Recently, there has been a lot of talk about oil prices and the dramatic drop it has experienced in the past few months. In fact, oil prices are down 60% and reached just under $50 per barrel.
So what does this mean for the economy? How does this affect businesses? How does this change consumer behavior? Above all, what is most interesting to me is how the low oil prices can affect construction.
Overall, my stance is that the drop in oil will be a positive for the construction industry, except for a few markets.
Low oil prices and most importantly low $/gallon at the pump can have a huge effect on consumers. A drop in oil prices works similar to a tax cut and often results in increased consumer spending. With more disposable income, people buy more goods and services, which in turn creates more jobs and stimulates economic growth. Personal consumption is 70% of the United States’ GDP and a critical driver of growth for this country. With lower heating/cooling and transportation costs, consumers will have extra money and can finally save money to try to buy a home or do that remodel they have wanted to do. The construction market is overwhelmingly driven by residential construction and this might be the extra push the industry has needed to get back to levels we’ve seen in the past.
Furthermore, this increase in consumer demand will drive retail and manufacturing industries stimulating construction in the non-residential market as well.
Another interesting effect is that because of the drop in oil prices, the US Dollar has increased in value versus other currencies. Some economists believe that because of the Dollar increase, the Federal Reserve might hold off increasing interest rates this year. Prior to the fall in oil prices, analysts thought the rate increase would occur this summer; however, the Fed will likely reconsider a rate hike if they believe it will further bolster the value of dollar and likely hurt the economy. In the event the Fed chooses to keep interest rates low, home buying will become more attractive and residential construction wins.
Obviously, the drop in oil prices also has negative effects, especially to the energy companies, their projects, and the economies driven by energy – for example, North Dakota and Texas (mainly Houston). In those markets, I expect a drop in construction activity. Michael Dahl, Credit Suisse analysts, expects a 20% decrease in construction activity in Texas. Axiometrics decreased their Houston forecast of job growth by 20,000 jobs. They believe there will still be an increase in jobs, just not as high as they predicted. With fewer jobs comes less demand for housing and a drop in construction. Most likely there will be a 5-10% drop in these specific oil markets. Furthermore, in considering the increase in the U.S. dollar’s value, foreign investors will likely be discouraged from investing in US Real Estate because it will be more expensive for them. This could have an impact on markets such as New York and Miami, which have high rates of foreign investments.
I believe the drop in oil prices will have a positive effect on overall construction boosting confidence and consumer spending. It will only be in select energy driven markets, where the effect will be negative, but that is a small part of the entire US economy.
