Economy Recovering From Mid-Year Oil Scare

The economy has recovered from the abrupt and steep slowdown in spending during the early summer—a slowdown prompted largely by yet another false alarm from the oil market. Nonetheless, economic growth slowed markedly at mid-year, enough to reduce most GDP forecasts for 2004 by about 0.3%. That also reduces 2005 GDP growth, compared to 2004, by about 0.3%, although the forecast pace of growth from late this year through the end of next year remains near 4%.

The signs that the economy has returned to a 3% to 4% GDP growth pace include resumed above-average expansion in exports, jobs, retail sales, factory production and business investment, and falling prices for oil and other commodities. However, a small inventory surplus and a dip in consumer confidence that both resulted from unexpectedly low summer sales will linger into the fall, imposing a modest restraint on expansion.

When it comes to oil, a little ignorance goes a long way. There was never a serious risk of a physical shortage of oil. The peak pump prices for gas were the result of purchases by speculators who bet that they could briefly, and very profitably, drive crude oil prices to a record-high level. Though it said oil supplies were adequate, OPEC had to give in to political pressure to boost them; now it is worried about a glut of oil that could cause prices to plunge.