IN THIS ISSUE:
1. Economy Rose More Than Expected in the 3Q
2. The Economy is Not Yet Out of the Woods
3. The Oil Price Decline is Like a Big Tax Cut
4. President Obama’s Post-Election Temper Tantrum
Economy Rose More Than Expected in the 3Q, But…
Last Tuesday the Commerce Department raised its estimate of 3Q Gross Domestic Product to a 3.9%annual pace from the 3.5% rate reported last month, reflecting upward revisions to business investment and consumer spending and a smaller than previously reported decline in inventories. The pre-report consensus was for a slight cut to 3.3%, so the latest report was much better than expected.
The report came on the heels of the second quarter report in which GDP expanded at a 4.6% rate. Indeed, in four of the last five quarters GDP has increased by 3.5% or more (and by 4.5% or more in two of the last five quarters). The American economy hasn’t strung together five quarters like that since the late 1990s.
There are several positive trends occurring that have underpinned the above-trend growth over the last two quarters. The first, of course, is the sharp decline in the price of oil and other commodities. That has translated into much cheaper gasoline, with average prices down 24%, or 89 cents a gallon, since late April. Americans are also enjoying cheaper natural gas, fuel oil and electricity, which have common roots in the falling commodity prices.
These savings tend to flow directly into other forms of consumption, much as a tax cut would. Every dollar not spent to keep cars filled up is available to buy something else, which is helping prop-up spending and economic growth in the final months of 2014.
Next, over the last year, employment has grown at the fastest pace since 2006 and the pace of hiring seems to be trending upward. The nation has been adding jobs since 2010, but in 2014 the rate of that growth has taken a meaningful shift up. Employers added 2.64 million jobs to their payrolls in the year ended in October, compared with 2.2 million in the year ended in February.
The next positive trend won’t sound like a good thing, but it is: More people are quitting their jobs. One of the more predictable consequences of the terrible economy over the last several years was that people who had a job were holding onto it for dear life. But in a sign that the job market is improving, the number of people quitting their job voluntarily has soared this year, while the number being fired or laid off has gone down since late 2012.
In other words, Americans appear more confident that they can find a better job than they did even a few months ago, giving them more freedom to escape terrible hours, obnoxious bosses or low salaries for something better. (That could be a signal that workers will have stronger leverage in pay negotiations in the months ahead, but that’s a topic for another time.)
The Economy is Not Yet Out of the Woods
With the economy growing by more than 3% in four of the last five quarters, and with the hiring data shown above, it is so tempting to conclude that all is well in America at long last. But is it? It all depends on the timeframe you select. Let’s take another look.
Real GDP grew just 2.4% from the 3Q of 2013 to the 3Q of this year. That, of course, is due to the woeful 1Q in which the economy shrank at a 2.1% annual pace. Thus, at least some of the robustness of recent months is surely attributable to making up ground lost in the first three months of this year. The 2.4% year-on-year growth rate is entirely unexceptional, even by the standards of this recovery; indeed, it is very close to the GDP trend since 2010.
Meanwhile, growth in both wages and prices remains weak overall. Average weekly earnings have grown by only 2.8% over the last year, which is fairly normal for this recovery but well below the rates in past expansions. Meanwhile, the price index for personal consumption expenditures (the inflation measure preferred by the Fed) rose just 1.5% (annual rate) in the 3Q, down from a 1.6% increase in the 2Q.
This is all occurring, of course, in a world in which the Fed Funds rate has been near zero since late 2008 (while its balance sheet skyrocketed to $4.5 trillion). Things are clearly still not right in America when monetary policy has to remain so accommodating and for so long.
Despite the absence of inflationary pressure, the Fed is nonetheless preparing to “normalize” short-term interest rates. The first rate hikes are expected to begin around the middle of next year, and possibly sooner if economic growth continues above 3.5% in 2015. Yet the Fed continues to pledge that upcoming interest rate hikes will be dependent on the economic narrative at the time.
It could be that recent GDP data paint a misleadingly rosy picture of things. If, as suggested above, the surge in growth in the last two quarters was in part a rebound from the snowy start to the year, we should anticipate reversion to a slower growth rate more in keeping with the signals sent by prices and wages.
This suggests the Fed should be watching closely for any sign of a growth slippage. Of course, we won’t get our first glimpse of GDP growth in the 4Q until the end of January.
A second scenario might be an economy that has simply been lucky, thanks to the implosion of gasoline and energy prices this year. It might be the case that the economy is fundamentally unchanged from where it was a year or two ago, but has received a boost from the falling cost of oil and other commodities. If this is case, the Fed should again be on the lookout for indications that disinflationary tailwinds are abating, or that the economy is approaching capacity – either of which could nudge up inflation.
A third scenario is the so-called “secular stagnation” world, a term suggested by former Treasury secretary Larry Summers early this year. In that scenario, the Fed has finally succeeded in getting growth going, but it most likely has only managed this by creating unprecedented increases in asset prices. In this version, the Fed faces a difficult choice: to try to identify the most worrying sorts of excess and rein them in at the cost of growth, or to tolerate growing financial instability in hopes the fallout is relatively harmless.
A fourth might be a world in which underlying productivity potential is finally growing nicely, thanks in part to information technology advances, new digital business models and the tremendous boost from American energy production. These trends are allowing growth in output to run ahead of growth in employment. At the same time, technology is also keeping a lid on wage growth, thanks to possibilities for automation and increased production without having to hire more workers.
Any of these possibilities may prove to be true. In any event, the American recovery has been looking impressive lately, but that is nothing to take for granted, not while interest rates and inflation are so low and the rest of the world economy is so shaky.
