Each day the Research staff takes a look at recently released economic indicators, addressing what these indicators mean for REALTORS® and their clients. Today’s update highlights oil prices and consumer spending.
- Economists have estimated that the stock market wealth effect is about 5 cents, meaning that $100 lost in the stock market leads to consumers holding back in spending by $5 over one year. In the case of the $1.3 trillion in lost wealth, consumer spending will be reduced by about $6.5 billion.
- One quick neutralizing factor in falling stock market wealth is the decline of oil prices. Here is the quick way to compute the dollar benefit of falling oil prices. The U.S. uses about 20 million barrels of oil each day, of which half are imported. Therefore, for each $1 decrease in the price of oil, U.S. consumers of oil save $20 million and $10 million that would have been shipped out of the country stays home.
- Oil prices after peaking in April have fallen by $10. Today’s reading on West Texas Oil is at about $98 per barrel. This reduction in oil prices, if it lasts for one month, translates into approximately $600 million in savings for U.S. consumers for the month and into $300 million staying in the country. For one year, it translates into $7.2 billion for consumers. The consumer spending response to oil prices is quite direct. That is, all of the $7.2 billion in savings will get spent on something other than oil.
- Bottom line: The economic impact of the fall in the stock market can be neutralized by a fall in oil prices.