Market and economic update: Lower energy prices may fuel consumer spending

The decline in oil prices over the past few months is starting to impact U.S. economic data. Inflation measures have slipped lower, consumer confidence is rising, and industrial activity is waning.

Data for the next couple of months may appear to indicate weaker economic activity due to adjustments made in capital spending by the oil industry because of lower prices. However, on balance, the consumer remains the major contributor to total economic growth and appears to receive the greatest benefits from lower energy prices.

Producer prices fell 0.3% in December, retail sales slipped 0.9%, and industrial production fell 0.1%, all indicating some pressure on companies in the near term. The decline in capital spending for the oil industry also indicates we may see some dislocation in employment. This week’s 19,000 rise in initial jobless claims to 316,000 matches the highest levels for the past six months.

Ultimately, we believe the positive momentum in employment will continue, but near-term reports may soften in light of oil industry layoff announcements. On the positive side, consumer confidence is improving, with the January preliminary University of Michigan Consumer Sentiment Survey rising to its highest level in eight years and small business optimism rising to its best level since October 2006. U.S. economic activity will likely normalize from the fast pace in the second and third quarters of 2014, but growth in 2015 will likely average a reasonably strong pace of 2.5% to 3%.

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The global economy outside the United States continues to slow, due to both price pressures and growth. Inflation measures slowed in Europe, Japan, and China, driven by weaker energy prices and also weakness in core price measures. Growth in China slowed to just 7.3% year over year through the fourth quarter, while industrial production slowed in Europe.

Global central banks, outside of the Federal Reserve, appear to be engaged in battling slowing growth across many fronts. Easier monetary policies, weaker currencies, and the benefits to consumers of lower oil prices will eventually offer some economic stimulus, but we may not see the effects in the economic data until later in the year.

For more information, go to https://reserve.usbank.com/insights/market-economic-update-1-19-15.

Robert L. Haworth, CFA, is a senior investment strategist and Darrell Behnke is the Madison market leader for the Private Client Reserve of U.S. Bank.

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