Oil price and consumption relationship defies expectations
What will higher oil prices really mean for consumption and growth?
The chart below shows something of an inverse relationship between YOY changes in real personal consumption expenditures (PCE) and YOY changes in the oil price. When oil collapsed a couple of years ago the consensus stated that cheaper oil meant more consumption and that was good for growth; that ignored the fact that about 40% of corporate CapEx was related to energy. The lower oil price led to lower growth despite a shift towards consumption.
Now we have the opposite situation: Oil prices are up a bit year on year and consumption is a bit squishier, as we see from recent data on personal consumption expenditures, retail sales and auto sales. Just as the collapse in the oil price was a modest net negative for the economy, the recovery in the oil price should be a modest net positive, with better CapEx in the oil sector compensating for a modest bite to consumption.