US Outlook Report: Reasons to Remain Optimistic
In times of market turmoil like we have seen in recent days, with aggressive moves in currencies (stronger dollar), interest rates (declining interest rates), oil prices (plunging oil prices), and stocks (taking a tumble), it is easy to become bearish on the economic outlook as well. But in reality, these market trends often work at cross purposes on the economy.
A stronger dollar can act as a drag on U.S. exports, but also tends to cut the cost of our foreign imports, giving the U.S. consumer an effective tax break. Declining global interest rates may be a harbinger of global deflationary pressures and looser global monetary policy, but it also can be a signal to potential homebuyers to take the plunge toward homeownership now, since these low rates may not last forever.
Some good news buried in the weekly mortgage applications report appears to support this argument. Mortgage purchase applications have jumped 14.5 percent since the end of October, and are now only 4.5 percent lower than a year ago, after spending much of the year with double-digit declines.
The 40 percent plunge we have seen in global oil prices is probably a function of weak global demand, but the increase in oil supply may be the most important catalyst. The return of the United States as the largest global oil producer at a time when OPEC has been unable to lower its own oil supply targets could be construed as a positive oil shock, that unlike the negative variety could bolster growth next year in oil importing countries, like those found in much of the developed world, from Japan to Europe to the United States.
Our models estimate that the $40 dollar plunge we have seen in oil since June could boost consumer spending by 0.5 percentage points and U.S. GDP growth by as much as 0.4 percentage points, if sustained at current levels. Oil well drilling in many oil fracking states will likely stall, hurting growth in some fracking states that are heavily dependent on the industry (like North Dakota), but the oil being produced from current wells will likely continue to flow despite the low oil prices. Declining oil and energy prices in the U.S. is still a net positive story.
The good news for the U.S. consumer is also great news for U.S. small businesses that have struggled with lackluster domestic demand and tight credit- mostly due to consumer deleveraging and lingering poor credit quality. The NFIB small business confidence index for November may be one of the first signals that the consumer is about to step it up in the months ahead. The index hit its highest level since February 2007.
In short, the dramatic market moves we have seen in interest rates, oil, and other markets do not spell doom and gloom for the U.S. economy. Indeed a compelling case can be made that this is just what the U.S. economy needed to bolster domestic demand.
To find out more checkout this week’s US Outlook Report.
Tags: economy