Last we checked, the Dismal set were having quite the problem dealing with the Monthly Non-Farm Payroll Numbahs. They simply haven’t been able to get it right. We previously delved into why they were having such a hard time, and came up with 10 reasons why.
My explanation: the unusual post-bubble recession/recovery was throwing their econometric models off.
Now, Tim Annett of the WSJ has a different take on the same group. Last Summer, the WSJ asked the Economists "Just how high would oil prices have to rise in order to tip the U.S. economy into recession?"
As of last summer, "one-third of economists who participated in The Wall
Street Journal Online’s economic forecasting survey said a recession
would follow if crude-oil stuck in between $50 and $59 a barrel —
exactly where futures prices have traded since late February."
Was that a good prediction? Well, we see GDP slowing, hiring anemic, and earnings momentum waning. The economy is hardly robust — perhaps time will prove this prediction prescient.
However, without a ravaging recession already occuring, the Economists are ready to "tear up last year’s predictions on the price level that would stifle growth:"
"In the latest forecasting survey, the economists have changed their minds. None feel that $50 oil will trigger a recession. Thirty-one percent said they feel oil would have to be sustained at $80-89 a barrel to snuff out growth, while 48% believe crude would have to top $90."
Monthly Economic Forecasting Survey: April 2005
Q&A – Oil and Recession
What price for crude oil, if sustained for a meaningful period, would tip the U.S. back into recession?
click for larger graphic
Source: WSJ
My personal expectations are that $80 oil grinds the global economy to a dead halt. $50 oil merely slows it down, although it exerts enough drag to eventually cause major problems.
As we showed yesterday, gasoline prices are not nearly at all time highs when adjusted for inflation. But high prices do exert a drag (even thought they are not a tax, as some dimwits observers would have you believe). This week’s same store numbers shows that the impact is being felt at Wal-Mart — less so at Target, whose clients are (on average) from a higher economic strata. And GM and Ford are getting crushed due to slwoing SUV sales. Think gasoline prices have anything to do with that?
Consider another factor: Some believe its not the "absolute level of crude oil," but rather, "the rate at which it climbs." But consider the impact of:
"Sudden spikes – that are sustained – can have a big psychological effect on consumers and businesses, causing them to restrain spending. "The economy adjusts more easily to higher prices when they occur gradually," says Richard D. Rippe, chief economist at Prudential Equity Group."
To be fair, the economists may have been right this time — only a contraction may be more likely to take place in 2006 than in 2005.
No, I am not suggesting its guaranteed to occur, either then or now — its just that the percentages go up the more: 1) stimulus fades; 2) higher rates slow the real estate complex; 3) oil maintains increased prices for a longer time; and 4) the U.S. current account deficits continue.
Perhaps time will proven the Economists right. It would be ironic if they snatch defeat from the jaws of forecasting victory due to a bit of impatience . . .
>
Source:
A New Take on Oil and Recession
By TIM ANNETT
WALL STREET JOURNAL ONLINE, April 7, 2005
http://online.wsj.com/article/0,,SB111270255444198252,00.html
Friday Ping Pong: Arbitrary Mother Banana Republic
In which I round up various arguments and smart points in the blogosphere I choose and like at random. Call it an Instabastard impression, but I hope to make it a new feature here at RM.
Friday Ping Pong
In which I round up various arguments and smart points in the blogosphere I choose and like at random. Call it an Instabastard impression, but I hope to make it a new feature here at RM.
Friday Ping Pong
In which I round up various arguments and smart points in the blogosphere I choose and like at random. Call it an Instabastard impression, but I hope to make it a new feature here at RM.
http://www.nytimes.com/2005/03/25/opinion/25deffeyes.html?ex=1113624000&en=308e38587e50abf8&ei=5070
What Happens Once the Oil Runs Out?
By KENNETH S. DEFFEYES
Princeton, N.J.
PRESIDENT BUSH’S hopes for the Arctic National Wildlife Refuge came one step closer to reality last week. While Congress must still pass a law to allow drilling in the refuge, the Senate voted to include oil revenues from such drilling in the budget, making eventual approval of the president’s plan more likely.
Yet the debate over drilling in the Arctic refuge has been oddly beside the point. In fact, it may be distracting us from a far more important problem: a looming world oil shortage.
The environmental argument over drilling in the refuge has often been portrayed as “tree huggers” versus “dirty drillers” (although, as a matter of fact, the north coastal plain of Alaska happens to have no trees to hug). Even as we concede that this is an oversimplification, we should also ask how a successful drilling operation would affect American oil production.
The United States Geological Survey has estimated that the Arctic oil field is likely to be at least half the size of the Prudhoe Bay oil field, almost 100 miles to the west. Opening that oil field was like hitting a grand slam: Prudhoe Bay, which has already produced more than 13 billion barrels, is the biggest American oil field. (I was once at a party with a bunch of geologists from Mobil Oil when an argument broke out: who discovered Prudhoe Bay? Everybody in the room except me claimed to have done so.) …
Kenneth S. Deffeyes, a professor emeritus of geology at Princeton, is the author of “Beyond Oil: The View from Hubbert’s Peak.”
http://www.nytimes.com/2005/03/25/opinion/25deffeyes.html?ex=1113624000&en=308e38587e50abf8&ei=5070
I used to work with Mr. Hubbert at Shell Oil, and my own independent research places the peak of world oil production late this year or early in 2006. Even a prompt and successful drilling operation in the Arctic refuge would not start pumping oil into the pipeline before 2008 or 2009.
