The decline in oil prices—the US benchmark West Texas Intermediate as of Dec. 1 is down roughly 35% since the recent peak in June 2014 —has inspired bullish expectations for consumer spending and related investments. As the Washington Post noted earlier this week: “Tumbling oil prices are draining hundreds of billions of dollars from the coffers of oil-rich exporters and oil companies and injecting a much-needed boost for ailing economies in Europe and Japan — and for American consumers at the start of the peak shopping season.” The slide in energy prices is also “spurring U.S. mutual fund managers to pick up shares of restaurants, airlines, and retailers, all consumer stocks that have been among the worst performers in the stock market this year,” Reuters reported yesterday.
Globally, lower oil prices are probably a wash in terms of the macro impact. “Falling oil prices have no implications for global growth—it merely redistributes global wealth,” according to Scott Sumner, an economics professor at Bentley University. But the results are likely to vary for individual countries. Economies that export most of their oil output will suffer the most—Russia, Saudi Arabia, and so on. Meantime, nations that have traditionally been net importers of oil—the US, Japan, Germany—will benefit. But how much of an energy stimulus should we expect? Probably less than conventional wisdom suggests. For some perspective, let's take a brief look at the numbers based on the historical record for the 20 years through October 2014 with monthly data.
The general assumption is that lower oil prices lead to higher consumer spending. Let's test this theory by comparing monthly percentage changes in oil prices with monthly changes in retail sales three months down the road. Why the lag? The reasoning is that a fall in energy prices takes some time to work through the economy before providing a boost to spending. (Note: lags in the charts below are referenced in terms of oil prices and so, for example, a December change in retail sales is compared with a September change in oil prices.)
