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Thursday, May 22, 2008

It's Thursday, So Let's Look At Employment

But first, since under no circumstances would I wish to make the title of this post too much of a clue to the contents, let's look at oil!

Yesterday the oil executives were summoned to testify before the Congress Critters, and they pointed out that barring most domestic oil production was going to make the Saudis laugh at bids to sue. The executives suggested that maybe unblocking internal energy production might be a nice step toward a free market and lower oil prices. Some of the oil price moves seem to be due to speculation and trading moves, and this will be tested by the fact that more supply is coming on line quite quickly. See this Telegraph article for a nice summary:
The world's finely balanced market for crude has been creeping into surplus for several weeks. Opec's monthly report says that demand this quarter will average 85.75m BPD. Supply was 86.8m BPD in April. The fresh output from Nigeria, Iraq and Saudi Arabia may push it significantly further into surplus.

The signs are already surfacing in global inventories. Opec says that stocks held by the OECD club of rich countries are above their five-year average, with "comfortable" cover for 53 days' use. US stocks have edged up for the last four months, though they fell last week.
The US Energy Information Agency says non-Opec supply will edge up by 600,000 BPD over coming months as Brazil, Azerbaijan and the Sudan raise production. By next year, the US itself will be producing enough extra oil to shave its import needs.
There is a lot of detail in the article, which also discusses the trading situation and the question of a commodity bubble. I do believe that there is a commodity bubble, but regardless, current prices are not sustainable on the world market and thus will not persist forever. The article also touches on the impact on Asian countries, soaring inflation, and the fact that we seem to be nearing a global recession by some forecasts:
What we know is that the International Monetary Fund has cut its forecast for world growth for 2008 three times since last autumn to 3.7pc, and the United Nations is predicting just 1.8pc - technically, a global recession. The major oil forecasters have halved their estimates for crude demand growth to 1.2m BPD.
In any case, the US urgently needs to cut energy imports in order to redress its trade deficit, and therefore we should be exerting all efforts to build internal energy production.

Now to US jobs. Initial claims are in the same basic range this weak. SA claims dropped a bit, but SA continuing claims did not change at all, although NSA continuing claims rose a bit. Both of these measures are and have been running at levels consistent with recession for quite a while.

The more interesting release was the publication of the Business Employment Dynamics (BED) survey for Q3 07. As I have written before, I believe we shifted into recession last year. I published a graph showing why - both gross private domestic investment and the Rockefeller adjusted state tax receipts had fallen into negative territory by the end of the year. Rockefeller went negative in the 3rd quarter, which does not happen unless we are in recession. For all of 2007, gross private domestic investment was negative.

BED for Q3 07 showed a net decline in employment, which also doesn't happen outside of recessionary periods. See table 2. The net job losses were widely spread in industry groups, supporting that this is a recession. See table 3.

BED is used to adjust BLS employment figures, so more substantial revisions remain ahead. These figures also feed in somewhat to income, etc, and I believe most economists will eventually acknowledge that the recession began in 2007.

We still have most of the impact of the credit crunch ahead for consumers, and we are just feeling now the full impact of the crunch on construction. But all is not lost, and the Gloom 'n Doom crowd should try to understand that this has been an odd period of very slow retraction, Since recessions are, economically speaking, periods of reallocation of resources, slow is better than fast. Slow allows the adjustments to occur more gradually, and one thing about the US economy is that it is very dynamic indeed, and adjusts well to new circumstances.

The pace of contraction has been surprisingly (at least for me) slow. However, there is one "accelerator" that we have to watch out for: the savings rate. Up until now it has remained relatively steady into this downturn, despite the decline in asset-derived savings. This has also been a function of the need to spend more on items impacted by inflation.

What about going forward? I would argue this is a true "animal spirits" element, one which is hard to predict both in terms of value and pace (but not direction!).

Its a function of fear, in other words. I bet there's nothing in Bernanke's models that would account for a non-linear change in savings behavior, yet that is just what I would expect.
I would say that the disproportion in household debt combined with very high prices for fundamentals indicate that most people in the US cannot save very much.

