Friday, August 24, 2012

Seasonality vs. Oil choke collar: a real-time test

- by New Deal democrat

As everyone who drives knows, instead of going down after Memorial Day as they usually do, gasoline prices have gone up by about $0.40 in the last couple of months. Had gas prices continued the decline they started in April, we probably would have $2.xx a gallon of gas in most parts of the country by now, the economy would be picking up smartly, and I would be doing a victory dance on Lakshman Achuthan's bonus check. Well, okay, maybe not that last part, but it sure looked like the upturn in the economic data that we've seen in the latter part of the year like clockwork in 2009, 2010, and 2011 was set to start.

But as of this past Monday, gasoline was up to $3.74 a gallon, only $0.20 below its high earlier this year. Oil was over $96 a barrel for awhile this week. In other words, the Oil choke collar has re-engaged.

This sets up a real-time test. Is the springtime slowdown and autumn acceleration we've seen in the economic data for the last several years reflective of seasonal adjustments gone awry? Or does it simply reflect the engaging and disengaging of the Oil choke collar?

We should find out over the next 4 to 8 weeks. Probably the easiest way to keep track of the test is to compare initial jobless claims against gasoline prices. Twice in the last 2 years, as initial jobless claims reached new post-recession lows in March, the Oil choke collar has engaged and during the second quarter the economy slowed to a crawl, with initial claims spiking up by about 30,000 a week. As the price of gas dropped from summer to late autumn, initial claims dropped and made new lows again.

Unfortunately, for the third time in a row, I believe the price of gas is going to win its duel with initial jobless claims. If I'm right, yesterday's uptick in claims was only the first week of the wave, and we should see claims over 380,000 on average within the next few weeks. A bad week of 400,000+ claims can't be rules out.

If I'm wrong, initial claims will continue to drop as they have seasonally for the last several years.

I've been shouting from the rooftops about the Oil choke collar for several years now. While Political Calculations has picked up on the same thing, virtually the entire rest of the economic blogosphere has failed to see what in my opinion is right in front of their noses.

The next month or two will either disprove my hypothesis, or else maybe the crucial role the the price of gasoline has been having on the economy -- acting as a governor on the pace of economic growth -- will finally be acknowledged.