Chart Of The Week: Is It All About Oil?

Where would we be without the shale oil boom?

The US economy has, since early in this century, become dangerously dependent on the energy industry. Core capital goods orders are now highly correlated with the price of oil, a phenomenon not seen prior to the depreciation of the dollar in the middle of the last decade. The close correlation has continued after the 2008 crisis and the implications are clear. From mid-2014 when oil was trading well over $100 to early 2016 when the price bottomed under $30, the US economy slowed with energy investment and came perilously close to a recession.

Will tax reform revive investment in other industries and reduce our dependence on oil? Based on what we've heard from companies so far, I have my doubts. The order of priority for the cash from tax reform appears to be: pay down debt, buy back stock, pay dividends and only then invest in the business. The key variable for near term growth may be the value of the dollar which has a large influence on the price of oil. Anything that pushes the dollar up is going to hit growth pretty quickly.