On one hand, crude oil prices continue to plunge and have lost 60 percent of their value in the past seven months. Oil prices have not been this low since the depths of the financial crisis in 2009. On the other hand, employment figures and U.S. gross domestic product are rising, showing market strength.
Falling prices have led to significant layoffs for oil workers, which could especially affect once-fast-growing areas like Texas. Decreasing oil revenues have resulted in budget concerns for oil-producing states like Alaska, Louisiana, Oklahoma, and Texas. The less diversified a state’s economy is, the more falling oil prices have a negative impact. For example, Louisiana loses $12 million for every $1 decline in the annual average price of a barrel of oil, according to the state’s chief economist, Greg Albrecht. Fortunately, the oil states’ economies are much more diverse than they were during the 1980s oil bust, so negative effects are mitigated.
If market data were the only indicator of an economy’s health, the prognosis for the United States would look shaky at best. Treasury yields have fallen to a 10-year low, with returns less than 1.7 percent at the end of January. U.S. Treasury yields are still better than other world economies, however: Germany’s 10-year note yields 0.3 percent and Switzerland’s 10-year note yields in the negative.
However, the U.S. is not in a recession; the U.S. economy is actually doing quite well. Employment numbers have been growing steadily, showing 12 months of 200,000-plus gains in nonfarm payrolls. Unemployment consistently decreased throughout 2014—falling from 6.6 percent in January to 5.6 percent in December.
U.S. gross domestic product (GDP) increased 2.6 percent in the fourth quarter of 2014 according to the first estimate provided by the Commerce Department’s Bureau of Economic Analysis, released at the end of January. The slower growth was slightly disappointing following the 5.0 percent third-quarter growth, which was the strongest GDP growth since 2003. Because such growth is hard to sustain, economists were not surprised by the decrease. Previous forecasts had estimated fourth-quarter growth at around 3.3 percent. Overall U.S. GDP grew 2.4 percent in 2014—the strongest annual growth since 2010. Severe weather in the first quarter of 2014 put the biggest damper on growth, causing a GDP contraction right out of the gate.
Fourth-quarter GDP growth was driven in part by 4.3-percent growth in personal consumption expenditures—likely evidence of cheaper gas prices freeing up funds for other goods and services. Americans are expected to save approximately $750 on average at the gas pump this year.
Long-Term U.S. Outlook
The Congressional Budget Office’s 10-year budget predictions released in January were cautious to say the least. Federal debt held by the public currently stands at 74.1 percent of nominal GDP, which is more than twice what it was at the end of 2007 and higher than any year since 1950. Barring any changes to current law, that percentage could decline to 73.3 percent by 2018 and then hike up to 78.7 percent by 2025.
Other long-term projections depend on external variables, including the key global economies that interface with the United States. The International Monetary Fund (IMF) expects markedly slower growth in China in the coming years. The IMF also cut 2015 growth expectations for the Eurozone, Japan, and Russia. Given the large proportion of our exports that go to these areas, the strength of their economies and the amount of exports they buy directly impacts the United States.