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By New_Deal_democrat February 16, 2016 9:49 am
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Two templates for 2016: I. the gas price decline of 1986
I have two templates with which to compare the present US economy.  My template for a big decline in gas prices is 1986, when they fell by 50%.

Below I have put together the most important series for that event:

  • Initial jobless claims (blue)
  • gas prices (red)  
  • the Fed funds rate (green) 
  • the US$ (purple) 
  • Real GDP (teal)

In 1984 and 1985, the Fed had raised rates as the US$ rose in value.  In response to that, GDP slowed down.

It was then that gas prices suddenly declined 50%+ in the first part of 1986.

Consumers did not spend their gas savings until a year afterward.

 In the meantime, quarterly GDP made a bottom in Q2 1986.  
GDP was also helped by the decline in the US$, and the 1985-86 cuts in the Fed Funds rate.

Now let's look at the same series for the present situation:

Unlike 1986, the US$ strengthened sharply even as gas prices declined.  Further, the Fed has actually raised rates by 0.25%.
Like 1986, consumers so far have banked most of their gas savings.

The result has been at least as sharp a turndown in GDP growth.

Although jobless claims declined throughout both periods, the decisive difference has been that in 1986, financial conditions as indicated by the Fed Funds rate and the trade weighted US$ were easing, whereas in 2015 they were tightening.  For now, it appears the Fed has gone back to being on hold. The US$ bears close watching.
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