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Even with an unexpectedly strong second-quarter GDP report, the current economic recovery is the weakest since World War II. Even worse, many long-term forecasts — including those from the Congressional Budget Office, Federal Reserve, and White House — see future growth far slower than the postwar average. But the economy would be even weaker, and those forecasts gloomier, if not for the shale revolution. Here is Goldman Sachs economist Jan Hatzius:
… we estimate that the overall impact from the increase in US energy supply on real GDP growth is currently in the range of 0.2-0.3pp per year. Most of this is due to the direct effects from increased energy output and drilling activity, while the spillovers to other industries or via lower household energy bills have been more modest.
So, lots of energy industry investment and output. But a sector story rather than a macro story.
1.) Hatzius goes on to note that lower energy prices have not given a significant boost to energy-intensive industries: ” … output in the most energy-intensive manufacturing industries has in fact grown more slowly than in less energy-intensive ones.”
2.) Nor have US energy intensive industries outperformed energy-intensive industries in other countries. And Goldman hasn’t been able to find much evidence for a significant increase in capital spending in energy-intensive industries” other than chemical manufacturing.
3.) As for the potential boost to consumer spending from lower household energy costs, Hatzius points out that energy outlays as a share of disposable income have finally flattened the past few years. Assuming that the shale revolution get full credit, the bank economist guesstimates “the impact on US GDP growth through this channel may have been in the range of 0.05-0.1 percentage point per year.”
Here is Hatzius’s bottom line on the shale revolution’s total economic impact:
Whether this is a large effect or a small effect is probably in the eye of the beholder. Our view is that it is quite sizable when cumulated over a longer period, even if the spillover effects remain limited and more so if they grow. But it is probably not a first-order issue from the perspective of business cycle forecasters or macro investors who are primarily focused on the quarter-to-quarter and year-to-year fluctuations in business activity.
My bottom line is that America’s myriad economic woes will likely not be solved by the shale revolution. This is counter to what I hear from a lot of folks on the right these days. Too many view fracking as a silver bullet solution that will crank up GDP and create kajillions of high-wage jobs. No more New Normal. America can become North Dakota! Actually, it can’t. The Goldman analysis is a needed cautionary note and reality check that while the shale revolution is a wonderful economic tailwind, it probably isn’t a jetstream. Policymakers should make reasonable assumption about economic impacts and not ignore all the other things — from education reform to deregulation — necessary to create a thriving middle class.
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