Plummeting oil prices and mortgage rates could boost consumers

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A man buys water, food and toilet paper at a store, as people begin to stockpile essentials over fear that supplies will be affected by the spread of the COVID-19, coronavirus, outbreak across the country, in Los Angeles on Feb. 29, 2020.

Mark Ralston | AFP | Getty Images

As the deadly coronavirus spreads across the globe, oil prices are down 30% for the year and the average rate on the popular 30-year fixed mortgage has fallen to an eight-year low.

It’s positive news for consumers in the short term, even as some economists warn that the virus could tip the U.S economy into recession as the outbreak escalates.

The drop in mortgage rates and oil prices could boost consumer confidence, which rose less than expected in February just one day after the stock market had one of its worst days amid virus concerns. A boost in consumer confidence, in turn, could ease those recession fears.

“The U.S. economy is 70% consumer driven,” said John Kilduff, founding partner of Again Capital. “A drop in gasoline prices acts like a tax cut, freeing up money to spend in other sectors of the economy, especially discretionary sectors, such as travel and leisure and dining.” 

The relentless pace of headlines related to the coronavirus, however, could ultimately act as a psychological break on any boost in confidence that low oil prices and mortgage rates might deliver to the consumer. 

“The question is whether the fear factor attributable to the virus will overwhelm any positive impact from lower gasoline prices and lower mortgage rates,” said Edward Yardeni, president of Yardeni Research. 

“That’s hard to answer, but it seems to me that fear is winning the tug of war currently as evidenced by the drop in stock prices and the panicky responses of governments, the media … and the public,” he added. 

‘Ray of hope’ for consumers

Oil has plummeted into bear market territory as the virus has led to weaker demand, and OPEC so far has failed to step in and reach a deal to cut production, which could lead to an even more dramatic drop in prices this year. 

Kilduff sees cratering oil prices as a “ray of hope for consumers.” People could see gasoline prices drop below $2 per gallon in upcoming days, and the recent decline in crude oil prices could add as much as 0.50% to U.S. GDP if the drop is sustained, according to Kilduff. 

Sectors such as entertainment and travel will likely need the most consumer support as the virus spreads and isolation measures are implemented across the U.S. Investors fear that the virus will disrupt supply chains as U.S. consumer and small-business confidence dips and jobless claims increase. 

Jeff Kilburg, founder and CEO of KKM Financial, said that the short-term reaction to lower oil prices will translate into lower prices at the pump for Americans, and that in combination with historically low mortgage rates will provide substantial strength for consumers in the second quarter. 

“This resiliency of the consumer will once again support equities and most likely show that this current market reaction is a ‘blip,’ not the end of this bull market … and certainly not the beginning of a recession,” Kilburg said. 

Scott Nations, president of Nations Indexes, a financial engineering firm, said the plummet in energy prices is an “apocalypse for producers.” But he maintained that lower prices help consumers save and spend in other sectors like entertainment and retail.

“Add lower prices at the pump, better industrial production, and Friday’s great jobs number and consumer confidence will surge once consumers are focused on buying something other than bottled water, face masks, and hand sanitizer,” he said.

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