However I think you will see an entire new generation relearning the skills and attitudes of the households of the 70s. They will be far more cautious about spending and debt. Instead of buying the bottled water, they'll bring their own if their own is drinkable, etc. But they won't save that much, because they'll be spending too much of their income on basics.

Wood stoves and discount shopping are back in style for the middle class! I remember the 70s well.

We are talking about an economic event that changes people's behavior for decades.
MoM, that's particularly true given that the boomers will start retiring soon. Since they haven't saved enough, and just had the sale value of their one big asset go south, they are not going to be living on the same income in retirement that they did when working. There is going to be a very big shift in consumption.

More domestic oil production would be a twofer: more oil on the market would drive prices down (thus cutting the trade deficit) as well as replacing imported oil (further cutting the trade deficit).
John, regarding oil, there is another aspect. The US is still a large consumer of energy (with the GDP to match) on a global scale, although the US is overall trimming consumption. If we opened up internal energy generation, we would create a little more margin for those Asian economies.

Few people grasp that the US needs world growth in order to sustain its own economy and most especially to rebuild its production base.

The only cure for the overall situation is for the Asian economies to cut their subsidies and to turn to targeted welfare, but it is very hard for them to do so. The US economy would gain greatly from internal energy generation, but the world economy would gain as well.
My guess is that many boomers will defer retirement and work longer if there is work to be had. This will defer some of the demographic stress that employers of boomers face.

Does it matter which factor is strongest: one's house is worth less money, one must work for another year or two to afford to retire, or the cost of basic living has risen? Each leads in its own way to less consumption of luxuries, and to more thoughtful choices about what constitutes an 'essential'. Look for sales to rise in the category "things to use to take my lunch to work instead of buying it."
Excellent post. The problem I see is that all the new oil that has been found may drive the price below $50 barrel, which will then lead to reductions in exploration, production, and oil well servicing. This industry has gone through these booms and busts before. To some extent the busts (low oil prices) have lead to bankruptcies, destruction of drilling rigs, and losses of skilled personnel. Those factors are why it takes so long to spool up more production when demand finally outstrips supply.

If our government would take a long term view and open this country up for exploration with incentives for domestic oil production maybe some of the peaks and valleys would be smoothed out. It would be a small price to pay for more energy security as well as cutting the trade deficit.
My husband, a geologist with one of the majors, echoed your sentiments exaclty as we sat and watched the executives being summoned the other day. Internal energy generation, he feels, will help a lot of the problems that we are facing right now.
Viola - it's an odd commentary on rhetoric divorced from reality, but the best thing the US could do for the world is to stop importing energy by raising internal energy production, and NOT by biofuel production. Anything else but that. Instead, our presidential candidates and Congress are doing the opposite.

Jimmy - the pace of growth in the Asian economies indicates that demand won't break sharply down. Energy subsidies in those countries don't constrain demand. Whereas your European and American consumers are mostly cutting back, Malaysia saw its car sales grow 50% over the year. Of course, fuel for those cars is quite cheap.

Such countries can't go from massive universal subsidies of industry and consumer supply straight to market pricing with nothing but direct payments to the poorest. If they did so, they'd blow up some internal industries. Instead they have to creep there.

A rapid downside bust of that magnitude is therefore not in the cards short of global depression.
You're positing that it is different now because of all the rising third world economies. If things slow here in the U.S. they will also slow in China, Japan, So. Korea, Taiwan, and that will trickle down to other Asian third world countries. Europe looks to be slowing as well. As a result of those factors I see a slow motion slide into worldwide recession. I think you opined that such might bottom out in 2009 then take a few years to rebound. Sounds like a reasonable scenario to me.

Many wild cards though. The ME, terrorism, central banks, BHO, and J.S. McCain to mention a few. We live in interesting times.
Jimmy - it's somewhat different now because of the Asian economies that SUBSIDIZE fuel costs. That makes the price-mediated supply/demand adjustment inefficient. The costs pool in the subsidy. Eventually those costs will break out, but it's not a smooth adjustment, and therefore will have unpredictable effects.

The likeliest outcome is that most countries modify their subsidies to a higher price level, but still keep some portion of the subsidy. In that case, demand in those countries would grow at a slower pace but keep growing.
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