Oil Prices May Be Unlikely Savior For US Economy

The US economy, desperately looking to stave off a recession, might find salvation in an unlikely place: volatile oil prices.


The recent decline in energy prices is one of the few bright spots in the sluggish economy, which took another hit Thursday as gross domestic product for the second quarter came in lower than expected and jobless claims showeda surprising and disturbing increase.

Friday's report on July employment is likely to paint an unflattering picture of the jobs market. Payrolls are expected to drop by 75,000, while the unemployment rate is forecast to inch up to 5.6% from 5.5%.

The drop in oil prices, which tumbled further on Thursday,has helped buoy the stock market and prevented the kind of freefall that such bad economic news normally precipitates.

"This might be the bursting of the commodities bubble," said Sean Snaith, director of the University of Central Florida's Institute for Economic Competitiveness. "The bursting of this energy bubble might be the salve that we need to get us through the rest of the housing correction without slipping into recession."

It might seem odd to think about oil actually helping the economy after spiraling prices sent gasoline past $4.10 a gallon at the pump. But the national average has dipped about 20 cents a gallon over the past month—about 5 percent—which provided some relief to consumers already strapped by surging food bills.

And while some analysts predicted stocks would continue to tumble through bear-market territory, the drop in oil has prevented a panic selloff and held index averages around key support levels.

That could be pivotal as most economists predict lackluster GDP numbers for the rest of the year now that the adrenaline dose from the government stimulus checks is wearing off.

"The question gets pushed back again, What's going to happen in the fourth quarter?" Snaith said. "Once the (stimulus) buzz wears off and the underlying fatigue comes to the surface, that's where oil comes in and might be a potential force that keeps things from slipping into recession."

Job Weakness a Big Hurdle

To be sure, there will be barriers along the way.

Oil could actually fall too quickly and spur consumers into old buying habits, sparking demand and renewing pressure at the pump. Geopolitical tensions also continuously loom throughout the big oil-producing nations, and a disruption in supply anywhere could send prices right back up.

And there's also the notion that it's a bit silly to talk about low oil prices when a barrel still costs about $125.

"Prices have to get substantially lower than this to undo the damage that has already been done," said David Ressler, chief economist at Nomura Securities in New York. "It's less damaging than at $150, but it's still a pretty onerous effect on consumer spending and household budgets."

(CNBC's Steve Liesman discusses the economy with President Bush's top economic advisors in video at left.)

Economists are particularly worried about the health of the consumer because of inflationary pressures. Some economists think Friday's employment report might not be quite as bleak as the jobless claims figure due to a lag between when employees are laid off and when they are actually removed from payrolls.

But even if that's the case, it's unlikely to allay fears about an economic slowdown.

"There are a lot of other indications that the job market has gotten weaker. I'm inclined to take this increase ... as real and indicative of a job market that's getting weaker by the day," Ressler said. "If that's the case then the economy's performance in the next couple of quarters is not going to be very impressive."

All About the Consumer

So with jobs increasingly scarce and inflation running high, any little bit will help.

If oil can drop even to $100 a barrel and gasoline gets back around $3 a gallon, the help for the consumer would be substantial, especially as people spend their stimulus checks and have to confront the difficult realities posed by the myriad economic issues.

"That's the problem with that kind of tax stimulus," said Tom Higgins, chief economist at Los-Angeles-based Payden & Rygel. "It only has a short-term impact. It doesn't impact the economy in a lasting way." But a sustained drop in gas prices would help in the long term.

"The real key to everything going on is inflation," said Ron Ianieri, chief market strategist at Options University. "What they're concerned about is the fact that I just drove down to the gas station and this week cost me less than the last eight weeks."

If housing can find a bottom--many economists believe it's close--the combination of falling energy prices and an expected easing in inflation could at least provide some hope heading into 2009.

"All of that could set the stage for a better performance in 2009," Ressler said. "The passage of time, too, is going to relieve some of the credit market strains, which are also holding back the economy. Time, in this case, will be a healing element."