Tag Archives: Economy

Gas Prices: Is the Sky Really the Limit?

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As we noted in our earlier post last week, there was another mix of good and potentially bad economic news. While the Dow Jones Industrial Average (DJIA) broke through 13,000 for the first time since May 2008, gas prices were projected to approach levels not seen since the spring of 2008. Although actual gas prices are still below even those of May 2011 when gas reached $4.02 per gallon, this is undoubtedly bad news in a nation that consumes more energy than any other nation on earth.

The factors driving this latest rise are the same as those that drive any market: supply and demand. Basically, gas prices are up because supplies are (at least potentially) down. In 2008, surging gas prices were the result of two factors: decreased supply due to U.S. refinery problems, and surging crude oil prices. While there was little to be done about the latter (other than consumer behavior decreasing demand), the U.S. was able to get refinery capacity back and, as the graph below shows, gas prices decreased steadily after that. As for the current rise in gas prices, the primary factor is once again supply, or more correctly, the fear of diminishing supply and a little international political intrigue that is driving that fear.

In recent days, Iran placed an oil embargo on France and Britain and considered extending that embargo to other European Countries. While this does not directly affect the United States, which has banned the import of Iranian Oil since the Hostage Crisis of 1979, it does introduce new buyers competing for oil normally purchased by the U.S. However, it is unlikely that a supply shortage will actually occur. For that to happen, Iran would have to stop supplying oil to the world market and, given that oil is Iran’s main source of income, it is doubtful that will happen.

We are interested in your thoughts on this. Did you know gas is actually less expensive now than it was in May 2011 or July 2008? Join the discussion below or let us know via Twitter or Facebook.

Rising Unemployment among Youth (Ages 16-24) in the OECD

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In last week’s post on the December 2011 unemployment numbers in the OECD, we showed how the total unemployment rate across the OECD has remained relatively stable in recent months, ending December 2010 at 8.2%; the same rate as in November 2010. While some countries—i.e., Germany and the United States—have seen a consistent decrease in unemployment since September 2011, the majority of states have not been so lucky: Spain, for example, ended 2010 with a shocking 22.8% unemployment rate, more than 8% higher than the country with the second highest unemployment rate (Ireland, with 14.5%).

What we did not discuss at the time, however, was the disproportionate impact the economic crisis has had on certain age groups. Today, we look at unemployment trends among the youth (ages 16-24); trends that are much more alarming than the overall unemployment trends.

The first chart, below, displays youth unemployment rates from January 2000 through December 2011 for the EA-17 (e.g., the 17 European Union member states that have adopted the Euro as their currency) and the EU-27 (e.g., all 27 European Union member states). From a low of around 15% unemployment at the start of the economic crisis in 2008, youth unemployment has grown to over 21% in 2011 with no sign of abating.

Source: Eurostat

The following chart uses the same Eurostat data, but looks at within-country trends over the past 4 years. We’ve also included the United States in this sample.

Note: The data labels represent the unemployment rates in Q3-2011.

 

Viewing the data in this way shows just how dire the situation is for younger job seekers in many countries. In Spain, the youth unemployment rate rose from an already high 24.6% in 2008 to 47.8% by the third quarter of 2011, more than twice as high as the total unemployment rate of 22.8%. A similar trend is seen in the other Southern European countries, including Italy (from 21.3% in 2008 to 28.2% in 2011), Greece (from 22.1% in 2008 to 45.8% in 2011), and Portugal (from 20.2% in 2008 to 29.9% in 2011).

As for the United States, the youth unemployment rate increased from 12.8% in 2008 to 17.5% in 2011; well below the EU-27 average of 21.6% in 2011, but close to double that of Germany (8.6%), Austria (7.3%), and the Netherlands (7.6%).

In short, it is important to keep different demographic age groups in mind as we evaluate economic trends. From this data, it is clear that the youth have been particularly affected by the Great Recession, and the recent economic gains (at least in the case of the United States) have done little to improve the situation of this group.

 

Unemployment Rates across the OECD: December 2011

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On Tuesday, the Organisation for Economic Co-operation and Development (OECD) released the harmonized unemployment rates for December 2011, showing an unemployment rate across the OECD area of
8.2%; the same rate as the previous month. Similarly, the rate within the Euro area also remained unchanged at 10.4%, marking a continued high since the start of the economic crisis in 2008. These averages mask a great deal of cross-national variation, however, with some countries having extraordinarily high unemployment – i.e., Spain (22.9%), Ireland (14.5%), and Portugal (13.6%)—and others having relatively low unemployment—i.e., Austria (4.1%), the Netherlands (4.9%), and Luxembourg (5.2%).

