In the new world order du jour, oil’s comfortably north of $60 a barrel, inflation’s running at a modest annualized 2.5%, the 10-year Treasury Note yields roughly 4.3%, and the economy’s advancing by an inflation-adjusted 3.4% a year at last count. To jump to the punch line: the much-feared fallout from a bull market in oil is a no-show.
Is this rosy scenario sustainable? Is oil no longer a threat at any price. To the extent the consumer votes with his wallet, there’s reason to be optimistic. Indeed, Joe Sixpack wasn’t intimidated by oil’s price ascent, at least not in June, when personal spending rose 0.8%, one of the stronger increases of late.
But if oil’s price keeps rising, is it time to rethink the so-far minimal fallout from escalating energy prices?
Much has been made of oil’s lesser role as an input in growing the economy. Compared with 20 years ago, that’s certainly the case. But it’s unclear at what point oil’s price rise offsets its diminished function as a component of GDP expansion and unleashes more astringent effects on the world of paper assets and economic growth.
The U.S. may be blind to such concerns, but elsewhere in the world there’s a more acute sense that oil’s continued rise is something more than a curious trend. In South Korea, for example, the sight of oil prices rising to new highs once more has raised anxieties about the future. “High oil prices shake up industries,” reads a headline from today’s Korea Herald. “In an economy plagued by a slow pace of recovery because of cooling exports and continual weak domestic consumption, high oil prices mean more challenges and strife for industries, particularly for the manufacturing sector that demand a lot of energy. Higher raw material costs will cut into profits.”
So far, there’s scant evidence that a similar set of worries afflicts the U.S. economy, which is currently enjoying a fresh bout of optimism as to its performance prospects. Indeed, on Monday we learned that the ISM Manufacturing index, a measure of industrial activity, jumped in June for its second straight month, confounding the pessimists and suggesting that the American economy is in no danger of slowing any time soon.
But that was then, and this is now. And now is dominated by the fact that oil’s upward price momentum is persistent. Few may care, but facts are still facts. At $62-plus a barrel this morning, the question of how high is too high for the economy is a topic with precious little discussion. The stock market, for the moment, could care less about such diversions. The S&P 500 is pushing higher, and looks poised to make another four-year high. Yet the < a href="http://www2.standardandpoors.com/servlet/Satellite?pagename=sp/Page/IndicesIndexPg&r=1&l=EN&b=4&f=1&s=6&ig=48&i=56&fd=&dt=02-AUG-2005&xcd=500&so=3">energy sector weighting in the S&P 500 ranks seventh in a field of ten, and measured by market cap remains a distant shadow to the leader, financials.
Energy, in short, still gets little, if any respect on Wall Street, even though oil prices have been moving higher now for four years running. One can only wonder what mix of events may conspire to alter that perception.