction between earlier oil price spikes and the current one.
"Successive oil shocks in 1973 and 1978-79 helped cause a dismal combination of low growth and high inflation," Harris said. "Indeed, in 1990, history seemed to repeat itself, as oil prices spiked and the economy slid into recession. [But] the impact on growth and inflation depends importantly on the underlying state of the economy prior to the shock and the psychological or confidence impact of the shock.
"The U.S. economy is in much better condition to withstand a shock than in any of these earlier periods . . .," Harris said. "Today, core inflation is low and essentially flat, productivity growth is soaring and [gross domestic product] is growing at a solid 3 percent to 4 percent rate."
An analysis by Macroeconomic Advisers, a St. Louis economic forecasting firm, concluded that a $20-a-barrel price increase eventually slices about 0.8 percent off the U.S. economic growth rate.
"That's a significant but manageable shock," Harris continued. "More serious damage comes if either the Fed feels compelled to aggressively fight the oil price increase or there is panic behavior--disruptions of supply, hoarding or a collapse in confidence. For example, in 1990 the hike in oil prices caused an immediate collapse in consumer confidence, which hurt the economy more than the direct impact of the price hike."
In fact, the Iraqi invasion of Kuwait in August 1990, which sent oil prices soaring, caused such a collapse in confidence that consumers cut back their spending enough to trigger a recession that lasted until the following April.
That contrasts sharply with what has happened since oil prices began rising in the first half of 1999. Most measures of consumer confidence are higher now than they were before oil prices started climbing.
As for the impact on the pace of economic growth, the recent slowing actually has been welcomed by policymakers at the White House and the Federal Reserve, who were worried that the extraordinarily strong growth of the past year posed an inflationary threat unrelated to oil. The Fed raised short-term interest rates six times beginning in June 1999 in an effort to slow growth to a more sustainable pace.
To the extent rising energy prices have reduced gains in consumer spending and thus slowed growth, they may simply have substituted for additional interest rate increases the Fed could have made to achieve the same goal, analysts said.
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