Is Cheaper Oil Good News or Bad News for the U.S. Economy?

Abstract

Oil prices have declined substantially since the summer of 2014. If these price declines reflect demand shocks, then this would suggest a slowdown in global economic activity. Alternatively, if the declines are driven by supply shocks, then the drop in prices might indicate a forthcoming boost in spending as firms and households benefit from lower energy costs. In this post, we use correlations of oil price changes with a broad array of financial variables to confirm that this recent fall in oil prices has been mostly the result of increased global oil supply. We then use a model to assess how this supply shock will affect U.S. economic conditions in 2015.

Citation

Groen, J. J. J. and P. Russo (2015), “Is Cheaper Oil Good News or Bad News for the U.S. Economy?” Liberty Street Economics, June 8 2015, Federal Reserve Bank of New York.