Low Oil Prices are Good for the U.S. Economy

Lately the idea that low gas prices raise economic activity has been in the headlines. At $80 a barrel oil is at bargain basement prices that lower the cost on everything from holiday travel to manufacturing costs. Oil is just one more factor in the total cost versus rewards businesses use to project future expansion and production. Can oil continue to spur the economy?

The reason oil has declined is based on four primary factors that include 1.) lower demand during a global slow down, 2.) production by Saudi Arabia, 3.) improvements in American shale oil and alternative fuel developments, and 4) higher levels of efficiency in transportation and equipment. Oil is presently on the market with enough supply as to not demand higher prices.

Oil prices impact the global economy but could have a more profound effect on the U.S. which is not only a heavy user of oil but also a reemerging manufacturing center. According to Tom Helbling of the IMF a 10% change in oil prices has a .2% impact on global GNP (as cited in the Economist). Low oil prices encourage economic growth both nationally and internationally.

Oil prices impact the entire supply chain. It is one of those commodities that influences the cost of resources, manufacturing, transportation, and consumer disposable income in one foul swoop. This is one of the reasons why nations fight wars, create national policies, and develop alternative fuel systems over oil. Their is a good reason why oil is considered the blood of the economy.

Companies that are considering investing or expanding operations will need to take into account the oil and gas prices to determine the cost of business. Any time you can reduce fuel and energy costs it lowers the total cost of doing business. When such lower prices are localized to the U.S. then it creates significant export advantages as products become cheaper to produce.

A strong economy relies on many different factors that range from transactional costs to global demand for products. Oil, and energy in general, is one of those inputs that has a wide impact. Oil will not be a savior for the economy but is is a significant contributor. There will be winners and losers with lower oil prices but for now it appears the U.S. is using it as an advantage.

Why are American’s Quitting Their Jobs?

According to a report by the Bureau of Labor Statistics 57.5% of people who left their jobs did so under their own free will. A total of 5.03 million employees were added which boosted the hiring rate to 3.6%. At the same time 2.75 million people resigned in September with a quit rate of 2%. Make no mistake, the job market is heating up and employees are finding options that were not available to them a few years ago.

When the economy is poor and employment prospects are low employees naturally stay in their jobs for fear that they will not be successful in securing new employment. Likewise, there may be an abundance of people seeking the same position which raises the stakes when attempting to jump ship. It is often wiser to stay where you are at until things get better.

At present the amount of people seeking the same position are 2 to 1. Those are pretty good odds for people who want to beat out the competition. When those odds are 3 or 4 to 1 that makes uncertainty higher. When unemployment declines and businesses start hiring it sucks some of the slack out of the workforce creating advantages for job seekers.

Consider the low unemployment rate of 5.8% there is growing competition among companies to retain top talent. In any recovering economy usually college educated and highly technical jobs are the first to come back. These are the positions employers need to fuel their growth and development.

The people who have fewer opportunities are those in traditional middle class jobs such as manufacturing. Without a reemergence of manufacturing within the country it can be difficult for a person with moderate education and an industry based skill set to obtain better employment unless the entire industry comes back.

Job hopping is one sign of an improving economy. This means there is some flexibility within the market and realignment going on. During the recession realignment is painfully based on lay-offs but in good times realignment is more voluntary based on the opportunities of workers that want to better their position. Work environment, compensation, culture, promotion, etc… all play a factor in a person’s decision to stay or move.

http://www.bls.gov/news.release/jolts.nr0.htm

Unemployment Lowers and Opportunity Rises-At least for Some

October was a great month for the unemployment rate. According to government data, 214,000 jobs were added last month and unemployment moved down to 5.8%. This is great news for those who are actively seeking employment and are counted in the rankings. Those in the lowest wage rungs haven’t seen much improvement in wages. 

As unemployment numbers decline it naturally soaks up the slack in the labor market. Higher skilled workers usually get the cream puff jobs while lower skilled workers will still be picking up crumbs. Typically higher skilled workers find employment faster because they are needed in penetrating growth sectors of society that rely heavily on education and specialized skills. 

Lower wage service jobs and part-timers will be stuck in lower wages until slack in the market is tighten to create demand-not so easy in a global world. Some lower wage workers may find new training opportunities that help them move into higher paying employment but others may simply stay in lower wage positions unless they actively seek to improve their own skills. 

Eventually wages will rise on all levels of society but inflation may eat up a higher percentage of its purchasing power. For example, people are paid more today than they were 30 years ago but their individual purchasing power has declined. It simply takes more money to live a middle class lifestyle in American today than it did in the past.

What mitigates this relationship is the cost of doing business and the productivity of the American worker. When infrastructure is strong, positive growth policies are enacted, cost of information transference is low, productivity rises, education is reasonably priced then the overall costs of business will be lower. Improving on productivity and lowering the systematic costs in society helps create new employment opportunities.  

