Impact of Higher Energy Prices on Overall Economy Minimal, Says S&P Report
NEW YORK — Despite the rapid rise in energy prices since Hurricanes Katrina and Rita, most companies other than airlines and automakers, whose costs and sales depend disproportionately on high use of fossil fuels, continue to enjoy robust earnings and credit health, says Standard & Poor's in a special report to be published on Monday, October 17. In addition, Standard & Poor's sees little chance of either a significant credit impact or a recession as long as oil doesn't rise and remain well above the recent high of $70 a barrel. The report is the cover story in CreditWeek, the investment research leader's weekly magazine on credit risk.
According to David Wyss, Standard & Poor's chief economist and the author of the lead article in the report, the simple answer to why the US and other industrial economies have been able to handle the oil shock much better now than in the 1970s is that these economies are vastly different. In the US, Europe and Japan, economies have enjoyed more momentum than during previous oil spikes, non energy inflation remains low, and central banks have been able to set more moderate interest-rate policies. Above all, energy represents a much smaller part of the economy than 30 years ago.
"Americans spend a much smaller share of their income on energy than in the past," says Wyss. "In 1981, energy spending accounted for 14% of GDP: in 2004 it was 7%. The average US household will spend about 6% of its income on energy this winter. That's 2% higher than two years ago but it is still below the 7.5% that Americans spent back in 1960, when energy was much cheaper but incomes were lower. Per capita, the average American uses about as much energy (in BTUs) as in 1970; but real incomes have more than doubled since then."
Source: PR Newswire, Standard & Poor's