Lack of Jobs, No Lack of Demand

Jim Brown
 
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High fuel prices may have been a depressant for new hiring in March. Rapidly rising gasoline prices brought back worries for employers with vivid memories of the 2008 highs.

The highest average price for gasoline in 2008 was $4.11. The average price today is $3.93 as of Sunday as reported by the AAA. There is not a lot of difference between those numbers and the press has been talking about $4 gas for several weeks now so it is almost like it was already here.

High fuel prices beginning in 2008 have altered the way Americans currently act. Since 2008 the population in the outlying suburbs has decreased and the population closer to the central city and industrialized areas has increased. People have started moving from closer to work and they have started to move to more fuel efficient cars.

In theory this would suggest gasoline usage would decline and we have seen that over the last three years. However, the main reason for the decline is still the lack of jobs. There are 22.4 million people out of work or underemployed, that means forced to work part time, in the USA. Since January 2008 until Feb 2010 there were 8.8 million jobs lost. Since that February low 3.6 million new jobs have been created. Unfortunately over that same period 4.6 million adults have been added to the labor force. The ranks of the unemployed are growing faster than new jobs are created. The only reason the unemployment number is not moving higher is because of the statistical games played by the BLS in reporting the numbers.

The rising number of unemployed persons consume fuel at a far lower rate than those employed. This is a major reason why gasoline consumption is trending well below historical levels. Better fuel economy and shorter commutes are also helping. Overall the U.S. population increases by 3.1 million people per year. This plus graduates from high school (2.25 million not going on to college) and college grads (1.75 million) entering the work force requires a minimum of 150,000 new jobs per month (1.8 million annually) just to stay even. Over the last 12 months 1.864 million jobs have been created or 155,300 per month on average.

I know if you add up those immigrants and grads you get 7.1 million but not all enter the workforce. Only about 750,000 immigrants are workers with the rest wives and children. Of the total grads at 4.0 million there are quite a few that don't enter the workforce because of marriage, family responsibilities, pregnancy, etc. The key here is that they all require oil/fuel for transportation and products made from oil. As long as this positive population growth continues our demand for fuel will also grow.

Our current gasoline usage is 8.783 mbpd. This is slightly below the same week in 2011 of 8.853 mbpd. If we were to move back to full employment there would be roughly six to eight million more workers commuting to work every day. Gasoline usage would rise to new highs. This will eventually happen. It is only a matter of time. Even if our unemployment rate remained at 8.2% where it is today the fact we are adding 3.1 million adults per year into the U.S. population means our eventual demand for gasoline will continue to grow. Even with the increases in gasoline economy there is a limit to how long that increased economy will be a factor in reducing consumption.

The decline in new jobs in March to only 120,000 is going to be a challenge for the economy unless it was a flaw in the data. If April suddenly rises to 300,000 then we will assume it was a data blip and go on. I seriously doubt that is the case.

The Fed is going to look long and hard at the decline in jobs. More than one Fed member had already warned the job gains in prior months were unsustainable. Declines in several of the regional activity reports are also troubling. The Fed meets again on April 24th and they will be pressed to provide further stimulus. Given the strong positions by several members against further stimulus the FOMC may not be able to come to agreement this soon. They may have to wait until the June meeting and the scheduled end of Operation Twist to add additional stimulus but quite a few analysts believe it will happen. Bill Gross said on Thursday that Bernanke was in a box. The economy is limping along despite nearly $3 trillion in stimulus and any removal of existing programs or failure to renew Twist could cause the market and economy to decline. Bernanke can't allow us to dip back into recession because they don't have any further ammunition to lift us out again. Interest rates are zero and the Fed's balance sheet at $3 trillion is maxed out. It is easier for the Fed to apply temporary stimulus like Twist to keep the economy moving at a +2% rate than have to resurrect the economy from a new recession where unemployment could exceed 10%.

Bernanke continually claims the recovery is not yet self sustaining. In the FOMC statement after the March meeting they said, "Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook." This is not an environment where the Fed is going to withdraw support for the market. If anything they will be forced to add further stimulus to keep the recovery going. Further stimulus means a weaker dollar and higher prices for commodities including oil and gold.

While we wait for the economy to accelerate we are going to be faced with weaker commodities because of expectations for weaker demand. The jobs numbers are seen as a representation of U.S. economic activity. When businesses see increased demand they hire workers to handle that demand. No hiring equals no demand increases.

Helping to support crude prices in the weeks ahead will be Iran and the various problems in the smaller nations including Yemen, Syria, Nigeria, Libya, Turkey, etc. Iran is scheduled to meet with the five UN Security Council nations plus Germany next week to discuss the nuclear problem. The talks were scheduled to begin on the 13th in Turkey. However, on Friday Iran said Turkey is no longer an acceptable host after that country cut oil imports from Iran. Assuming a new site acceptable to Iran can be agreed upon the talks will continue. I have my doubts since Iran typically looks for excuses to postpone them.

The last talks ended after two days because they could not decide what to talk about. Iran refused to let any nuclear issues to be added to the calendar so everyone went home. With the Iranian oil embargo picking up speed the Iranian negotiators may be a little more flexible this time. However, it was disclosed this weekend the six nations are going to demand Iran close and dismantle a recently completed underground nuclear facility near the city of Qum. They will also demand the shipment of any highly enriched uranium out of Iran. These concessions are not going to be acceptable by Iran so that implies we could be moving closer to an attack on Iran's nuclear sites.

The sanctions on any firm, bank or country that facilitates purchases of oil from Iran is having the desired impact. The large groups of international reinsurers from Europe, Japan, China and the USA have all suspended coverage of new cargoes. Initially the sanctions were expected to reduce Iranian exports of 2.6 mbpd to 1.8 mbpd. Those estimates are now being raised to a cut of 1.0 mbpd or more because of a lack of insurance and a lack of payment methods. Iran has been cut off from the world when the SWIFT transaction network blocked wire transfers to and from Iran.

The Washington Post released a story on Saturday claiming the U.S. flew stealth surveillance drones deep into Iran for the last three years and those drones took hundreds of pictures of nuclear sites and including the secret nuclear facility at Qum. The article said there were hundreds of flights before a RQ-170 drone crash inside Iran in December. While the drones can't look into buildings or underground the analysts can determine a lot by examining the traffic into and around those sites. This may be why the six nations are demanding a complete shutdown of the site near Qum. They have determined the activity there is too advanced to allow it to remain in operation.

The bottom line for me is that Iran is NOT going to cave in to requests at the first meeting. Iran has a history of dragging out negotiations for weeks, months or even years in an effort to delay decisions contrary to its goals. This should continue to provide support for oil prices in the months ahead.

We need to remain patient because the long term fundamentals remain firmly positive. Remember, oil prices are still in the $105-$125 range and not $65-$75. The long term trend is still up.

Our biggest risk is that high gasoline prices will push the U.S. back into a recession. We will have to watch the economic numbers closely over the next 60-days to see if the trend is changing. The payroll report may be a sign of further weakness ahead.

Jim Brown

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