A permanent drop in world oil production will have serious consequences. In addition to the economic blow, there will be the psychological effect of accepting that there are limits to an important energy resource. What can we do? More efficient diesel automobiles, and greater reliance on wind and nuclear power, are well-engineered solutions that are available right now. Conservation, although costly in most cases, will have the largest impact. The United States also has a 300-year supply of coal, and methods for using coal without adding carbon dioxide to the atmosphere are being developed.
After world oil production starts to decline, a small group of geologists could gather in my living room and all claim to have discovered the peak. “We told you so,” we could say. But that isn’t the point…. The problem we need to face is the impending world oil shortage.
Kenneth S. Deffeyes, a professor emeritus of geology at Princeton, is the author of “Beyond Oil: The View from Hubbert’s Peak.”
While I have drank the coolaide of energy supply limitations and China / India demand growth it would seem appropriate to caution against irrational expectations of cyclical immunity to energy. Slowing economies will see contracting requirements for oil.
So while believing in the secular growth story keep in mind that cyclical swings in the world economy will likely create many doubts about the durability of that secular story and therefore some significant pullbacks (200 dma?) and buying opportunities in the stocks.
The bond market, utes, drugs and staples are saying a slowing is coming. If so, a real estate contraction coupled with a secular bear market in equities could easily unhinge the global growth story and therefore energy demand.
Don’t get me wrong, I believe we will likely hold at higher lows than the last cyclical trough and ultimately run to higher levels. Just trying to keep a realistic perspective.
John
Are utilities typically strong in a slowing economy or weakening market? Why, because of steady earnings or expected lower interest rates? But, utilities were strong last year. They can fairly readily adjust prices when energy costs increase. Well, I like regulated utilities.
You dismissed it last time, but offshoring is the reason. See my belated comment from “Part 1”.
The chief economist at Morgan Stanley holds similar views: “The big question is, why? What is it about the macro climate that is squeezing labor income generation as never before in the US and elsewhere in the developed world?”
“My vote for the explanation continues to go for the “global labor arbitrage””
http://www.morganstanley.com/GEFdata/digests/20050404-mon.html
Understand that I am not dismissing it; I find it hard to believe that its not fully — or even mostly — accounted for in most econometric models.
I may tweak the economists, but I do not beleive they are totally incompetent. Yes, global labor arbitrage has pressured US job creation. Is there anyone in the Dismal set who doesn’t know that yet?
Other than Stephen Roach, which other economist has been beating this drum? Its been awfully quiet out there.
This hits on two issues that I’ve been thinking–and blogging–about a lot.
First, oil.
Demand basically rises or falls pretty slowly, based on demographics, economics, and so on. Price doesn’t move demand much–it’s inelastic, since people have to drive to work/fly/etc. almost regardless of the price.
Supply can go up only slowly, as new fields are explored and drilled. It’s a lengthy process.
However, supply can go down very quickly, such as an explosion at a refinery or major oil pipeline.
Prices were low for so long that supply has been flat. Now, we have demand banging up against the supply ceiling and pushing up prices.
In other nothing can change quickly–except that we CAN hit a supply shock, which would cause the price to rocket.
Conclusion? While traders can take oil up or down a few dollars pretty quickly, the supply/demand equation pretty much says oil will stay high and possibly go higher.
I have bullish positions in oil companies.
Two: why the economists are wrong
Basically, my thesis, which has been borne out for some time now, is that any numbers not having to do with real estate or credit card purchases are going to be missed on the downside.
Our economy is choking on debt. Mortgages, credit card, federal, you name it. While the economy is nominally expanding, it’s an unhealthy expansion bought at the expense of the future. A society can buy its way to a higher GDP for a time; but it cannot buy real affluence that way.
I’m not bearish by nature, that’s just how I see things for now. I hope that soon we in the U.S. will start saving and slow our spending. It’ll feel painful in the short run, but it’ll help us all in the long run.
Rational minds might be tempted to think that since there are no alternative energy initiatives, there must be no immediate supply shortage as widely reported.
Brandon discounts/forgets the role that speculators play even though his analysis suggests that the minor supply disruptions could not possibly have accounted for the price volatility.
The numbers that the Economists have come up with, express the same volatility giving one the impression that those calculations are as useful as the dart board.
Barry thinks $80 is the brick wall, but I refuse to throw my dart. I want a different metric. Something that gets away from not just the dollar but any currency. Something tied to exports or GDP but if possible not those stinky productivity numbers. Seems to me that we should be looking at the portion we are laying aside of our GDP to carry the show. There is some magic number/fraction, 1/6 say, that we can handle before we hit the wall.
If you take the premise that recessions occur when the business community makes a mistake and is too optimistic about final demand and has involuntary inventory accumulation, or as last time had excess capital spending,
it is nearly impossible for the consensus to correctly forecast a recession. To get a recession you would have to forecast that the consensus forecast of final demand is too high, or that the consensus is wrong. Since the consensus is unlikely to forecast that the consensus is wrong, it is unlikely that the consensus will ever correctly forecast a recession.
The above post on recessions occuring when business makes a mistake also applies to the major econometric models. It is almost impossible for one of the major models to forecast a recession — they have to really be forced into generating a recession forecast.
But since the typical wall street economists takes the big old models and tweak them to change their forecast by a 0.1% to get an “independent” forecast it just reinforces the above comments.Wall street economists are like portfolio managers, if they are wrong doing what everyone else does they probably will keep their job. But if they are out on a limb and are wrong they are in real danger of losing their job.