Standard & Poor’s Economic Report: The Sum of Oil Fears
By David Wyss, Chief Economist, and Beth Ann Bovino, Senior Economist
MARCH 2011 — The continued wave of rebellion in the Middle East sent oil prices soaring above $100/barrel, their highest level in over two years. The unrest in Libya and the threat of unrest in Saudi Arabia added to worries of supply disruptions, especially within Europe. How much disruption will occur is completely speculative at this point. But even small changes in output can cause big price swings.
If the turmoil in the Middle East spreads to other oil producers, we could look back on $100/barrel oil with nostalgia. Prices could surpass the 2008 high of $148/barrel very quickly — and $200/barrel is possible if there is a significant disruption in the Persian Gulf. We believe that the $150/barrel range would threaten to push the U.S. back into recession. The rule of thumb that we use is that a $10 rise in oil prices takes about 20 basis points (bps) off growth in each of the first two years of the price hike. This is a bit less than in the past because natural gas and coal prices no longer react significantly to oil prices.
Houses Move, But Prices Drop
Existing home sales rose 2.7% in January, while new home sales fell 12.6%. The divergence reflects two factors. First, new home sales are counted when the contract is signed, while existing homes count at settlement, which means that the bad January weather had less impact on existing than on new sales. Second, a tax rebate on offer in California created a spike in December sales in that state. The drop in new home sales was almost completely concentrated in the West (down 36.5%), but sales in the West (and nationally) remain up from November. The rise in existing home sales, in contrast, came everywhere except the Northeast, which dropped 4.6%; the West rose 7.9%, the largest regional gain.
The inventory of unsold homes dropped by 0.5% for new homes and 5.1% for existing ones. There is a 7.6-month supply of existing homes and a 7.9-month supply of new homes now on the market. However, this does not include the so-called shadow inventory of homes in process of foreclosure or being temporarily held off the market. Distress sales (foreclosures and short sales) accounted for 37% of existing home sales, up from 36% in December but down from 38% last January. Investors accounted for 23% of purchases (17% last January), and all-cash transactions were a record 32% of purchases (26% last January). The price of the median existing home fell 3.7% from a year ago, to $158,800.
The S&P/Case-Shiller Home Price Index (20-city) fell 2.4% from a year earlier in December, and is now down 31% from its July 2007 peak (and is only 2.3% above its April 2009 low). We expect another 5% drop in the index before it hits bottom this spring. Only Washington and San Diego are up from a year earlier. The largest declines from the peaks are in Las Vegas (down 55.6%) and Phoenix (54.5%). The smallest declines are in Dallas (9.4%) and Denver (11.5%).
The Rest of the Economy
Fourth-quarter real GDP growth was revised downward to 2.8% (annual rate) from the 3.2% reported a month ago. Most of the revision came from state and local governments, the spending decline of which was revised to 2.4% from 0.9%. We had been expecting lower state and local spending as governments try to eliminate their deficits, but the drop came somewhat earlier than expected. Consumer spending was revised slightly downward, to 4.1%. The saving rate was unrevised at 5.4%.
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March 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Ronald J VanSurksum, CFP® , a local member of FPA.