US Economic Headwind

March 5, 2015

Economic numbers released today show the US Economy contracting. But some of these numbers understate the damage.

One of the most important statistic is Unemployment. Government figures show that Initial Claims for Unemployment, and Continuing Claims, both were up – to 320,000 and 2,421,000 respectively. While single week changes certainly can’t demonstrate a trend, there has been a significant increase from just a couple of months ago.

One thing which has changed in the jobs world is that the price of oil has dropped by over 50% in US Dollar terms. This has caused a reduction of oil service jobs, which tend to pay above average wage rates. Since the first of the year, Challenger-Gray-Christmas, a company which tracks such things, reports over 100,000 layoffs in this sector. For January, their numbers were at odds with the BLS statistics.

Now, falling oil prices also will tend to lower the cost of living for all Americans and lower business costs, especially in sectors like transportation (airlines) and plastic. This eventually should spur some new job creation down the road. So far, the stimulus to hiring has not become apparent.

So, in Employment, the numbers show the US Economy declining, and there is reason to believe that official reports understate this effect.

Also reported today was the worker Productivity figure, which is down 2.2% in the latest quarter, after falling by 1.8% the previous quarter. When business sales go down, a company either lays off employees (as we’re seeing in the oil patch) or has less being produced for the remaining employees.

This latter case is why Productivity would fall. (It’s not that the employees are working any less hard.) Many companies will keep their well trained workforce on payroll hoping that sales go back up. If those sales do not go back up, there may be more layoffs in prospect. Six months, with a productivity decline of 4% combined, is not encouraging for the Economic outlook going forward.

The flip side of Productivity is the Unit Labor Cost, which as just announced rose by 4.1% in the 4th quarter after rising by 2.7% the previous quarter. For any business, when costs go up, the remedy is a Hobson’s choice between layoffs, price increases, or lower profits.

We’ve seen that layoffs are increasing, but in a slowing Economy, price increases are harder to accomplish, without having sales take a nosedive. What we’re starting to see is that many companies are announcing lower earnings than previously forecast, and in many cases, those earnings are well below last year.

For public companies, whose stocks are traded on the NYSE or NASDAQ, if earnings go down, then their already high PE Ratios will go up to even higher levels. More expensive stocks tends to mean that those stock prices are more susceptible to falling, even in the face of the massive company stock buybacks and government upward market manipulation that we’ve seen. Now may not be a good time to risk your life savings in the stock markets.

Also released was the weekly Inventory figure for Crude Oil (up by 10,303,000 Barrels), which has continued its rise of the last few months. This number can go up or down for several reasons. As the price goes down, it is less costly to hold more inventory. If you expect the price to go up later on, there is greater urgency to building inventories.

However, at several ports where imported oil is received, there are many tankers just sitting there waiting to have their oil unloaded. The problem? Inventories have risen so much that it is hard to find any space to put additional supplies. You can’t just fill up another warehouse as you could with copper or coal.

The high level of crude oil inventory, and continuously arriving supply, make it more and more likely that the price of oil may have to fall further to help bring supply and demand back into balance. Again, this helps some groups and hurts others.

Other concerning reports indicate that the numbers of sub-prime mortgages, delinquent credit card debt, delinquent student loan debt, and delinquent auto loan debt, all are as high or higher than before the 2008 credit collapse. Bank balance sheets generally have not improved, and the Federal Reserve balance sheet especially is in danger of making the FED “insolvent.” Yes, the FED can just print its way out of insolvency – but for how long?

World Trade also has been greatly reduced, especially trade denominated in US Dollars. Much of this trade is moved by ship. Space on these ships, and the ships themselves, largely are leased. The cost to move merchandise across the oceans can be measured by the Baltic Dry Index. This index is at an historic low – and there is NO adjustment for Inflation!

The US Dollar is much higher than just a couple of years ago, and seems to be continuing its rise. This makes US goods for export less competitive, while also making imported goods that much more competitive in our domestic market.

All these things together make me think that the already troubled US Economy is in for much harder sailing going forward. 

Robert (Bob)  Shapiro is self-taught in Austrian Economics and has consulted briefly for the governments of Mexico, Greece, Portugal and Spain. He has traded Gold & Silver and their stocks since 1970. Bob Shapiro’s blog is

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