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High oil prices are 'manageable' for now — but precarious

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A couple of weeks ago, our friend Greg Daco outlined the triple threat to US economic growth right now. Daco, the chief economist at EY and a frequent guest on Yahoo Finance Live, said the autoworkers strike, a government shutdown, and resumption of student loan payments could together create a “significant drag on growth in the fourth quarter.”

Now, there’s a new threat to contend with: Oil prices have soared by around $20 a barrel in the past six months. That means prices at the pump are about 20% higher now than they were at the beginning of the year, according to AAA.

But fret not, say some analysts and economists. While higher oil prices could indeed trim GDP, it’s a “manageable headwind.” That’s the framing from the economics team over at Goldman Sachs, which is cutting its fourth quarter growth forecast by 0.4 percentage points to 0.7%.

JPMorgan’s Michael Feroli says the pain could be a bit more acute, trimming GDP growth by half a percentage point annualized, but wouldn't be "large enough to threaten the expansion by itself."

Goldman’s Jan Hatzius & Co. (this particular note is credited to Spencer Hill) put the oil price rise into perspective, comparing it to bigger spikes in 2008 and 2022.

These spikes may be big, but still out of the danger zone. In a note from DataTrek, hedge fund veteran Nicholas Colas wrote that the price would have to double before it would really cause a problem.

“History shows they must double in a year or less before a recession is inevitable. That makes the warning track $140/barrel," Colas wrote, adding that history says that "oil price spikes matter much more than modestly rising prices."

Of course, nothing exists in a vacuum, and oil prices have gone up in tandem with Daco’s other threats rearing their heads. As my colleague Brian Sozzi points out, citing RBC’s Lori Calvasina, markets don’t react well to government shutdowns, an event that could happen next week.

As for the other threats, economists have largely gamed out the hits to economic growth from the auto strike and student loan repayments.

There are a lot of modest headwinds, and one way to look at them is that they could also add up. The oil supply cuts, JPM noted, could "interact with a combination of other modest negative US shocks" like "an escalation of the UAW strike, a government shutdown or the recent rise in US long-term interest rates."

Macro effects aside, the higher oil prices do prompt a lingering question for investors: Which companies will be most affected? One answer to that question came today in the form of Jefferies downgrading Nike to Hold, citing the impact from student loans.

“Most US consumers with student debt are concerned about meeting all their monthly expenses (87%) and that apparel/accessories and footwear are likely to be areas of reduced spending ahead,” wrote analyst Randal Konik.

Presumably, those monthly expenses also include the price of gas.

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