While the phrase, “it’s a small world,” may evoke warm feelings or perhaps strange childhood memories, it also captures a pattern that plays out each day: The ripples of rising and falling foreign economies eventually reach our shores, affecting the financial health of Americans, whether they are buying a home, running a business or simply taking care of their families.
Let’s discuss three financial experiences that everyone has – which, while you may not see a foreign price tag on them, are nonetheless strongly influenced by unexpected economic developments in places as different as Saudi Arabia, Japan and continental Europe this year.
An oil-producing revolution has turned North America into the world’s largest producer over the past few years. But that is not evident by looking at prices at the pump alone – at least, it was not until late last year. That’s when the Organization of the Petroleum Exporting Countries (OPEC, led by Saudi Arabia) decided to inundate the world oil market with more oil than people needed and send prices tumbling, rather than risk losing more market share to the United States and Canada. Oil prices nearly fell by half from mid-2014 to mid-2015, and the prices paid by Americans at the pump fell along with them.
The cheaper prices look especially dramatic to Americans because as the price of oil has been falling, the value of the dollar has been rising. A U.S. dollar buys about 20 percent more euros, Japanese yen, Canadian dollars or Mexican pesos in mid-2015 than it did in mid-2014. PNC’s Economics Division is forecasting that the U.S. economy in 2015 will see the strongest year of growth since the Great Recession.
Once the gas tank is full, these global effects will show up again in the grocery store. At several points between when the seed goes into the ground and the groceries reach the checkout counter, low oil prices put downward pressure on the cost of food.
The prices that fertilizer producers charge have fallen in each of the last three years, unsurprisingly since petroleum is a major component of the cost of chemical fertilizer production. Similarly, low gas and diesel prices help to hold down food prices since the fuel burnt to transport farm products to the markets where shoppers buy them is an important part of their cost.
The effect is showing up slowly and unevenly in the end-prices that we pay for food. Beef prices are higher than a year or two ago because of a record low U.S. herd, for example, but wholesale prices of grains, fruits and vegetables have been falling. And, for some fruits and vegetables, drops in wholesale pricing are now showing up as lower prices at grocery stores and farmers markets, as well.
Foreign economic developments are boosting American household budgets in another way this year, by holding down interest rates for mortgages and other forms of consumer credit. Most U.S. consumer interest rates remain low in 2015 despite the unemployment rate having fallen to just 5.4 percent in April 2015. This is because foreign central banks have been aggressively expanding monetary easing programs to stimulate their economies in 2015, even as the U.S. Federal Reserve inches toward raising U.S. interest rates this fall.
In fact, central banks in Japan and the euro area are planning a monetary policy for 2015 that together should even more aggressively stimulate their economies than the Fed’s program did for the U.S. between 2010-14.
These faraway policy decisions lower interest rates directly in the foreign economies they target, and indirectly, they also lower interest rates in the United States. Since large foreign investors treat U.S. government bonds and government bonds from Japan and Germany similarly, the sharp decline in interest rates in Japan and the Eurozone ripples out to push interest rates down in the United States.
PNC Economics forecasts short-term interest rates will gradually rise over the next three years, starting this fall. But long-term interest rates, like the interest rates on mortgages, should rise more slowly, which is good news for Americans and the U.S. economic growth outlook.
As PNC’s senior international economist, Bill Adams constantly tracks and analyzes economic activity from China to Canada, India, the European Union, Brazil and Mexico.
Bill Adams underscores the significant ripple effect of the global economy to American finances
American households have more money left over after filling their gas tanks – money that gets spent on all the other things Americans buy, and which fuels stronger business demand, profits and hiring in the rest of the U.S. economy.
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