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Enjoy Low Oil Prices While They Last

The positive effects and sustainability of lower energy prices remain an open question.

Robert Johnson, CFA 31 December, 2014 | 9:16

Last week I griped that the economic news was amazingly good and no one really cared. With better news out of the Fed, oil prices stabilizing, and even more economic good news, the U.S. equity market bounced sharply off of its bottom. The magnitude of the attitude adjustment was truly stunning. The United States did the best of various country metrics, with the S&P 500 up 3.3% even after having been down sharply early in the week. Europe and emerging markets did half as well, with most up in the mid-1% range. Commodities were down just a touch, and the U.S. 10-year bond rate was a bit higher at 2.18%.

The best of the economic news was a surprisingly strong report on U.S. industrial production. Purchasing manager data also suggested that European production may have stabilized. However, China continued to look weaker. U.S. prices also ticked down, although parts of the report were troubling, including rising rents, rising medical costs, and sky-high beef prices. The housing industry remained stuck in neutral, showing no real signs of a breakout in either direction.

With both retail sales and industrial production--two of the most concurrent economic indicators--showing unusual but sustained strength, it's quite tempting to raise my 2015 growth forecast from 2.0%-2.5% to something closer to 3%. However, with housing and business construction remaining soft and the trade situation likely to worsen with a strong dollar, I am staying put for now. Low gasoline prices could make my conservative stand look silly for a couple of more quarters, but I don't think low energy prices are sustainable for very long. Plus, I think the December employment report will potentially have a negative surprise or two.

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About Author

Robert Johnson, CFA  Robert Johnson, CFA, is director of economic analysis with Morningstar.

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