Tags: Economy | inflation | Oil Price | investors

Economy Continues to Advance Despite Plunging Oil Price

Economy Continues to Advance Despite Plunging Oil Price
(Dollar Photo Club)

By    |   Wednesday, 20 January 2016 08:37 PM EST

  • INDICATOR: December Consumer Prices, Housing Starts and Real Earnings
  • KEY DATA: CPI: -0.1%; Excluding Energy: +0.1%/ Starts: -2.5%; 1-Family: -3.3%; Permits: -3.9%; 1-Family: +1.8%/ Real Earnings: +0.1%
  • IN A NUTSHELL:  “The restraining influence from collapsing oil prices may continue for a while, but otherwise, inflation is increasing at a moderate pace.”

WHAT IT MEANS:  While the equity markets focus intently on the ever-declining price of oil, the economy continues to move forward.  Indeed, though the drop in energy costs has helped households but businesses, it has not slowed the rise in inflation.  Consumer prices declined in December, but excluding energy, they were up once again.  Over the year, household expenses, either just excluding energy or excluding food and energy, rose pretty much at the Fed’s target of 2%.  Commodity prices remain soft but services, which are over 60% of consumer costs, are still on the rise.  In December, it was cheaper to buy food in the stores, but eating out continued to cost more.  And in a very surprising outcome, medical commodity expenses declined while medical services costs were up minimally.  Even health insurance price increases were modest, though don’t tell that to either businesses or households. 

Workers hourly earnings, adjusted for inflation, rose in December, largely due to the fall in inflation.  The gain over the year was somewhat less than we had been seeing.

On the housing front, new construction activity moderated in December.  This was a surprise since the warm weather was expected to provide a boost to housing starts.  Even the details of the report were disappointing as the only gain was in multi-family activity in the Northeast.  Single-family starts were down in every region.  That said, housing permit requests have been outstripping starts for the past three months.  We should see a pick up in construction going forward.  For all of 2015, both housing starts and permit requests surged by double-digits.  That clearly indicates the housing sector ramped up activity last year.

MARKETS AND FED POLICY IMPLICATIONS: Another down day for oil, another down day for stocks.  So it goes.  Except in the energy and energy-associated segments, the potentially negative economic implications of the falling oil prices have yet to be seen in the general economy.  Housing may not be booming, but it is doing okay.  Inflation hasn’t collapsed, at least if you exclude the energy price declines.  So, what are we to make of things?  Clearly, the Fed has to be concerned about the extent of the drop in equity prices.  But the members have to separate the impacts that are related to sectoral or largely foreign issues from fundamental domestic growth concerns.  The simple fact is that non-energy inflation is at the Fed’s target rate when you look at the Consumer Price Index.  Also, the rate has been rising for the past year, during which oil prices have been cratering. 

The Fed’s preferred measure, the Personal Consumption Expenditure Index, is still running a below target, though.  Until that changes – and the craziness in the oil market settles down - the members will continue to worry about inflation and growth. 

Still, though Wednesday’s reports don’t tell us the economy is booming along, they support the view that conditions are still good and inflation is not falling.  That should put things in perspective, even if the equity markets’ wild mouse ride continues.   

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm. To read more of his blogs, CLICK HERE NOW.

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The restraining influence from collapsing oil prices may continue for a while, but otherwise, inflation is increasing at a moderate pace.
Economy, inflation, Oil Price, investors
Wednesday, 20 January 2016 08:37 PM
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