Oil slides, but economy still slips

WASHINGTON — It should only be this simple: Oil prices plunge 20 percent, leading businesses and consumers to ramp up their spending, which gives a nice jolt to the economy.

That seems the conventional wisdom on Wall Street, where investors are cheering the pullback in energy prices.

But some contrarians think that view could be missing the point. While falling prices will provide some relief to motorists, it also reflects the country's weakening economic outlook.

In other words, any benefit from lower pump prices may be outweighed by higher interest rates and a stagnating real-estate market.

Moreover, the economy did not crater in the face of soaring fuel prices — because energy costs are only a small portion of the average U.S. household budget — so why should the reverse be true?

"Lower oil prices don't mean that the economy is going to improve," said David Resler, chief economist at Nomura Securities in New York.

Crude-oil futures fell sharply to around $62 a barrel Tuesday as traders focused on rising global inventories, easing supply threats and weakening demand.

The interplay between energy and the economy, in the context of a real-estate slowdown, is likely to be a key issue at the Federal Reserve's interest-rate meeting today.

To be sure, the nickels and dimes Americans save on fuel add up; the country is spending roughly $70 million a day less on gasoline today than a year ago, according to the Oil Price Information Service.

This may make consumers feel a little wealthier, and they could spend the extra pocket change on other things.

"But it's not going to stimulate spending that wouldn't have been there," said Resler. "It's just going to reallocate the spending" — from, say, Exxon Mobil to Wal-Mart.

That somewhat pessimistic view is even a little too sunny for Peter Schiff, president of Euro Pacific Capital of Darien, Conn.

Schiff said the economy has grown in recent years despite soaring gasoline prices, thanks to historically low interest rates that made credit-card debt look cheap while fueling a housing boom that prompted many homeowners to take out home-equity loans.

According to the Federal Reserve, U.S. consumers owed $841 billion in credit-card and other revolving debts in July, compared with $804 billion a year earlier. Nonrevolving debt, which includes automobile and personal loans, totaled $1.51 trillion in July, compared with $1.46 trillion a year earlier.

But as adjustable rates on mortgages and credit cards rise, Schiff said, "all of a sudden, $2.50 a gallon might feel more expensive than $3."

Instead of spending all of their savings at the pump on other goods and services, Schiff expects many consumers to buckle down by either paying debts or saving.

Retailers have a somewhat similar outlook. The National Retail Federation said Tuesday it expects sales in November and December to rise 5 percent, below last year's 6 percent increase.

That assessment is backed up by signs from the trucking industry that its peak pre-holiday shipping season will be a disappointment.

And as if any further confirmation of the housing market's woe was necessary, the Commerce Department reported Tuesday that construction of new homes dropped a bigger-than-expected 6 percent in August.

But with oil around $65 instead of $75, Global Insight chief economist Nariman Behravesh sees U.S. gross domestic product getting a bump of one- to two-tenths of a percentage point next year if oil prices stay down.

Wall Street already seems to have factored in a likely economic boon. Since July 14, when oil prices peaked above $78 a barrel, the S&P 500 index has climbed almost 7 percent. (Part of the stock-market surge is tied to expectations the Fed is done raising rates for the time being.)

Merrill Lynch economist Sheryl King said investors may not be putting the drop in oil prices in proper perspective.

Over the past 52 weeks, retail gasoline prices have averaged $2.62 a gallon nationally, or 12 cents more than the current average of $2.50, according to Energy Department data. So it doesn't make much sense to get giddy about the post-summer slump, King said.

"The $3 gas price wasn't there for very long," King said.

Or as Schiff put it: "We're talking about $60 instead of $70 [for a barrel of oil]. We're not talking about $20."