Although oil at $100 per barrel would likely cause a recession, terrorism is still the most significant short-term problem facing the U.S. economy, according to the latest Economic Policy Survey from the National Association of Business Economics (NABE).
The semiannual survey, taken August 1 to August 15, 2006, surveyed a panel of 195 NABE members.
"NABE members believe that oil prices above $100 per barrel would probably cause a recession but don’t believe they will go that high,” says Stuart Hoffman, NABE president and chief economist, PNC Financial Services Group. “They see little prospect of significant substitution of other technologies for oil in the next decade.”
After terriorism, which 34 percent of respondents (up from 26 perecnt in March) said is the main short-term problem currently facing the U.S. economy, energy came in second (29 percent of respondents, up from 23 percent), followed by inflation and the trade deficit.
Looking out over a longer period, more than one-fifth of the respondents cited the federal deficit and an inadequate educational system as the main concerns affecting the U.S. economy.
The flexibility of the economy, with technology a close second, remains the strongest area, according to the survey.
Although the panel agreed that the U.S. monetary policy is about where it should be, they are divided as to the next steps that should be taken. Of the respondents, 71 percent said current monetary policy is about right, but 29 percent want further rate hikes, 17 percent want a cut, and 53 percent prefer leaving rates at their current level.
Only 57 percent of respondents expect the Fed to tighten, down from 89 percent six months ago. Most respondents feel that press reports of poor communication by the Fed are overplayed, and that communication is no worse than usual.
While 68 percent of respondents believe fiscal policy is too loose, there is not a consensus of opinion on how to reduce the budget deficit.
Among the panel members, 75 percent believe budget deficits should be cut, but only 17 percent thought deficits would actually drop, while 35 percent expect deficits to increase. As to how to reduce the deficit, extending the tax cuts came in as the most popular fiscal priority, in contrast to the second choice of raising taxes or allowing the cuts to expire.
Most economists believe that the Middle East violence will not result in major disruptions to oil supplies; only about a third of those polled think the war will expand.
Their estimate of oil prices for the summer of 2007 is $75 per barrel, about the level it was when the survey was taken. About a quarter of respondents expect prices to drop by at least $10 per barrel, and a similar percentage expect a $10 per barrel or more increase.
It was less clear from survey respondents as to how the U.S. should reduce its dependence on oil. Only 38 percent of respondents believe that any combination of policies would allow the U.S. to eliminate reliance on non-North-American oil.
On a scale of 1 to 5 (1 most promising), ethanol and biodiesel were seen as the most promising at 2.3, followed closely by nuclear (2.4). Hydrogen was seen as least likely to succeed. Nearly half of respondents think the world has sufficient oil, but that we should reduce dependence on the Middle East.
The panel was not very positive when it came to rising health care costs. According to 53 percent of respondents, health care costs are not likely to be controlled, with more costs being absorbed by patients.