If there was one thing most economists agreed on at the start of the year, it was this: Plunging oil prices would boost the U.S. economy.
It hasn’t worked out that way.
The economy is thought to have shrunk in the January-March quarter and may barely grow for the first half of 2015 — thanks in part to sharp cuts in energy drilling. And despite their savings at the gas pump, consumers have slowed rather than increased their spending.
At $2.74 a gallon, the average price of gas nationwide is nearly $1 lower than it was a year ago. In January, the average briefly reached $2.03, the lowest in five years.
Cheaper oil and gas had been expected to turbocharge spending and drive growth, more than making up for any economic damage caused by cutbacks in the U.S. oil patch.
Consider what Federal Reserve Chair Janet Yellen said in December: Lower gas prices, Yellen declared, are “certainly good for families. … It’s like a tax cut that boosts their spending power.”
Other experts were more direct: “Lower oil prices are an unambiguous plus for the U.S. economy,” Chris Lafakis, an economist at Moody’s Analytics, wrote in January.
So what did they get wrong?
It turns out that the economic effects of lower energy prices have evolved since the Great Recession. Corporate spending on drill rigs, steel piping for wells and rail cars to transport oil has become an increasingly vital driver of economic growth. So when oil prices fall and energy companies retrench, the economy suffers.
The drilling boom that erupted in 2008 has boosted U.S. oil production nearly 75 percent and natural gas 30 percent and made the United States the world’s largest combined producer of oil and natural gas. Energy production contributes about 2 percent to economic output, up from less than 1 percent in 2000.
Yet in recent months, industry activity has dropped more sharply than predicted.
“So far, it is fair to say that we have been hurt more than helped,” Lafakis acknowledges now.
Some economists are reconsidering assumptions they use to forecast the economy.
“The benefit of lower oil prices is less pronounced than, say, 10 years ago,” says Jim Burkhard, a researcher at IHS Energy. “You’re taking a big engine of economic activity and cutting it sharply.”
Lafakis and many others still expect consumers to spend much of their savings from cheaper gas, powering faster growth in the second half of the year. Economists say it can take up to six months for people to spend unexpected windfalls. But any gains won’t likely be enough to counter the anemic start to the year.
Moody’s Analytics expects the economy to expand just 2.6 percent this year, down from an earlier forecast of 3.3 percent. (The downgrade is also due in part to a stronger U.S. dollar, which has depressed exports.)
For families, the drop in gas prices was an unexpected gift. The government has estimated that cheaper gas will save a typical household $675 this year.
Yet still scarred by the recession, many remain reluctant to spend freely. Analysts also note that Americans are less likely to spend extra money if they think the gain is temporary.
“Consumers have been very reluctant to spend [savings from cheaper gas], because they view that as fleeting,” says Greg McBride, chief financial analyst at Bankrate.com.
Consumer spending rose at an annual rate of just 1.9 percent in the first quarter, compared with the previous quarter’s 4.4 percent. Much of the cash saved at the gas pump was put away: The U.S. savings rate reached its highest point in more than two years. Wal-Mart and Target have confirmed that their sales aren’t getting much lift from cheaper gas.
For Vince Cimilluca, a 28-year-old video editor in Edison, New Jersey, lower gas prices haven’t changed his finances much. He’s struggling to pay $800 a month in student debt while saving for a home. He’s seen gas prices gyrate and doesn’t trust that they’ll stay low.
“The extra money that I have, I save,” Cimilluca says.