Lower Oil Prices Are Actually Stopping a U.S. Recession, Not Causing One

What a difference a few months makes: Not so long ago, hand-wringing pundits warned that plunging oil prices portended an ugly global recession from which the U.S. wouldn't escape.

Now that concern seems overblown. The economy continues to grow and add jobs -- 242,000 in February, according to the latest government data.

The truth is that falling energy costs are a net benefit. They may have helped the country dodge an economic bullet, since lower gasoline prices have eased the impact of substantial increases in rents and health care. 

If the price of crude oil hadn't fallen to about $30 a barrel from a mid-2014 peak of more than $100 a barrel, the economy might not be in such good shape. "I'm still of the view that lower energy prices are a net positive for the economy," says Stuart Hoffman, chief economist at PNC Financial Services.

In fact, a 2015 report from the Washington D.C.-based think-tank JPMorgan Chase Institute found low fuel prices saved an estimated $700 per household last year. 

"At a time of slow wage growth, this boost in discretionary income is significant," the study says. 

While consumers are using some of the money to pay down debt and ramp up savings, they're also treating themselves. Using data from 57 million credit- and debit-card holders, the authors found that individuals spent 80% of the savings on non-fuel items like restaurants.

The conclusion is simple: Lower gasoline prices are great for American consumers, and therefore, for the economy. 
 
So what about Big Oil? It's definitely feeling the pain. When the price of crude tumbled, stocks like Exxon Mobil (XOM) BP (BP)  and Chevron Corporation (CVX)  followed suit. But energy isn't such a large part of the economy that lower profit and job losses there can't be offset by growth elsewhere.

"The reality is that the energy patch employs fewer than one out of a hundred of us," writes Jack Ablin, chief investment officer at BMO Private Bank in Chicago. He now wouldn't be surprised to see a big consumer boom come spring.

Without lower gas prices, that might not have come to pass, thanks to higher rents and climbing healthcare costs, which have put a big dent in household discretionary income.

Both are basically non-discretionary items -- you need somewhere to live, and the rules of the Affordable Care Act (also known as Obamacare) mean that you must buy government-approved insurance or pay a fine.

Rents, which had been stable as a percentage of income for a quarter-century, jumped in 2013. They went from an average of about 22% of after-tax income to 25% before slipping slightly, according to a February report from the Manhattan-based Economic Cycle Research Institute

Healthcare costs jumped, too. Spending on health care had remained less than 5% of after-tax income for renters for 25 years, then jumped to more than 6% in 2013, the report states.

Add the two together, and it's "an extra 5% or so of after-tax incomes," says ECRI. 

"This holds especially true given the double-digit declines in real average household income for the lion's share of households since the turn of the century," states the ECRI report.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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