Sunday, August 10, 2008

The dark side of weak oil prices

Dropping oil prices change everything.

But like every other economic event it will happen in time.

Central banks can begin to feel more comfortable but they may still have some difficult numbers to face. The worst of headline inflation should be over. But the overshoot will not go away overnight - just overtime.

Lower oil prices are both good news and bad. The good news is obvious: less inflation pressure and fewer funds taken from consumers so their discretionary income rises. We saw US discretionary stocks rise sharply this past week on just those hopes... But the bad news of dropping oil prices remains. It is that weak prices just might reflect an overall drop in demand. We are getting some very weak economic figures from Europe and Japan to join with what have been weak numbers from the US.

Some US numbers are getting much weaker too. Jobless claims and announced corporate layoffs each are up sharply. Those who say claims are up because new job market entrants are not being absorbed can't so easily dismiss the rise in planned corporate layoffs. Nor can they blame that on teenagers becoming unemployed...

The dark side of low oil price is that the world economy is weakening faster than we thought. And with energy prices that climbed so rapidly that would not be hard to believe. Along with continuing financial problems and and key sectors like autos that need restructuring and a housing sector that is still deteriorating the US has its challenges ahead of it. Lower oil prices will help. But at the same time they might indicate how deep the abyss is that the US is trying to avoid.