Why the Outlook for the Economy Just Got Worse

Cheaper oil will create benefits for American consumers and for oil-consuming industries. But as the shale gas industry has grown and the United States has become a net energy exporter, the balance has changed in how cheaper energy affects the economy.

The pain of cheap oil will tend to be highly concentrated in oil-producing locations, and will have an outsize impact on capital spending. (Spending on energy is a major driver of demand for heavy industrial equipment.) A telling indicator: Shares of Halliburton, the leading maker of energy equipment, were down 35 percent in midmorning, compared with about 7 percent for the overall market.

The United States has experienced something like this before, in late 2015 and early 2016, when a drop in commodity prices caused an economic slump that was most pronounced in the oil patch and in heavy industry.

In that episode, the overall United States economy kept humming along because consumer spending and service industries were mostly unaffected. What makes the outlook for 2020 seem so different is that the oil price swoon is coming at the same time coronavirus appears likely to wallop those sectors.

The damage is still highly uncertain. But if more large gatherings like conferences and concerts are canceled, and more people decide they will not fly this summer and stay home more generally, it’s likely to cripple the consumer-driven side of the economy.

That means that workers who serve those industries will be in danger of furloughs, lost hours or layoffs. “This is unusual in that it may prove faster acting than past downturns,” said Jay Shambaugh, director of the Hamilton Project at the Brookings Institution. “The drop in oil prices and drop in financial markets alone, and when you add those to the impact of the virus and the hit to global demand, at some point that has spillovers to the U.S. economy.”

Companies affected by the coronavirus spending freeze would, like their counterparts in the energy business, be at risk of default.

Article source: https://www.nytimes.com/2020/03/09/upshot/coronavirus-oil-prices-bond-yields-recession.html