Trade Deficit Shows Need to Improve Exports

The Commerce Department stated on Tuesday that the trade gap increased in September 7.6% to $43.03. It is much larger than the estimated $38.1 billion. It is believed that an improving GDP will lend to improvements in exports but this not what happened. The results may be long-term or short-term but do reflect a need for the U.S. to adjust its policies to return to a higher exportation status unseen since a generation ago. Exportation is a solid reflector on internal capacities of a nation to meet market demands.

Much of the recent decline is associated with global economic factors much outside the control of the U.S. The biggest losses were a 6.5% decline in exports to the European Union, 3.2% to China, and 14.7% to Japan. The losses seem to reflect lower economic activity in all three regions of the globe and may simply be a factor of total consumption.  That doesn’t mean the country can’t improve its export capabilities.

Outside of a slower global economy are two major points that should be considered. 

Dollar Value: The dollar has an impact on the total cost of American made products to foreign buyers. When the dollar is cheaper American products become cheaper as well. Research supports the idea that the deflation of the dollar improves exports (Bahmani-Oskooee & Ardalani, 2006). The opposite is also true; a rise in value of the dollar makes imports cheaper and lends to increased trade deficits. 

Regional Export Specialization:  One of the reasons why I am an advocate of regional hubs is that specialization raises exportation but is not so much as to thwart adjustments into complementary products and services when the market shifts. According to Naude, Bosker, & Matthee (2010) and their analysis of exportation found that specializations increased local economic development.  

The dollar amount is difficult to adjust unless you artificially deflate its value while a global slowdown isn’t something in our control. However, ensuring that a greater allocation of international business is in the hands of American companies and worker pockets is important. This requires a level of hub based development focus to create efficiencies that lower the overall cost of production that make companies more competitive. 

When regional hubs are attracting investments, improving their infrastructure, developing the right skills in the local labor market, and generating market breakthroughs they naturally lower the cost of production and improve market relevance. The dollar may be worth more but the cost of production is lower to thwart its damaging effect. A higher dollar can be used to purchase raw materials and turn them into higher profit exports. 

http://www.bea.gov/newsreleases/international/trade/tradnewsrelease.htm

Bahmani-Oskooee, M. & Ardalani, Z. (2006). Exchange rate sensitivity of U.S. trade flows: evidence from industry data. Southern Economic Journal, 72 (3).

Naude, W. Bosker, M. & Matthee, M. (2010). Export specialization and local economic growth. World Economy, 33 (4).

Improving Consumer Confidence and 3.5% GDP Comes with a Warning

The economy took a jump from July to September as Gross Domestic Product (GDP) calculations rose 3.5%. This is great news for those hoping to finish off the last of the recession and move onto more prosperous times. This improvement is the largest in a single quarter since 2003 and parallels higher levels of consumer enthusiasm. Positive news also comes with a warning to redirect focus to balancing budgets, encouraging long-term economic growth, and reducing income disparity.  

To add to this positive news the University of Michigan’s consumer confidence index also jumped to 86.9 in October when compared to 84.6 in September.  With GDP expanding and consumer confidence rising few can argue that the world’s super power isn’t regaining economic ground. 

Measuring economic growth often rests on imperfect numbers such as GDP that can create improper assumptions among decision-makers. GDP is seen as the total market value of the goods and services produced by a nation over a certain period (Kolb, 2008). That number includes all final goods and services generated by economic resources within a nation. 

GDP product doesn’t consider the production of American citizens but any business or entity that works within a nation. It is an important distinction, as the global world can allow companies to do business within the U.S., but be owned by foreigners that still contributing to local growth.

Despite its wide reaching use GDP is not a perfect measurement. There is a fundamental difference between wealth creation and increased production. According to Strow & Strow (2013) GDP can encourage lawmakers to push for increased government spending but ignore wealth creation as a primary function of economic expansion. 

As an imperfect measurement the improvement of GDP and increasing consumer confidence are positive markers for the potential of future growth. Growth years are also times when the strategies of lawmakers and business leaders should also change to make such growth long lasting. Unfortunately, too many wait until another crisis occurs before refreshing their thinking.  

When the economy improves officials sometimes focus on maximizing additional spending to balance old budgets and encourage pet projects. With the ending of unprecedented government asset purchases, historic low inflation, and a few deficit improvements it is important to focus on reasonable budget reduction plans, improving economic trade conditions, and the reduction of income disparity. The underpinnings that lead to growth should not be ignored for short-term budget advantages.

Kolb, R. (2008). Gross Domestic Product (GDP). Encyclopedia of business ethics and society. 

Strow, B. & Strow, C. (2013). Gross actual product: why GDP fosters increased government spending and should be replaced. The Journal of Private Enterprise, 29 (1).