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Sunday, August 22, 2004

NY Times Claims Oil Shock is an "Economic Stimulus"

The NY Times' Eduardo Porter asks a bunch of economists about the impact of the oil price shock on the economy. The bottom line turns out to be:

Undoubtedly, the recent price surge will hurt.
But maybe not that much.

Most economists have only shaved their growth forecasts slightly. The 30 analysts polled by the Federal Reserve Bank of Philadelphia reduced their forecast for growth in the second half of the year to 3.8 percent from 4.1 percent, and they sliced their growth forecast for 2005 by 0.2 of a percentage point -- to 3.7 percent.
Porter mostly quotes economic forecasters working for investment banks and such, but also talks to the right academic economist, James Hamilton. Hamilton is mainly known for his highly technical work in time series econometrics, but also happens to do a lot of more applied work on oil prices. He agrees that the oil price shock is bad but not that bad:

The price is high enough now that it can reduce the growth rate of the economy...But I'm not predicting a recession.
Hamilton has a nice web page devoted to his research on oil shocks, which includes a one-page summary of his current predictions.

Given all these pretty clear forecasts, it's more than a little strange that the article is headlined, "An Oil Price Shock That Could Be an Economic Stimulus in Disguise." Huh? How can something that slows the economy be an economic stimulus?

As best I can make out, the problem seems to be that the financial sector economists are focused on the very short term. And the recent news is not so much the oil rise, as it is changes in investors' expectations. "Investors have concluded that higher energy costs are likely to slow the Fed's hand in raising interest rates."

This is all well and good if you want to know what's going to happen to the stock market next week. But if you want to know what's going to happen to the economy in the next year, the answer is that the oil price shock will modestly slow economic growth, but not by enough to start a new recession, and that the effects will be somewhat offset by the Fed.


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