Advisors Capital Market's Lieberman: Deflationary Effect of Lower Oil Prices Will Help US Economy

Plenty of economists are concerned about a deflationary spiral, the deflationary impact of the 56 percent drop in oil prices in the past seven months is positive for the U.S. economy, says Charles Lieberman, chief investment officer at Advisors Capital Market.

"Almost unanimously, economists expect growth to be reinforced by lower energy costs that give households the ability to increase spending," he writes in a commentary.

"Even so, there is greater uncertainty over whether this will delay the beginning of the Fed's rate hikes, since inflation measures will be depressed significantly over the coming months, possibly even suggesting deflation."

So what are the ramifications of deflation here?

"In this circumstance, deflation is a good event," Lieberman argues. "It is the basis on which consumers experience increased discretionary income. Not all deflation is bad."

Deflation is bad when it stems from recession. "But deflation is good when it is caused by large improvements in productivity or large increases in supply in response to technological change that increases supply or reduces cost," he notes.

Lieberman does not believe the Federal Reserve will delay raising interest rates because of the oil price drop. "Public statements by Fed officials indicate quite clearly they understand that lower oil prices may fuel higher prices in other parts of the economy in direct response to the increase in spending in those other sectors," he adds.

"And the data do permit the Fed to unravel the downward pressure on prices from lower energy costs from the possible upward pressure that comes from tightening labor markets."

Meanwhile, a survey of 306 investment professionals by the ConvergEx Group brokerage shows that 66 percent think oil prices at current levels are positive for the U.S. economy, while only 22 percent think they're negative.

But 68 percent think oil prices will keep falling.

And an identical percentage believes that if oil slides below $30 a barrel, global recession is inevitable.

"The idea behind this question was simple: at some point oil prices aren't just a nice theoretical tailwind for global economies," Nicholas Colas, chief market strategist at ConvergEx, wrote in a commentary.

"Rather, they become a signal that worldwide demand is contracting so quickly that oil prices must quickly decline to reflect that fact."

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