$80/b oil: An obstacle to US economic recovery
US unemployment data suggest the country's economic recovery remains weak. This will weigh on world energy markets in the coming months
"SURPRISE rise in jobless claims casts pall on the economy." So read one recent headline by a large US newswire. Another noted the "unexpected" rise. Why are headline writers so apparently shocked by this event? I'm shocked by their shock. It should remind us that the only reason economic forecasting was invented was to make astrology look respectable.
In September the National Bureau of Economic Research (NBER), finally, declared the US credit recession ended in June 2009. As such, this recession which lasted 18 months was the longest contraction in economic activity since the onset of the Great Depression (August 1929 to March 1933). But if the US is indeed out of the recession, then isn't it reasonable to expect some progress on the jobs front by now?
According to the latest estimate from the US Bureau of Labor Statistics, non-farm payrolls fell by 54,000 in August. That was well below the consensus forecast, but still disheartening given that an increase each month of 125,000 is needed just to keep pace with growth in the workforce – let alone find jobs for the 8.4 million Americans who have lost theirs since the start of the recession.
More to the point, over the past 30 years, when the US economy was growing, the weekly number for unemployment insurance claims averaged 354,000 (with a very low margin for error of about 1,300). In the previous three recessions (July 1981 to November 1982; July 1990 to March 1991; and March 2001 to November 2001) jobless claims averaged 487,000 (but with a much higher margin for error, of around 6,900). As far as the most recent recession goes, accepting it ended in summer 2009, the claims compare favourably with ones before: that is, 478,000, but with a very high margin for error of about 12,600.
So far so good, but here's the part that is hard to reconcile. Since the alleged end of the recession in summer 2009, weekly jobless claims average 489,000 (margin for error: 5,600). Although jobless claims during this recession averaged 1.8% below the previous three recessions, jobless claims through the "recovery" are averaging 0.4% above.
Add to this the latest unemployment report for the month of August: while there were some threads of hope in the headlines, the overall jobs-market picture is still tenuous. Thirteen months since the "end" of the recession, the unemployment rate is 9.6%. Worse still, the U-6 unemployment rate (which, because it is a broader assessment of unemployment than other measures, is a better gauge of the true level of joblessness) is averaging 16.8%. That is around twice the average of the rate during the 13-month recession that preceded the recovery – and 25% above the average when the Bush and Obama administrations tried to stimulate the economy with a lot of borrowed money.
Another headline, from the US Federal Reserve Board's Beige Book, issued on 8 September, is also telling: "Reports from the 12 Federal Reserve Districts suggest continued growth in national economic activity during the reporting period of mid-July to end-August, but with widespread signs of a deceleration compared with preceding periods."
The bottom line is that the US economy is improving, but glacially. Recent numbers for industrial production and manufacturing from the Institute for Supply Management, as well as for retail sales, are encouraging. But recent comments from the Federal Reserve that the economy is not out of the woods yet are an obvious concern. So is the Office of Management and Budget's July mid-session review, which predicted that the average unemployment rate (for the narrower U-3 category) will remain above 8% until 2012.
This weak employment picture will weigh on US energy markets into 2011. Over the three months to the end of August – the so-called "Recovery Summer" – the Conference Board's sentiment index of American consumer confidence hovered in the low 50s. While that is nearly double the all-time lows during the depths of the recession, it is only back to levels from summer 2008, when there was an actively traded market for Nymex's December 2008 light crude oil contract at $200 a barrel.
Of course, a not-so funny thing happened on the way to $200/b, namely, the US sank into the worst economic contraction since the 1930s, leading to – for all intents and purposes – a jobless recovery.
So, is $80/b oil (roughly equivalent to $2.90 a gallon of retail gasoline) justified in an economy where the private sector is barely hiring? Data published by the Federal Highway Administration shows that inelasticity of demand for gasoline wanes somewhere between $2.90/USG and $3.30/USG – and then falls with prices above that range.
For example, a long-term growth trend in vehicle-miles travelled hit a plateau in late 2005, when retail gasoline breached $3.00/USG as a result of supply shortages following Hurricanes Katrina and Rita. Then, in 2008, demand was destroyed when prices breached $4.00/USG as a result of the bubble in crude oil prices to nearly $150/b. (And that was when a lot more people had jobs and the value of their homes – assuming they still are in them – was a lot greater than today.)
The Bush and Obama administrations have borrowed trillions of dollars of "stimulus" to revive the US economy and yet four of every nine of the 480,000 workers that are being sacked each week will still be out of work in six months' time. Something is not working. Companies are sitting on cash and are not interested in expanding their payrolls.
Cue your personal political ideology to assign the blame. Given the way credit evaporated last year and the way taxes and employee healthcare costs are set to rise (with the latter being incalculable), it is understandable that preserving cash flow is priority number-one for employers. Private-sector jobs will eventually return. However, every dollar increase above $80/b in the price of oil will make it much harder.
For instance, the value of personal consumption of gasoline and other energy goods in the US rose to $287.3bn in the second quarter, up by just 0.28% from a year ago and up by 1.2% from Q1. Meanwhile, Nymex WTI futures averaged $78.05/b in Q2, up by 30.5% from the same quarter in 2009, but down by 1.1% from the previous quarter. The correlation is negative, with a coefficient of -0.31.
Historically, correlation switches between periods of being highly positive (WTI and consumption grew from 2002-05), or highly negative (WTI rose while GDP fell from, 2005-08). Eventually, there will be a return to positive correlation, similar to the aftermath of the 2001 recession, when consumption between Q4 2001 and Q3 2002 rose by an annualised 23.92%, while crude oil prices rose by 77.31%. A similar effect took place after the 1990-91 recession, when consumption rose by 10.80% by Q2 1992, while WTI prices rose by 5.04%.
Until then, this anaemic economic recovery needs lower oil prices to encourage consumers to return to the pump – that is, a negative correlation. Lower prices disproportionately encourage consumer spending elsewhere in the economy. With more than two-thirds of the US economy driven by consumer spending, a rally above $80/b will retard the small steps that have been made.
*Stephen Schork is editor of The Schork Report www.energymarketintelligence.com