The U.S. produced about $17.6 trillion (annualized) worth of finished goods and services in the third quarter of 2014. About $12 trillion, or 68 percent, was purchased by consumers. Just $0.62 trillion, or about 5.2 percent, of that went for energy. Within that category, electricity and home heat (typically natural gas or heating oil) account for about 2.0 percent while vehicle fuels accounted for 3.2 percent.
By comparison, before crude prices began to decline, total energy expenditures accounted for about $0.64 trillion, or about 5.4 percent of consumer spending. So the energy savings amounted to about $20 billion at an annual rate in the third quarter compared with the second quarter, and are on track to match or somewhat exceed that rate in the fourth quarter (Chart 2). In relation to $12 trillion of consumer spending, the savings from lower gas prices is quite small. In addition to the lower direct expenditures on energy, consumer may benefit from indirect savings on things like cheaper airfares or lower shipping costs. Any savings redirected to extra consumer spending could be a positive development for consumer discretionary companies.
On the flip side, there are potential negatives from falling crude prices. Employment in the energy mining field has grown sharply in recent years – rising from about 300,000 jobs in 2003 to 660,000 as of November – as high prices made production from U.S. shale-oil fields profitable.
Similarly, investment in new drilling and extracting equipment totaled $7.7 billion in 2003, while by 2014 these expenditures were on track to exceed $27 billion. While neither of these trends is at risk in the short term, if lower crude prices are sustained, employment in the energy mining and extraction industries as well as demand for this machinery and related goods could decline later in 2015 or 2016.
AIER’s Business Cycle Conditions (BCC) leading indicators point to continued economic expansion in the quarters ahead. We combine our 12 leading indicators into a single index where a reading above 50 percent suggests further growth.
As of our December evaluation, 80 percent of the leading indicators were expanding, or in an upward trend, the 64th consecutive month that the index has exceeded 50 percent. Consistent readings well above that midpoint suggest a low probability of recession over the next six to 12 months. Among the 12 leading indicators, six hit new cycle highs, meaning that they are at their highest level since the current expansion began, while two indicators were trending lower and two were indeterminate, or trending sideways.
In addition, we also calculate three other AIER measures: a cyclical score for our 12 leading indicators, an index of coincident indicators, and an index of lagging indicators. Our cyclical score of leading indicators registered a reading of 86 in December, marking its 65th month above 50 and confirming the expansionary reading from our leading index.
The index of coincident indicators posted a reading of 100 in December, the 36th month in a row with a perfect 100 reading and the 59th month above 50. Among our six coincident indicators, four hit new cycle highs in the latest month.
For the index of lagging indicators, December came in at 100 for the 8th straight month and the 29th time in the last 32 months. Among the lagging indicators, three of the six were at new cycle highs while three had indeterminate trends. Overall, all of our indexes remain well above the neutral level of 50 and suggest continued growth in the quarters ahead, supporting our generally optimist outlook for the U.S. economy (Chart 3).
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