Soaring Dollar, Plunging Oil – Do we win or lose?

Seeing the Forest for the Trees

 

January 13, 2015 –(BUSINESS WIRE)–Mesirow Financial’s Chief Economist sorts out the winners and losers as a result of plummeting oil prices. For consumers, it is effectively a back-door wage increase that puts more spending money in their pockets, but quite a different story in the energy sector.

Diane Swonk says “Shale oil producers are scrambling to lower the thresholds where their operations break even, in order to match the price declines. That is taking a toll on investment.” “Shale oil producers are scrambling to lower the thresholds where their operations break even, in order to match the price declines. That is taking a toll on investment.”

And a stronger dollar, which sounds like a good thing, is a factor in the oil equation. Swonk reminds us that the “stronger dollar lowers import prices and increases export prices. The result is lower inflation and reduced pricing power for businesses so profits will suffer.” Lower inflation could also delay the Federal Reserve’s plans to “normalize” interest rate policy.

“The Fed may have to delay liftoff as late as the fourth quarter of 2015. We see the fed funds rate ending the year at 0.50%.”

Excerpts:

  • Why is this of any consequence today? Because most people are asking the wrong questions about the economy. In so doing, they are losing sight of the forest for the trees. A good example is the recent debate on plummeting oil prices. The question shouldn't be whether it is good or bad; the questions should be 'who wins and who loses from falling oil prices?' and 'where do we sit on that spectrum of wionners and losers?' Spoiler alert: we all win as consumers
  • Investors would rather hold U.S. treasury bonds than risk default on the debt of other countries
...stronger dollar lowers import prices and increases export prices. The result is lower inflation and reduced pricing power for businesses so profits will suffer.

Read the latest issue of Themes on the Economy to learn more about potential risks and the net gains for the U.S. economy in 2015. Archived issues can also be found at mesirowfinancial.com.

Mesirow Financial is a diversified financial services firm headquartered in Chicago. Founded in 1937, it is an independent, employee-owned firm with approximately 1,200 employees globally. With expertise in Investment Management, Global Markets, Insurance Services and Consulting, Mesirow Financial strives to meet the financial needs of institutions, public sector entities, corporations and individuals. For more information about Mesirow Financial, visit its website at mesirowfinancial.com.