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US real gross domestic product grew at a 0.7 percent
annualised pace in the fourth quarter of 2015, the government announced.
Now, forget that number. It is the “advance estimate,†and the Bureau of Economic Analysis will revise it again and again over the coming months and years. These revisions tend to be especially big at points where the economy tips from growth into recession, or vice versa. Consider what happened to GDP growth estimates for the first quarter of 2008, which turned out to be the beginning of the Great Recession.
There are those who fear the US economy might be tipping into recession now. Could be, but clearly today’s advance GDP number won’t tell you much about the likelihood of that. There’s another BEA report, though — released last week, on GDP by industry in the third quarter of 2015 — that might offer some more insight into the likelihood of recession.
There’s one industry in particular that I’m curious about: oil and gas. Oil and gas prices have plummeted, partly because of reduced global demand and partly because of new supply. In general, lower energy prices are good for the U.S. economy. In the 1990s oil was mostly cheap, and the economy was mostly great. In 1997 and 1998, as crude oil prices fell 50 percent in the face of emerging-market economic troubles, U.S. GDP grew at a 4.5 percent annual pace. Now emerging-market economic troubles are back, and the Brent crude benchmark price is down 70 percent since June 2014. The boom must be just around the corner, right?
In the 1990s, though, U.S. oil production was dwindling, while since 2008 it has almost doubled, thanks to new technologies such as hydraulic fracturing (fracking) and horizontal drilling. The U.S. is even exporting crude oil again, for the first time in four decades. Oil and gas have become a lot more significant since the late 1990s.
With natural gas, net imports are negligible. But in general, the consumers of both oil and natural gas account for far more of US economic activity than the producers do. For consumers, cheap energy is good.
So eventually, whatever drag the oil and gas industry’s troubles exert on the economy should be more than compensated for by gains in other sectors. I’m guessing that, for the US economy at least, the parallel with the 1990s will hold up.