While a record amount of ink has been spilled praising the benefits of plunging crude price on the US consumer, so far this has manifested merely in soaring consumer confidence, if not in an actual boost to retail sales.
In fact, as the Census Bureau reported last week, December retail sales were the biggest disappointment and suffered the steepest monthly drop since the polar vortex. It appears that instead of doing what so many economists thought, and immediately using their “savings” to boost discretionary income, households are either i) saving the lower gas price windfall (and considering the unprecedented savings rate revision gimmick used by the US Department of Commerce to boost Q3 GDP to 5.0% this is completely understandable), or ii) as we explained some time ago, instead of spending on discretionary purchases, households are forced to spend more on far less pleasant, if just as GDP-boosting staples, such as soaring health insurance premiums courtesy of Obamacare (those who benefit from Obamacare most likely don’t have any work commute-related expenditures in the first place).
Less has been written about the adverse side-effects of plunging oil, even though by now even the most “undisputed” permabulls have been forced to admit that the imminent collapse in capital spending is truly “unprecedented”, a phrase Goldman uses in the chart below.
So what does plunging CapEx actually mean for the economy, aside from a substantial haircut to 2015 GDP, and what other areas of the economy will be affected by the Saudi Arabian scorched earth war on the US shale industry?
First, we look at the impact of plunging crude on non-residential construction and specifically physical structures, which is where roughly 90% of energy capex is — namely outlays for exploration and wells. Spending there tracked an annualized rate of $140bn in the first three quarters of 2014, a sum that accounts for a whopping 30% of total non-residential private fixed investment in structures, or about a 1% of GDP.
So what about residential construction? Here are some thoughts from bank of America:
The plunge in oil prices is creating havoc in forecasting the US economy. On the upside, lower oil prices supports consumer spending by reducing the cost of gasoline. But on the downside, it hurts oil producers and will curb investment in the sector. These dynamics can directly influence the trajectory of the housing market this year as well. The regions with economic growth driven by oil production likely will see housing conditions weaken….
Let’s focus on Texas and North Dakota, which account for more than half of US oil production. Housing starts in these two states make up about 15% of the nation and have contributed 18% to the national gain from the trough. Using the early 1980s as a guide when oil prices collapsed, starts in Texas declined more than 75% over a five-year period. This is probably the worst-case for today given that starts were at much higher levels then and the regional economy was more dependent on energy production. That said, a similar decline today would translate to a loss of 133K starts between Texas and North Dakota, which translates to a decline of 25K per year over five years. This can likely be absorbed by greater building elsewhere in the country.
Home price appreciation in the oil states likely will also be negatively impacted. Slower job growth means less income creation, hurting affordability and therefore weighing on home sales. Home price appreciation in Texas has been strong especially considering that the market was resilient during the crisis. This has left homes overvalued in many parts of Texas and therefore susceptible to correction.
Given the stickiness in home prices, we would expect this to start to show up in the statistics in the second half of the year.
A chart of where the housing pain will be most acute:
Texas accounts for a significant share of US oil production. Using the early 1980s as a guide when oil prices collapsed, housing starts in Texas declined more than 75% over a five-year period. This is probably the worst-case for today given that starts were at much higher levels then and the regional economy was more dependent on energy production. Furthermore, an 80s-sized drop in starts can likely be absorbed by greater building elsewhere in the country.
Home price appreciation in the oil states likely will be negatively impacted by the decline in oil prices. Slower job growth means less income creation, hurting affordability and therefore weighing on home sales. Home price appreciation in Texas has been strong especially considering that the market was resilient during the crisis. This has left homes overvalued in many parts of Texas and therefore susceptible to correction.
All of this is followed by the obligatory spin: “While the housing market in oil-producing states will weaken from the drop in energy prices, we think this will be offset by positive developments otherwise. The decline in oil prices has been accompanied by a drop in mortgage rates, boosting affordability. There was also an unexpected present from Washington – premiums on FHA loans were lowered by 50bp, reducing the cost of borrowing for lower-income and first-time homebuyers. There are clearly winners and losers from the drop in oil prices. We cannot dismiss the pain caused from the plunge in oil prices in the regions driven by oil production. However, on a national scale, the stimulus from lower oil prices and interest rates is a powerful offset.”
Unless of course it isn’t, just as the latest retail sales report showed, which prompted a violent scramble to preserve the sanctity of the confidence-boosting "crashing oil is unambiguously good” narrative. Then again, if all else fails, it is getting cold outside... almost cold enough to crush the US economy by about $50 billion as "happened" last year.