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The Impact of Oil Prices on the U.S. Economy

Nine of the ten recessions since WWII have been preceded by relatively large and sudden increases in the price of oil. In this paper, I use time series analysis to forecast GDP growth using oil prices. I use the methodology from Hamilton (2009), and extend the dataset through 2010. Impulse response functions are used to analyze the historical performance of the model’s one-year-ahead forecasts. In April, 2011, the International Monetary Fund changed its forecast of 2011 GDP growth in the U.S. from 3.0% to 2.8% largely due to persistently high oil prices. My model suggests that the price increase in 2011Q1 will lead to growth of 2% in 2011. Furthermore, my model predicts that a 54% increase in crude oil prices during the second quarter of 2011 will lead the U.S. into a double dip recession