What does $100 per barrel oil mean for the US?

The recent rise in the price of oil to above $100 per barrel will not send the economy back into recession according to Economists Paul Ashworth and Paul Dales from the research firm Capital Economist.  Over the past month we’ve seen a 14% increase in per barrel price of oil, and it has risen 28% over the past year.  This is a small increase in comparison to prior spikes that preceded previous recessions (see chart below).

Years	Rise in the Price of Oil	Time Period of Increase
1973 – 1974	240%	over a few weeks
1978 – 1979	150%	over six months
1990	150%	over three months
1999 – 2000	75%	over six months
2007 – 2008	100%	over 12 months
Presently in 2011	28%	over 12 months

One reason for caution this time around is that oil is not the only commodity to increase in price.  Agricultural prices are up 8% in the past month and by nearly 90% over the past eight months.  So, even though oil prices remain well below the 2008 summer peak of $145 per barrel, agricultural commodity prices are hitting record highs.  The two economists cited above believe that the gains in both agricultural commodities and oil prices will have only a modest impact on inflation and economic growth this year. They forecast a 0.4% increase in inflation and a 0.3% reduction in economic growth if prices hold at the current levels. 

Of course, the price of oil could rise further.  But equally, if tensions in the Middle East subside they could fall back.  Either way, the price of oil would have to rise much higher too seriously threaten the US economic recovery. 

We believe the key risk is how consumers actually react to the higher price of oil.  Given media coverage, at what point will consumers become nervous and feel the need to pull back spending? 

America Saves Week

This week is officially “America Saves Week” and is a nationwide initiative that started in 2007 aiming to promote healthier personal financial decisions and boost attention paid to financial responsibility.

Continued economic challenges, shifting responsibility from the government and corporations to the individual, and constrained personal balance sheets make this initiative more timely today than ever.

For more information see a related article released by the CFP® board here: http://tinyurl.com/4bu2wyk

Fed Meeting Minutes

The Federal Open Market Committee (the Fed) released their minutes from January’s meeting this past Tuesday. They revealed that the improving economic data had left them more confident that the recovery was “on a firmer footing” and “would be sustained and would gradually strengthen over the coming quarters.” As a result, “the downside risks to forecasts of both economic growth and inflation, as well as, the odds of a period of deflation had diminished.”


The Fed now expects GDP to expand by 3.4% to 3.9% this year, compared with November’s projection of between 3.0% and 3.6%. Even though the outlook for economic growth is improving, Fed officials are still forecasting that the unemployment rate will decline only gradually and that core inflation will remain muted for the next couple of years.

Given their outlook, we don’t anticipate that the Fed will halt its plan to buy a total of $600 billion of Treasury securities by mid-year (a.k.a QE2).