Gas prices tip against recession

Falling energy costs act like a quick tax cut, boding well for an economic rebound.

The United States economy is getting a boost from an unexpected source: tumbling energy costs.

Prices of oil, gasoline, and natural gas, whose upward spike two years ago helped bring a record economic expansion to a stall, are now falling - helping the US economy avert a possible recession.

Add the impact of lower interest rates, coming tax rebates, and an upturn in stock prices, and some economists now see modest growth in the year's second half, up from nearly zero this spring.

In effect, cheaper energy acts like a tax cut, fattening consumer wallets.

Where some analysts, for example, had foreseen gasoline at $2.00 per gallon this summer, the average price has fallen from $1.60 in early June to $1.40.

"Money you don't spend at the gas tank, you can spend at the mall," notes David Wyss, chief economist at Standard & Poor's.

That bonus could help offset the downward drag of several challenges: rising layoffs, a strong dollar that hurts exports, and worrisome consumer debts.

Unemployment ticked up to 4.5 percent in June. Moreover, in a sign that troubles may be spreading from the beleaguered manufacturing sector, the service sector failed to provide new jobs during the April-June quarter - the first time in more than four decades.

Some economists worry, meanwhile, that further slippage in corporate profits could force firms to lay off more employees.

Against that backdrop, falling energy prices represent an important, albeit modest, boost.

"It is definitely good news," says Chris Varvares, an economist with Macroeconomic Advisers, a St. Louis consulting firm.

The price drop could add two-tenths of a percentage point to economic growth over the next year, estimates Mr. Wyss in New York.

The tax rebates will do somewhat more - adding about 0.3 percentage points starting in this quarter, he says. Rebate checks of up to $300 to single taxpayers and up to $600 for married couples will go in the mail starting two weeks from now, and continuing through Sept. 24.

Wyss predicts the economy will grow at 2.5 percent annual rate in the summer quarter, and more than 3 percent in the final quarter.

Mr. Varvares sees a similar growth path for the economy, noting also the stimulative impact of interest rates - which the Federal Reserve has cut by 2.75 percentage points this year - and stock prices that are up 10 percent or so since early April.

Last year, by contrast, soaring energy prices were acting like a tax hike, taking away spending money from consumers, trimming business profits, adding to inflation, and peeling perhaps a full percentage point off of economic growth.

Now, the supply of energy has risen and demand fallen. Refineries have been producing gasoline at nearly full blast, while a slower economy has sidelined some trucking and other energy consumption.

OPEC and its most important member, Saudi Arabia, have also played a key role. At a meeting in Vienna last week, the oil cartel decided to leave production rates unchanged, despite a price drop from $31 a barrel earlier this year to $26 to $27.

Another factor is oil-rich Iraq. It halted exports on June 4 to protest a US-British plan to overhaul United Nations sanctions. But the plan failed, and Iraq said last week it will resume exports of about 2 million barrels a day.

OPEC wants to keep oil prices in the $22 to $28 a barrel range.

And unlike in years past, the cartel's efforts to bring a greater level of certainty to oil prices are generally welcomed by oil-consuming nations.

Indeed, President Bush is encouraging a price target for OPEC of about $25 a barrel.

"Domestic producers prefer stable prices," says John Lichtblau, chairman of the Petroleum Industry Research Foundation in New York.

The drop in energy prices has numerous implications for US consumers and industry.

It may help maintain sales of gas-hungry sport-utility vehicles - at least the smaller varieties. Sales of Ford Explorers, helped by incentives, have hit a new record.

Natural-gas has fallen in price even more than oil. At $3.16 per million Btu (a measure of energy), the price is almost one-third the level of its $9 peak in January. People relying on gas for air conditioning will see smaller bills. Electricity prices will fall in areas with gas-fired plants. Its lower price could ease somewhat the power crisis in California, though there is a shortage of pipeline capacity to the Pacific Coast state.

But on Wall Street, lower energy could squeeze profits for oil and gas companies.

(c) Copyright 2001. The Christian Science Monitor

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