Saturday, October 24, 2009

Revisiting effects of oil on GDP

Over the next week, I will revisit a paper that I wrote last year predicting the effect of high oil prices on GDP. In short, however, I would say that the lion's share of the effects of high oil prices on the economy have passed for now. Of course it is impossible to know what prices lie in the future, but so long as oil prices stay below $115, the effects on the economy will be minimal. In fact, since there appears to still be at least some resource slack in the system, there is room for above-trend growth starting in 2010q3 and lasting until 2011q2 or until oil prices move above their previous highs.

My prediction for quarterly growth (using oil price and consumption as the only determinant!) is as follows:
Of course there are wide error bars on these predictions and there are other determinants of GDP, but the wide brush prediction here is that resource prices are supportive of improving economic growth in the US.

The other determinant I would keeping a close eye on is of course the degree to which fiscal and monetary authorities continue their stimulative efforts. If the stimulative efforts are withdrawn, then this is going to create a negative effect on GDP for several quarters. Note also that we may be between a rock and a hard place when it comes to this subject. If we try to continue stimulative efforts (either fiscal or monetary) and foreigners balk at further bond purchases, or lower the value of the dollar, then this will undoubtedly cause oil prices to spike. So we will see.

Conclusion: although there is a menacing cloud still on the horizon, the weather should be good for the next several quarters!

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