Global growth, the $, (under-priced) oil and their impact on US growth rates.

October 22nd, 2014 at 7:55 am

Those stalwart number crunching research economists at Goldman Sachs (i.e., not the traders) have a really interesting graph out this AM that packs in a ton of info on current growth pluses and negatives.

The figure uses the Federal Reserve’s macro model (which is actually publically available now…and, yes, I will fire it up myself once I have the time to figure out its bells/whistles) to decompose a set of factors nudging real GDP growth this way and that, including slower global growth, the stronger dollar—they’re the larger negatives—and lower oil prices and interest rates (pro-growth).

The GS analysts offer two flavors of growth impacts, one if equity and fixed income markets remain weak and one if they strengthen (ftr, GS seems to make money either way, but that’s a different post).

A few observations:

–Even under the weak market scenario, the drag on growth is predicted to be a few tenths of GDP at most. This is partly due to our relative low export share—13% of GDP, half that of the Eurozone–as well as the offsetting impact of cheaper oil.

–If you follow this stuff, I suspect you’re well aware of the global slowdown and the cheaper oil parts of the story. But the stronger dollar has been a bit of sleeper, and it’s something I worry about a lot. Right now, it’s less a function of currency management by our trading partners and more the result of weakness in other economy’s currencies. But the figure provides an important reminder that a strengthening dollar is a drag on growth through the export channel.

–On the other hand, both the dollar and the oil dynamics will put downward pressure on prices (though oil is not in the core price index most closely watched by the Fed) and this could lead a data-driven Fed to postpone the liftoff of the Fed funds rate.

–From what I can glean, the oil price decline is a function of both stronger supply and weaker demand, with the former dominating. In this regard, it’s worth remembering that the price of energy fails to account for environmental degradation, i.e., considering polluting externalities, it is under-priced. That is the motivation for a carbon tax and that, in turn, is a reminder about our existentially lousy politics.


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5 comments in reply to "Global growth, the $, (under-priced) oil and their impact on US growth rates."

  1. rjs says:

    the downside to the underpricing is that everyone will consume more, with attendant environmental effects..

  2. Fred Brack says:

    Stronger supply, not weaker demand, the main factor in oil-price decline, Jared? Check with your pal Dean Baker, whose blogpost about oil prices carries this hed: “Cut the Fracking Nonsense: Demand, not Supply Explains Low Oil Prices.”

    Geez, when two of his data-driven gurus disagree on such simple matter what’s a fella to do?

  3. Kevin Rica says:

    “both stronger supply and weaker demand, with the former dominating.”

    Stronger supply and weaker demand both reduce price in an additive (and probably non-linear) fashion. They don’t conflict.

    It’s like saying that trade and automation rather than immigration explain the secular decline in wages. They all do. They are additive. If trade and automation reduce the demand for labor, there is no labor-market need for immigrant labor. So immigration just pushes wages down further.

    However, since 2005, U.S. net petroleum imports are down almond 9 million barrels per day (bpd).

    On a global basis, total U.S. liquids production (including fuel ethanol and NGLs) are up about 8 million bpd. That’s about a Saudi Arabia that we’ve added, while global demand increased by about 8.7 million bpd. That’s about a Saudi Arabia that we’ve added.

    And let’s not forget our Canadian friends (where global warming is progress). They added about 1.3 million bpd (mostly tar sands).

    Demand growth during that period was a little below trend, so I give the award to fracking, with an assist from tar sands.

  4. Larry Signor says:

    This from DB:

    “Joe Nocera is anxious to credit shale oil with the recent plunge in oil prices, but our old friend Mr. Arithmetic sees things differently. In his column pronouncing the end of OPEC, Nocera credits the “shale revolution” in North America, which he credits with an additional 3 million barrels a day of production.

    While this undoubtedly has put downward pressure on prices, it is not the major cause of price declines as can be easily seen from looking at the projections from before the economic collapse in 2008. The 2007 World Energy Outlook projected output in 2015 of 98.5 million barrels per day (Table 1.3). The most recent projections put production at 92.7 million barrels per day, 5.8 million fewer than had been projected before the slump. This means production has actually grown less rapidly than projected. That is not a good explanation for declining prices.”