As we noted in a previous article, unemployment in the U.S. fell to 8.3% in January 2012, marking the fifth consecutive month that the rate has declined. To put this trend in perspective, we wanted to look at the unemployment trends in other OECD countries. The following chart shows unemployment rates in selected OECD countries from September 2011 through January 2012 (note: January 2012 rates were only available for Canada and the U.S.):

Although there’s a lot going on in this chart, one trend is unmistakable: whereas most of the countries in the sample have seen a steady increase in unemployment rates over this period, only the U.S. and Germany have seen consistent declines in unemployment over this period. Furthermore, the rate in the U.S. is quickly approaching the OECD average, and is already significantly below that of the European Union.

In short, while the U.S. economy still finds itself in a big hole, the recent trends are very optimistic; something that cannot be said for very many of the other OECD member states.

Risky Business…Just How Exposed Are U.S. Banks to European Debt?

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The European debt crisis has been casting a shadow on the U.S. economic recovery for most of the past twelve months.   However, in spite of the hysteria in the popular press, the International Monetary Fund’s recent update to its World Economic Outlook left its prediction of 1.8% annual GDP growth for the US untouched while lowering their estimates for the Eurozone and economies with significant trade and financial ties to Europe.  One rationale for the IMF’s decision to leave the US estimate where it was in their September 2011 report was that the US is now more insulated from “financial and trade spillovers” from the euro area economy.  In this article, we use various infographics to show that in spite of the media fixation with Greece’s debt problems stalling the U.S. economy, banks in the United States have little  exposure in European countries other than the United Kingdom, France and Germany as the map below shows.

 

European Debt US Bank Risk

 

 

In those countries, the collective exposure for U.S. banks is about $1.5 trillion while the U.S. GDP is $15.3 trillion.  To put that another way, if things in Europe got so bad economically that Germany, France and the United Kingdom all defaulted on their debts to U.S. banks, the cumulative loss in GDP would be about 10% whereas the cumulative loss from the Great Recession was about 20 percent.  The chart below shows the relative risk for U.S. banks across all countries in Europe.

 

US Bank Exposure on European Debt

 

Politics, Markets and Confidence

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In a recent interview, Jim Cramer of CNBCs Mad Money stated that while government cannot do much to change the economy, it can “create a world where there is more confidence” which leads to more risks and more investment.  That made us wonder if  we could find some empirical support for Jim Cramer’s statement—in other words, we wondered if this was a fact or just another example of conventional wisdom, which as we know is often wrong.

We decided to use the nine threatened government shutdowns in 2011 as a proxy for government failing to create a world where there is more confidence. And we used the DOW Jones Industrial average as a proxy for economic risk taking, theorizing that a down market means less investment (more selling) and less risk taking (more cash, fewer stocks).

The chart below shows the Dow Jones Industrial average for 2011.  We annotated it with numbers in circles that are placed where a government shutdown was threatened.  As you can see, threatened shutdowns coincide with downturns in the DOW Jones average ranging from about 1% (between the third and fourth continuing resolutions, the last of which funded the government through the end of the fiscal year) to 15.75% (the two weeks leading up to raising the debt ceiling, annotated as number 5 on the chart).  Likewise, we also see a drop in the DOW Jones average in November, coinciding with the threatened shutdown that ultimately led to the passage of a budget for FY 2012 (number 6 on the chart).

 

Thus, while we cannot say that the threat of shutdowns and defaults caused the downturns, it certainly appears that Jim Cramer is on to something.

 

Gross Domestic Product and Other Measures of Wellbeing

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Today, the Bureau of Economic Analysis released its advanced estimate for Gross Domestic Product for the 4th quarter of 2011.  As expected, GDP grew again (by 2.8%), marking the tenth straight quarter of growth.

While GDP growth is a good indicator that The Great Recession is finally over, other measures, such as the number of mass layoffs, have been mixed.  In December 2011, there were 1,384 mass layoff events (an increase of 52 events over November 2011) affecting 145,648 workers. However, the annual numbers for 2011 as a whole show a more positive story, with the lowest number of events (18,521) since 2007.  Similarly, the Bureau of Labor Statistics (BLS) reported that median weekly earnings for full-time workers increased during the fourth quarter of 2011 by 1.6% over the same period in 2010 (a positive sign), but in urban areas, this increase was not enough to keep up with the inflation rate of 3.3% during the fourth quarter of 2011 (a not so positive sign).

So where does this leave us?   Unfortunately, eschewing speculation and using only facts, it is hard to say as our table below shows.

Next week, BLS will be reporting January 2012 unemployment rates and BEA will be reporting December 2011 personal income and outlays.  These are two additional important measures of the economy that can help us better understand whether there is cause for celebration.  We will be watching them so we can provide our readers with more facts on whether the economy is indeed improving.