Energy Industry Spending Might Get Crunched, But The US Economy Will Barely Notice

If oil prices remain low, expect a slowdown in energy-related capital expenditures, says Joseph LaVorgna, Deutsche Bank’s chief US economist. As the price of oil goes, so does investment in new equipment with a lag of about two quarters.

What you shouldn’t expect, though, is a major drop in GDP as a result.

In total, capex spending accounts for 9% of GDP, says LaVorgna. But, lower energy investment doesn’t make up close to all of that. And any reduction is likely to be offset by consumer spending given lower gas prices.

Here’s the calculus, from LaVorgna’s note:

If crude prices remain near current levels, given the aforementioned relationship between prices and energy-related capital expenditures, this would imply roughly a 20% year-over-year decline in oil and gas capex. In turn, this would subtract approximately 20 basis points (bps) from 2015 real GDP growth.

Compared to some countries that rely heavily on oil revenues, the hit on US economic output relatively insignificant. And overall, the outlook for 2015 business spending is still looking pretty good, LaVorgna says.

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