- The Washington Times - Tuesday, October 5, 2004

N. Gregory Mankiw, the White House’s top economist and possible nominee to be the next chairman of the Federal Reserve, yesterday offered a sober assessment of the economy, saying high oil prices are sapping growth but not enough to thwart the recovery.

“Recent increases in oil prices are a drag on the economy, as well as a strain on family budgets,” and likely will slow growth by as much as a half a percentage point this year and next, the Bush adviser said in a speech before the National Association of Business Economists in Philadelphia.

“Such a decline would be an undesirable head wind in the continuing recovery, but it would not reverse the upward trajectory of the economy,” he said — an assessment echoed by top Fed officials this week as they ponder the effects of persistently high oil prices.

Mr. Mankiw’s frank remarks come one month before the election as oil prices are once again climbing to new highs each day on the New York Mercantile Exchange. Yesterday, premium crude surged to a record of $51.05 — nearly 70 percent above its price a year ago.

The persistently high oil prices provoked a slump in the stock market this past summer and a decline in consumer confidence as average gasoline prices crept back toward $2 a gallon. A 16-month low in a gauge of America’s sprawling services sector yesterday was blamed in part on high energy prices.

The soaring cost of oil helped prompt a renewed round of cost-cutting by businesses and a downshift in hiring this summer. An employment report on Friday is expected to show a pickup in job growth from its anemic summer pace, but not the robust levels seen when the economy took off early this year.

The White House Council of Economic Advisers, headed by Mr. Mankiw, is projecting that revisions to the jobs data will show more job gains between March 2003 and March 2004 — taking some of the wind out of Democratic criticisms of Mr. Bush’s jobs record.

Mr. Mankiw is on a short list of candidates identified as likely Bush nominees to replace Fed Chairman Alan Greenspan when he retires in 2006, should Mr. Bush win a second term.

Economists from Mr. Greenspan on down were quick to dismiss high oil prices when they took off in the spring as a mostly transitory phenomenon that would only temporarily raise inflation and slow growth.

However, oil’s march back to record levels last month forced the Fed to back off its prediction of transitory effects, and economists everywhere have been scurrying to calculate what the long-range effect on consumers and businesses might be if oil and gas remain expensive indefinitely.

Some are upbeat.

“The economy is taking this higher level of oil prices in stride,” Anthony Santomero, president of the Federal Reserve Bank of Philadelphia, said on Monday. “The economy was hurt and slowed down somewhat because of the movements in oil, but we seem to be looking beyond that.”

But Fed governor Ben Bernanke was more guarded in his outlook. “We think the economy can accommodate [oil prices] at the current levels at least as long as they don’t rise substantially more,” he said in a speech Monday.

Treasury Secretary John W. Snow, who hosted the Group of Seven finance ministers here last week, said record oil prices are the chief threat to expansion in the United States and around the world.

Few analysts are now predicting a return to the low and moderate oil prices prevalent during the 1990s and early 2000s.

“High oil prices are here to stay, at least for a few years,” said Nariman Behravesh, economist with Global Insight. He cites a “perfect storm” of rising demand for oil in the United States and China coupled with tight supplies and threats of disruption from the Gulf of Mexico to the Middle East.

“There is little relief in sight in the next few years,” he said. “With markets as tight as a drum, worries about the security of oil supplies will continue to be reflected in high prices.”

The high prices eventually will stoke development of increased supplies, and those will become available five to 10 years from now, he said. But “growth in oil supplies over the short term is likely to come mainly from high-cost, remote and politically unstable areas in Russia, Central Asia and West Africa.”

Mr. Behravesh sees a bigger effect on economic growth than Mr. Mankiw stemming from the new oil realities, a “dilemma” for the Fed as it seeks to stifle the inflation pressures created by high energy prices while maintaining growth.

“The other major consequence of higher oil prices and sluggish growth this year will be a much tighter race for the U.S. presidency,” he said.

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