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Investing Specialists

Better Balance Sheets Power Better Consumer Spending

Consumer net worth is going up, consumer debt is going down, but a hike in oil prices could still foul it all up.


Despite rising oil prices early in the week, a batch of ugly headline economic data on Thursday, and a tsunami on Friday, the S&P 500 managed to hold its losses to a manageable 1.3% this week. Oil prices and their effect on the economy continued to dominate the headlines. As we discussed in this week's video, the amount of oil lost from Libya is not enough to move the economic needle. Less than 2% of the world oil supply comes from Libya, and most of that goes to Europe. The fear is that political unrest may spread to a major producer such as Saudi Arabia, which supplies more than 10% of the world's oil. That fear has boosted the price above what normal supply and demand would suggest.

The Economy Can Absorb $100 Oil...$120 Oil, Not so Much
At $100 a barrel oil, the price is up about $20 from the average price in 2010. Considering we use 7 billion barrels of oil, that represents an additional tax of $140 billion a year on the consumer. That is more or less equal to the savings from the recent payroll tax cut. The next $20 increase in the price of oil could prove more painful without another clearly visible offset. Each $20 increase represents about 1% of GDP or 1.5% of consumer spending.

Unemployment Claims, Trade Deficit, Spain's Downgrade, and Consumer Sentiment Disappoint
On the economic front, a lack of substantive economic or earnings news placed undue emphasis on the few indicators for which headline numbers weren't great: initial unemployment claims were up, the U.S. trade deficit increased 20%, China's exports fell, and Spanish debt markets looked to be in trouble as Moody's downgraded Spanish debt yet again.

Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.