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Sizing Up The Energy Boost To The Economy

If gasoline prices in 2015 stay as low as they were in October 2014, the American economy literally would experience a major energy boost.

In 2013, Americans spent an amount equal to 2.4% of gross domestic product (GDP) on motor fuels and home heating oil.  In late 2014, gasoline prices were down about 18% from $3.75 per gallon in 2013 to $3.08.  If the 2.4% share of GDP spent on gasoline and diesel fuel in 2013 were reduced by 18%, it would mean that Americans would get an additional 0.43% of GDP (18% X 2.4%) to spend on all other retail categories. 

Of course, consumers might choose to bank some of the savings they're getting from lower gas prices, and you can't assume that the GDP will get a.43% boost from energy savings in 2015.  But, even if the boost to the economy were half of that amount, say .20% instead of .43%, it's a material plus looking ahead.

Even if consumers don't turn around and spend every dollar saved on lower gasoline prices, the stimulus to GDP provided by the energy boost is likely to have a noticeable effect on the economy.  A three-tenth of 1% boost to GDP tacks on an additional 10% to GDP growth.  That money stays in the U.S., and will help create jobs and trickle down through the system.

In addition to the energy boost resulting from lower gas prices, car sales and housing starts also are brightening the economic forecast for the U.S. 

Car sales collapsed during the last recession but have recovered fully.  We're running at about a rate of 17 million car sales per year, but the average cars in the U.S. fleet is 11 years old, and that is old by historical standards.  As a result, it is likely that car sales will be robust for the foreseeable future as we replace old cars with new ones.

Housing starts also are experiencing a tailwind because of demographic factors.  The U.S. population grows by three million annually, which requires adding about 1.5 million housing units a year to accommodate our growing population.  At the rate the U.S. was building new housing as of October, we were set to build one million new housing units in 2015.  To keep up with population growth, the rate at which new housing units are built in 2015 is likely to increase to the 1.5 million historical norm, further adding to the likelihood of a "Goldilocks economy" -- not too hot, not too cold, but just right.  

Of course, the world and personal circumstances can impose a new reality on you at any moment.  Jihadis, Vladimir Putin, China, and factors unknown to us currently can overtake economic fundamentals temporarily at any time.  Still, the tailwind to economic growth is undeniable and perhaps explains why, in mid-November 2014, U.S. stocks, as measured by all major broad stock indexes, had broken through to new all-time highs.

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