The Oil Price Decline is Like a Big Tax Cut
As noted earlier, gasoline prices have plunged almost 90 cents a gallon since April, and Americans are thrilled to be paying almost 25% less to fill up their tanks, especially now that we’re in the holiday season. Yet many in the mainstream media seem downright unhappy over this energy price windfall.
Since when did the mainstream media care about oil companies? Some warn that shale companies will go out of business. Others warn that Russia will go bankrupt. Some even argue that falling oil prices are a signal that deflation is coming. Some go so far as to say that the big drop in oil prices is bad news. That’s preposterous!
Oil prices have plunged simply because the world’s supply of oil has exceeded demand in the last year. US oil production has nearly doubled in recent years to nine million barrels a day, and the Paris-basedInternational Energy Agency (IEA) expects US oil production to rise by more than one million barrels a day next year. And it is this supply increase that is driving down prices.
Saudi Arabia and OPEC have essentially thrown in the towel, surrendering to the inevitability of lower prices from exploding US energy production. There is a good explanation on this in SPECIAL ARTICLES below. It remains to be seen if any major OPEC producers will move to decrease production.
The latest oil price drop of nearly $8 a barrel makes the economic outlook even rosier. Apart from the declining share prices of some oil producers, virtually every other aspect of the world economy benefits, including most world stock markets.
(FYI, the IEA reports that most production in the North Dakota Bakken formation, one of the main drivers of shale-oil output, remains profitable at or below $42 a barrel.)
Here in the US, the oil-price drop is the equivalent of a huge tax cut which is benefitting all Americans (oil company Execs excluded) and especially the middle class. This is not only a triumph of US energy independence, it is a victory for the workings of the free market. Greater supply, not government cartels, is driving down prices.
The American energy revolution, combined with the market forces of supply and demand, is delivering something on the order of a $125 billion tax cut. Not only have wholesale oil prices dropped from about $100 a barrel to $66, but gasoline prices have fallen from near $4 a gallon to $2.78 at last week’s close.
That's a tax cut, no thanks to the government.
While very few Democrats, including President Obama, supported the entrepreneurial, innovative dynamism of horizontal drilling and hydraulic fracturing, they've lately tried to take credit for the oil and gas shale revolution. Thank goodness, no one's buying it.
Of course, the far-left Democratic environmentalists aren’t sitting still. The EPA is now taking aim at the entire US energy industry with its newly proposed smog rules – probably the most expensive regulations in history – even though the fracking revolution is producing much cleaner energy than ever before.
So what we have is a major energy revolution, and it’s lighting a much-needed fire under the economy.
President Obama’s Post-Election Temper Tantrum
Most political pundits agreed that the sweeping mid-term election results were a repudiation of Barack Obama and his far-left policies. Unlike most recent presidents who suffered such a defeat in the mid-terms – including Reagan, Clinton and Bush(43) – and then compromised with the opposition, Obama isdoubling-down on his unpopular policies.
Rather than move toward the Republicans since the election, Obama has defied them. Here’s a short list of what he has done since November 4:
– Nov. 10. He declared strong support for“net neutrality,” the idea that Internet content be freely available and subject to government regulation to protect consumers. Opening the door to government regulation infuriated conservatives and even some Democrats.
– Nov. 12. During Obama’s Asia trip, the United States and China unexpectedly agreed to new targets for greenhouse gas emissions supposedly designed to help combat climate change. Republicans complained that Obama unilaterally decided the US would cut greenhouse gas emissions 26% to 28% below 2005 levels in the next 11 years, while China has to do nothing. In fact, China can continue to increase emissions until 2030.
– Nov. 20. Obama announced he would unilaterally protect millions of immigrants who are in the United States illegally from deportation. Most constitutional scholars believe the president’s authority to grant amnesty is limited to illegal aliens facing “emergency situations” in their home countries – such as wars or earthquakes, floods, droughts, etc. – that prevent their safe deportation. The almost five million illegals getting a pass from Obama face no such hazards.
– Nov. 24. Obama forced out Defense Secretary Chuck Hagel, a former Republican senator. It was widely reported that Hagel was dismissed after a series of disagreements. But previous Obama defense secretaries have written that national security decisions were/are often made solely by the White House and President Obama personally.
– Nov. 26. The Obama administration said it will move to implement much tougher air quality standards for ozone. House Speaker John Boehner (R-OH) branded the plan a “massive new regulation” that would “cost our economy millions of jobs.”
To me, this rash of controversial decisions amounts to a “temper tantrum” on the part of the president, in reaction to the drubbing that the Democrats suffered in the mid-term elections.
Ken Mayer, a political science professor at the University of Wisconsin-Madison who wrote the book “With the Stroke of a Pen: Executive Orders and Presidential Power,” said it appears that Obama and his advisers saw no reason to hold back despite the pledges by Republican leaders to cooperate with him.
Obama has signaled he won’t let up anytime soon. The White House strongly suggested in November that Obama will also veto any bill authorizing the Keystone XL oil pipeline – a top priority of the new Republican Congress.
If that weren’t enough, word has leaked from the White House that Obama wants to restore diplomatic ties and ease restrictions on travel and trade with Cuba, even though it would infuriate most conservatives, especially South Florida Republicans.
And that’s just the agenda for this year. Who knows how far Obama will go during the last two years of his presidency. There is a MUST READ piece in SPECIAL ARTICLES below entitled “How Obama Blatantly Disregards the Law.” Read it and you’ll understand why this president defies the Constitution. Hint: It’s worse than you think!
Very best regards,
Gary D. Halbert