Economic Soft Patch and Oil Price Band-aids

How many believe that the release of 60 million barrels (MB) of oil from global strategic reserves over next 30 days will be effective? Econintersect’s Dr. Elliott Morss analyzed the significance and concluded:

The IEA release will have little significance in the longer term. The demand for oil will continue to grow as the demand of Western nations ultimately pulling out of the global recession will be added to current growing demands in emerging nations. Recent nuclear disasters will reduce uses of this fuel and thereby stimulate the demand for other energy sources.

In the US, the energy policy remains to keep gas prices as low as possible. The result? According to IEA data, the US now imports 68% of its oil, and that amounts to 24% of all oil traded globally. A problematic global dependency? Yes.

Let me add to what Dr. Morss is saying – the USA runs on oil. The oil price increase is likely one of the causes of the current USA economic softness, but is only one of the many major forces acting on the economy.

We intuitively understand that rising fuel prices in a large landmass country dependent on roadway based distribution / travel will add to costs, and limits the items one can purchase on a fixed income. The less spent on fuel, the more that can be spent on other things.

In the graph above, the two recent periods where this gasoline / GDP correlation is obvious is highlighted. It is likely that consumers wage growth prior to 2000 was able to compensate for the oil price inflation. Or it could be that there is a price tipping point ($3 per gallon? or rate of price inflation YoY?). But more likely it works in combination with other economic forces, and there is no simple formula.

Rising oil prices may not all be all bad as my colleague Derryl Hermanutz has pointed out.

Former CIBC chief economist Jeff Rubin, now author of the peak oil book, “Why your World is about to get a Whole Lot Smaller”, believes that as the transportation component of import prices rises with the inevitable rise of fuel costs, US manufacturing will enjoy a renaissance on economic grounds. No “subsidies” or other political aids would be required. It would cost less to pay higher domestic wages than to ship cheaper foreign manufactures. The straight economics in a peak oil world would favor local, domestic production that required less transportation.

I suspect the oil prices must rise much higher before before it begins to effect manufacturing location to any significant degree. But it should be recognized that rising oil prices work against exports of manufactured products – and one green shoot in the USA economy is exports.

The release of oil reserves is one more example of the advanced economies kicking the can down the road with temporary band-aids on relatively serious issues. It seems to be timed to mitigate the recent economic softness (caused by other band-aids falling off). It is hard to believe at the end of the year, this oil release will be remembered.

Spot oil prices have been increasing this whole week almost recovering about half of the initial contraction following the announcement of the release of the strategic reserves.

Band-aids only cover up the real problems.

Economic News this Week:

Econintersect’s economic forecast for July 2011 indicates the soft patch will continue. This is based on “less good” data, not data suggesting the economy is falling off a cliff.

This week the Weekly Leading Index (WLI) from ECRI declined from 2.9% to 2.0%. This level implies the business conditions six months from now will be approximately the same compared to today. This index is eroding and clearly in a downtrend. If the current trend line holds, this index will be in negative territory shortly. A negative reading in this index is indicative of a contracting business cycle – and depending on the duration and magnitude of the negative number, may also be suggesting a recession is underway.

Initial unemployment claims fell a statistically insignificant 1,000 to 428,000 and remains elevated. The real gauge – the 4 week moving average – rose an insignificant 500. Because of the noise (week-to-week movements), the 4 week average remains the reliable gauge. Historically, claims exceeding 400,000 per week yields employment gains less than the workforce growth.

We are continuing to see disturbing May 2011 data. Much of the information that has attracted attention comes from business surveys and Econintersect does not count surveys as data, nor believes they accurately forecast or reflect current economic conditions. The business opinion surveys lead the real hard data by 1-2 months. The elevated initial unemployment claims is a unusual development at this point in a “recovery”.

Weekly Economic Release Scorecard:

Item Headline Analysis
June Michigan Sentiment
Remains at Recession levels
May Construction Spending
Yes down YoY, but is up MoM – broke 2 month down trend
June ISM Manufacturing
It is only up and better than last month if you listen to CNBC
July Economic Forecast

Economic soft spot will continue in July
May Pending Home Sales Index
Up 8.2%
Here is a case where up is down – and pending home sales actually is foretelling a 20% decline YoY in June home sales
June Consumer Confidence
Doug Short puts these disappointing numbers into context
April Case-Shiller Home Prices
Up / down
The unadjusted index is up, the analysis says it is not up as the past historical Spring bounce
Oil Stockpile Release

Elliott Morss provides background info, and potential effects of this release
May Personal Consumption Expenditures
Inflation adjusted data is down
Latin America

Elliott Morss & Diego Gauna do a complete evaluation including economic vulnerability and resiliency

Henrik Isakson evaluates importance of exports and imports
1Q2011 GDP

Rick Davis takes a second look and believes QE3 may be on the horizon

Dirk Ehnts takes a look at this new currency

Bradley Lewis plays out where this crisis may be going
USA President

Frank Li has ideas how to make this political office work better
Financial Profits

Lance Roberts correlates increasing financial profits to degradation of economic prosperity
Deficits & Debt

Elliott Morss argues against immediate budget costs suggesting economic damage will result
India Anti-Corruption

Ajay Shah identifies 3 paths to make headway
Greece Crisis

Dirk Ehnts offers an insiders view, and illustrates media disinformation
QE2 & Economy

Jon Markman argues Fed’s actions only prevented deflation and did little for the economy
USA Investment Outlook

MacroTides details events which must fall into place for a market run up
Russia, India & China

Sanjeev Kulkarni reviews how this trading block is picking up steam
Trading Week

Jeff Miller looks at why the markets are so volatile
Brazil, India & China

MacroTides looks at investing in these economies which are expected to slow

Bankruptcies this Week: DSI Holdings, Nebraska Book Company, Los Angeles Dodgers, Transdel Pharmaceuticals, Teltronics, Innkeepers USA Trust, Ultimate Escapes

Failed Banks this Week: