Two major opposing forces have been affecting the US economy for the past several months. The drastic drop in oil prices is the first factor. Oil prices affect consumers in their driving habits which, in turn, influence spending and saving. In addition, businesses also feel the relief of lower oil prices, particularly the airline and shipping industries. The second force is the rising strength of the US dollar. Importers benefit from a strong dollar by buying more foreign goods but exporters are simultaneously hurt by the weakened sales abroad. Both of these phenomena play a role in national output or GDP. The question is: which of the two factors is dominating?
Unfortunately, the strong dollar is winning the battle. In other words, the negative impact from the dollar’s rise is reducing output. Earnings of publicly traded businesses are set to drop by 3.3% in the first quarter compared to last year’s numbers. This would be the largest drop since the recession. Meanwhile, exports have dropped by 1.4%. Economists speculated that the dropping oil prices would balance out the equation by boosting consumption but that has yet to happen. Consumer savings rose from 4.7% in the January and February of 2014 to 5.7% in the same period this year. People are channeling their money differently than expected and consumption is not rising to keep up with the drop in exports. Some economists believe that consumption is simply lagging behind because of the harsh winter that discouraged people from driving to shopping malls and retail stores. They hope that seasonality did not account for the full effect of the abnormal weather.
Since oil is such a big part of the US economy, the decline in gasoline prices has severely impacted the industry. Corporations are slowing down investment and laying off workers. It’s not just the businesses that are hit; communities that rely on the oil industry are edging towards a recession.
These two forces are putting pressure on the Federal Reserve which is trying to decide whether or not to raise interest rates. After being at nearly zero percent for the past six years, the Fed wants to increase the interest rate but is hesitant because of the growing concern regarding the strength of the dollar. The Fed will likely wait a few more months before raising interest rates and hope that consumption will rise due to lower gas prices.