Accelerated Economic Growth in U.S. on Cheap Oil

Economic activity is growing at an accelerated rate as oil prices reach a bottom.

The Chicago Federal Reserve announced early Monday morning that economic growth accelerated in November. The Fed’s three-month moving average from economic activity rose to 0.48 in November, up nine basis points from October. 

Economic activity is growing at an accelerated rate as oil prices reach a bottom.

The Chicago Federal Reserve announced early Monday morning that economic growth accelerated in November. The Fed’s three-month moving average from economic activity rose to 0.48 in November, up nine basis points from October. 

That is the highest reading since May 2010, when the economy was recovering off a very low base caused by the global financial crisis. Before 2010, the Chicago Fed did not see this economic activity since January 2006, when activity continued to fall until the recession began.

The Chicago Fed noted this rate of growth is above the historical trend, which could cause price and wage inflation in 2015. Many economists are calling for incomes to rise next year, as continued growth and job gains indicate more bargaining power for workers, who have seen real wages decline since 2007.

Cheap Oil, Russia Woes

Many economists expected a reacceleration in November thanks to cheap oil, which is empowering U.S. consumers to spend more on discretionary items. At the same time, steady economic recoveries throughout the country on growing confidence and easing credit has also bolstered employers to hire more staff. Many analysts believe the two trends will reinforce each other throughout 2015. Others worry that a strong economic recovery could embolden the Federal Reserve to raise interest rates, which could tighten credit and cause stocks to fall.

In their recent meeting, the Federal Open Market Committee said that low oil costs were keeping inflation low, far below the Fed’s target and near actual deflation. Oil costs have halved since their peak, and energy costs have fallen by over 30% in 2014.

While cheap oil is getting Americans to spend more, net exporters are suffering, most notably Russia. Liquidity fears and high borrowing costs have forced Russia’s central bank to announce it will bail out the National Bank Trust with 30 billion rubles, or $531 million, as a weakening ruble and a lack of liquidity is threatening the NBT. Some analysts are predicting a Russian debt default, while Venezuela expects to default on its sovereign debt.

Meanwhile, energy prices have remained low, but some are predicting a bounce off a bottom. Crude oil futures expiring in February are currently $56.73 (WTI) and $61.19 (Brent), slightly up from recent lows.

Cheap oil is also pressuring institutional investors and Middle Eastern states. Saudi Arabia Oil Minister Ali Al-Naimi said the price in oil is “temporary” and caused by slowing global demand, not by oversupply. He also dismissed fears that cheap oil would remain. “The oil market will recover,” he said yesterday in a press statement, saying that recent low prices are part of a “correctional period” that is not to last.

However, many analysts are now arguing that the Middle East is in for a period of severe economic contraction and declining oil revenues for the long term, mostly because of growing energy production offsetting OPEC’s control of the market. In an interview on Bloomberg TV, Bank of America Head of Global Commodities and Derivatives Francisco Blanch said the oil cartel “is no longer relevant” because of higher energy production in the U.S. and outside of OPEC.