- The drop in oil prices is a sign that the US will avoid a recession in the near term, DataTrek said.
- That’s because cheaper crude means cheaper gas prices, a major expense for most Americans.
- “The risk of a recession in the near term seems very low,” said DataTrek cofounder Nicholas Colas.
Oil prices are a harbinger of an impending recession — and there are flashing signs that the US will avoid a recession, according to DataTrek.
“Lower energy prices are an underappreciated counterweight to many arguments for an impending US/global recession. With the exception of the Pandemic Crisis, every US recession since 1973 has been predicted by doubling in oil prices over the course of a year,” DataTrek cofounder Nicholas Colas said in a note on Tuesday. “Furthermore, periods of economic expansion coincide with stable or (at worst) predictable increases in crude oil prices.”
That’s what happened in 2000, when the price of oil increased by 141% in the year, and in 2007, when they increased by 96%.
Increases of that magnitude mean the U.S. economy is likely to be pushed into recessions even if the dot-com and housing bubbles never burst, Colas said.
That’s largely due to the impact of oil prices on households, with the average American spending $150 to $200 a month on gas, DataTrek said, citing data from JD Power. Rising gas prices mean less money is available for other bills, squeezing Americans’ spending power and curbing economic activity.
But crude prices have tumbled in recent months, with West Texas Intermediate Crude down 35% since hitting $124 a barrel last year, when Russia invaded the Ukraine and caused chaos in the energy markets.
This is a good sign that the US may avoid a recession in the near term, as falling oil prices are usually associated with periods of economic expansion, such as the 1990s and late in the 2010s, Colas said.
Although some analysts predict that crude oil prices will rise back up to $ 100 per barrel by the end of the year, prices have hovered around $ 70-80 per barrel for three months, and are expected to remain that’s on hold until the summer, Colas said. And even if prices hit $90 a barrel, they will still drop every year until October.
“The risk of a recession in the near term seems very low,” Colas said, adding to a growing chorus of market commentators who are more optimistic about the economy.
After predicting a recession, JPMorgan CEO Jamie Dimon recently said it is possible for the US to avoid a recession, given strong indicators of economy.