Other than the credit crunch, nothing has done more to depress economic activity than soaring energy prices.
Now that oil prices are coming down sharply we should see the economy adjusting to a new level of energy costs. Strangely, the financial media is not talking about the beneficial impact that lower energy costs will have. Perhaps no one can quite believe that such good fortune could come our way. Whatever the reason, if it continues cheaper, oil will be a boon for the economy.
One of the biggest payoffs is consumers will have more money to spend on the goods and services that support over 70% of the economy. Manufacturers, transporters, importers, retailers, and all their aunts and uncles will get a share of the rewards. We aren't expecting anything you would mistake for a boom, but we might be able to work ourselves out of the current bust a bit earlier than expected.
In addition, the balance of payments deficit should come off life support. Soaring oil prices were creating the largest hemorrhage of wealth out of our country that has ever been seen. We may not have a reversal of the balance in our lifetimes, but just cutting it down will help the economy.
Lower prices for energy will also help keep inflation in check. This topic gives us a chuckle because the Fed took energy out of the inflation equation a few years ago in order to make the numbers look better. Now Ben is finding himself caught in his own trap. That's okay because you won't need official reports to see prices moderate.
The dollar is already starting to reflect the benefits of less expensive energy. The greenback is up a bit against the euro and other strong currencies. Although we remain convinced that the soaring federal debt will push the dollar back down again, it's nice to have at least a temporary reprieve.
The question now becomes, how low are oil prices likely to go? We can only say that oil has a long history of spiking and then dropping back 30% or more. If it happens again, we could see oil drop to $98 or so. Some analysts think the decline could be greater because the recent run-up was especially large and quick. Any price below $100 would be pure adrenalin for the economy.