Falling Oil Prices, Holiday Shopping Point North for U.S. Recovery

Posted: Nov 30, 2014 12:01 AM

This past week markets hit new highs on Wednesday, only to pull back a bit on OPEC’s decision to hold steady on production quotas.

OPEC is in crisis because two of the three biggest oil producers—Russia and the United States—don’t participate in its market rigging activities. With Russia buffeted by sanctions and desperate for revenues and the United States undergoing an oil and gas boom, Saudi Arabia has decided to test the resilience of non-OPEC oil suppliers by forcing prices down instead of up. Not exactly a friendly act by an ally whose security the United States guarantees, and whose economy and stability depend importantly on a vibrant U.S. economy.

Overall falling oil prices are a big plus for the U.S. economy. Crude prices would have to fall a lot more to impact near-term U.S. energy production, and the decline in benchmark oil prices since its peak in September 2013—about $35 a barrel—is equivalent to about a $70 billion tax cut for the U.S. economy. If those prices hold for three years, that should boost U.S. GDP by about $125 billion or 0.7 percent and create more than 1 million additional jobs.

If the Obama Administration were smart, it would respond to the Saudi led move to drive down prices with efforts to reduce regulatory and transportation costs for Northwest and Texas oil producers and give the Saudis a taste of their own medicine by further opening up drilling in the Gulf of Mexico. That would further boost the economy, pressure rogue states like Russia and Iran, and lessen dependence on more environmentally risky projects abroad.

This week we will tally Black Friday weekend sales. Initial soundings indicate American shopping tropism went into high gear—sales were up dramatically over last year. Caution though: it’s a short holiday shopping season and in past years, strong Black Friday sales have sometimes taken a bite out of subsequent weeks’ commerce. We have reason to be optimistic, though, household balance sheets are much stronger than in years past—meaning the capacity for credit card purchases quite considerable.

Overall, holiday sales should improve over last year—both in nominal and inflation-adjusted terms—and the U.S. economy, despite the endless bickering between the White House and Congress, powers ahead.

Upcoming this week, the Institute for Supply Chain Management manufacturing and services surveys are expected to continue pointing upward, but at a more moderate pace. Not bad signs, as hardly any economist expects the average pace of second and third quarter GDP growth—4.3 percent—to continue into the closing quarter of 2014.

Growth should moderate to something close to 2.5 to 3 percent over the next 12 months.

Friday, the monthly jobs report should indicate the economy added about 215,000 additional positions in November. My estimate is a bit below the consensus forecast—228,000—but both are well below the 400,000 monthly pace needed to put most folks displaced by the Great Recession back to work over a three year period.

Here are my forecasts for upcoming economic data.
Forecast Prior Observation Consensus
Week of December 1
December 1
PMI Manufacturing Index - November 55.0 55.9
ISM (Mfg) - November 58.2 59.0 59.1
ISM Prices 52.5 53.5 52.1
December 2
Auto Sales* - November 16.55M 16.46 16.6
Car Sales 7.95 7.97
Truck Sales 8.60 8.49
*SAAR, as published by Motor Intelligence
Construction Spending - October 0.4% -0.4 0.6
December 3
ADP Employment Report - November 205K 230 228
Productivity - Q3 (r) 2.0% 1.5 2.0
Unit Labor Costs 0.3 0.0 0.4
ISM Services - November 57.1 58.6 57.7
ISM Prices 53.0 55.2
December 5
Initial Unemployment Claims 290K 313 290
December 5
Nonfarm Payrolls - November 215K 214 228
Private 205 209
Manufacturing 10 15 10
Unemployment 5.8% 5.8 5.8
Average Workweek 34.6 34.6 34.6
Average Hourly Earnings 0.2 0.2 0.2
*Core Private equals Private less Medical, Social Assistance, and Temp Services
International Trade - October -$42.5B -43.0 -41.5
Factory Orders - October 0.0% -0.6 0.0
Durable Goods Orders 0.4 -1.1
Consumer Credit - October $16.0B 16.2 16.5
Week of December 8
December 9
IBD/TIPP Economic Otimism Index - December 47.0 46.4
NFIB Small Business Optimism Index -November 96.1
JOLTS - October 4.735
Wholesale Inventories - October 0.3% 0.3
Wholesale Sales 0.3 0.2
December 10
Treasury Budget - November -$66.0B -121.7
December 11
Retail Sales - November 0.0% 0.3
Retail Sales, ex Autos 0.1 0.3
Export Prices -November -0.3% -1.0
Import Prices -1.6 -1.3
Business Inventories - October 0.3% 0.3
December 12
Producer Price Index - November -0.4% 0.2
PPI Core 0.1 0.1
Michigan Consumer Sentiment - Dec (p) 89.4 88.8
Peter Morici is a professor at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and five-time winner of the MarketWatch best forecaster award.