As I noted last week, two indicators - initial jobless claims and the price of Oil - were nearing inflection points. Yesterday the 4 week average of jobless claims came within a whisker of crossing the 400,000 threshold consistent with a self sustaining recovery that adds more jobs than it needs to accomodate population growth.
This week the price of Oil actually did cross the threshold of 4% of GDP (about $94 a barrel based on the latest data) historically associated with economic slowdowns and recessions. As I indicated last week, I'm a little less sanguine about this than my co-blogger Bonddad, whose latest post is just below, here.
Professor James Hamilton has done some excellent work on oil-induced recessions, but all of those involved (1) a sudden spike in Oil prices that (2) with one exception went substantially above the 4% of GDP threshold. What his data doesns't have much to say about is the few cases where Oil has gradually approached or brushed the 4% threshold. In the 1990 recession, there was a spike that just passed the 4% threshold. The only other occasions are 2005-2007, last spring, and now.
Since the St. Louis Fred only tracks Oil prices monthly, in the graphs below I have made use of their weekly gasoline price data (blue) compared with the S&P 500 index (red). First, here is a look at the last 10 years:
Note first of all tht in general gas prices track economic growth. As there is more growth, there is more demand, and prices go up -- up to a point. Secondly, note that in 2005 (Katrina) and 2006, when gasoline crossed $3/gallon, the S&P 500 backed off. Indeed in 2006 GDP slowed down for one quarter to a just barely positive crawl. Both of these spikes to ~4% of GDP were short-lived. When in 2007 prices decisively moved through the barrier, the S&P anticipated that move by a couple of months. Finally, last spring when Oil brushed $90 a barrel (4% of GDP then), the S&P backed off 15%, and GDP immediately slowed to 1.7%. In all of these cases, of course, Oil was not the exclusive culprit, but the pattern remains.
Now here is a close up of the last 12 months:
The 15% downward move in the S&P last spring described above shows up more clearly here. While again generally energy prices are highly positively correlated with economic growth, note that this week as gas prices moved decisively above $3 a gallon, and Oil shot up from ~$90 a barrel to briefly over $100 a barrel, the stock market moved inversely to those prices, showing that the inflection point has been reached.
While as I say I am less sanguine than Bonddad, our points of view (and that of Prof. Hamilton) are not that different. Prof. Hamilton expects a few tenths of percent of GDP to be shaved off by prices as of a few days ago. I am expecting a slowdown similar to spring of last year - and I believe that is already showing up in real retail sales, for example.
So long as Oil supply from the Mideast is not disrupted, that is all I am expecting. Specifically, I do not foresee a "double dip." If on the other hand, disruptions in supply or speculation do cause Oil prices to continue to climb another $20 a barrel (or about $.50 a gallon of gas) as they have in the last 5 months, there will be further damage and I am sure Prof. Hamilton will agree with that.
In the Bigger Picture, it would be nice if Versaille could look beyond trying to apply the Shock Doctrine to seniors and the states, and actually take action that would begin to immediately loosen the choke collar that is Oil around the neck of the economy.
4 comments:
Right now we're seeing a fear induced run up that's largely about possible risks of supply disruption. This is something that won't be sustained unless there's a genuine supply problem that develops. In that case prices return to normal and the only damage done is spending more on oil in the short term than would have otherwise been necessary.
If however real disruptions materialize then we get into the demand destruction situation we saw before the start of the Great Recession. In a situation like that, the only way to get prices under control is for there to be a recession to reduce fundamental demand.
The 4% of GDP figure is largely based on a presumption of the situation necessitating demand destruction. Speculative increases in pricing won't sustain themselves long enough to cause problems. But a real supply problem will. There was rumor that Gadaffi, in a blaze of glory move, might destroy the country's oil infrastructure on the way out. If he does then we might have a real issue.
There were so many other factors in play last spring I'm not sure it could be included. Stimulus was winding down, the european debt issue, China talking about interest rate hikes, BP oil spill, and the volcano in europe. All of this was not a good thing for an economy that was running on inventory and government. Right now, with the exception of real estate, all sectors of the economy are showing strength.
This will be obvious to most people around here, but just to nip it in the bud (because I'm hearing it elsewhere), yes, we get a relatively small percentage of oil from the Middle East. Our biggest importer is Canada. So, just to get it out of the way: It doesn't matter.
First, as everyone here knows, oil is priced globally. It's also fungible, which is basically the exact same thing -- we happen to buy our oil from Canada, but anyone can buy oil from anywhere. If China can't get oil from the ME, they'll make Canada an offer.
Second, and I think this is the greater unspoken misunderstanding among laymen, is that the impact of a shortfall is often magnified by inelastic demand. Just because you're 2% short on supply doesn't mean prices will go up 2% (though we set up the market to make that the most likely outcome). Prices can go up 20% depending on the circumstances. We rely very heavily on oil to transport goods with few alternatives in place, so a supply disruption can cause price instability as people have trouble managing short-term needs, even if the amount of oil coming in doesn't change all that much. If you have 3 gallons of fuel and you need 4 to make it home, you're going to be willing to pay far more for that last gallon than you did for the first three.
Dragon,
Two very important facts in your comment, a globally priced commodity. Some think the US can keep all our oil and sell it at whatever low price we want (fairy tale visions of $0.25/gal gas). As everyone here knows, that is not going to happen. Plus the US only supplies 48% of its oil consumption (less exports) so even if we only use "our" oil, we don't have enough.
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