Claims Move Up: Will The Economy in 2015? Why lower oil prices are a symptom not a savior!

Robert A Brusca, PhD, Chief Economist FAO Economics, New York; Bob has been excellent in his views and forecasts for the world’s economies and the economy as well.  We pay close attention to his outlook which advises institutional investors. The following contains Bob’s very cautious economic outlook for this year.   

 Claims Move Up: Will The Economy in 2015? Why lower oil prices are a symptom not a savior!

                                            “The claims-eye view of the economy”

The claims data have been surprising in 2014 and largely ahead of the curve in terms of signaling economic performance. But the economy has not performed as well as it usually has in the past with sub-300K claims on the books. The chart on claims trends hints of a rounded bottom and at a potential rise in claims ahead. Is that what’s in store for 2015?

Continuing claims (below) popped up above trend in November and have stayed there. Since early September, the insured unemployment series has been plastered to 1.8% with one exception, a hiccup to 1.9% in late November. ‘Everyone’ is looking to stronger growth in 2015. The trends are in place and low oil prices will, well, grease the skids.

                                      Do continuing claims hint at backtracking?

If you have survived on Wall Street you know not to fight the tape (an expression that few will have any reference for in a few more years. For now we still have the Wall Street treasurers such as Art Cashin to remember). But my issues with embracing these trends are two: (1) the ‘positive trends’ do not look as good to me, and (2) the support for these trends is still largely missing. We saw in the recession how consumers reacted to a temporary tax cut. How will they react to a temporary drop in oil prices? Or do you think oil, at $50/barrel or so, is here to stay?

                                    Underlying forces have not changed (i.e. not improved)

The dollar is rising and that is undercutting U.S. manufacturing competitiveness at the same time oil exploration and development is being cut back because of these same prices. So where is the basis for income growth from that? Lower energy expenditures are fringe good news for consumers, worth one-half of one percentage point on GDP. But what will drive growth if we are having our legs cut out from under us by a rising dollar and folding investment from the oil sector? Moreover if YOU we investing what would you invest in? Would you continue to pay for energy conservation (are you still going to buy a Prius or a Leaf?). What should firms do? There is a new investment uncertainty in the mix from lower energy prices and more from the uncertain path for energy prices.

                                                 Dealing with lower oil prices…NOT

The US should impose tax relief for those making energy saving investment, making a statement about the future. A simple government action could help sweep away some of the uncertainty by lowering the investment threshold and boosting the after tax returns on this sort of investment- the sort that does not look so good today- but will probably look better in a few years.

                                                             Politics are unchanged

Still, that won’t happen. One of the reasons the outlook is still so shrouded is that Republicans and Democrats are still at one-another’s throats. Boehner made it clear with a post-election attack on Obamacare and the President responded by heading to normalize relations with Cuba without Republican input. So we will have another political year like that.

 

                                         U.S. Competitiveness is still poor and worsening

China is still more competitive than the U.S.- add to the list a whole host of foreign economies. So what change gets in the U.S. to boost our growth…as the dollar rises? Will it be a boost to demand? How much of that new stuff we buy will be made in America? How much will actually boost US output? On the margin probably more than that last dollar spent on energy, hence the net stimulus, but less net stimulus than you might think.

 

We are still uncompetitive. We are still a net importer. We are losing competiveness as the dollar rises making our current account deficit bigger while the lower euro will make Germany’s world-leading surplus even larger. Does that make sense?

                                                  The international economy is broken

    The international economy has its priorities upside down and until that is fixed we will remain in a difficult situation.   We are right there with Europe, but for different reasons. Look for the Monetary Union to conduct QE but not to embrace it. Lower oil prices will keep their inflation undershoot in place (as it will for us as well) but the stimulus argument will temper whatever QE they actually do.

The Germans will be foot draggers along with the Austrians and the Dutch, at least. QE will be too little and done way too late at interest rates that are far too low. This will subject Europe to more risk from QE-related fiscal issues in the future. The Germans know it puts THEM at risk and that is why they will fight to contain QE. It will not be big enough to be a difference-maker in Europe. No, QE will not save Europe.

And the turns for the worse in the Russian economy will keep the geopolitical pressures high. China will continue to struggle with is massive demographic problems (too many males and an aging population), its pollution issues, its domestic debt levels and its need to shift away from export dependency and all the ‘creative destruction’ that implies for its domestic economy. Meanwhile, the role of corruption in the Chinese economy while being addressed remains a risk to political as we as to economic stability.    

                                                                   HAPPY NEW YEAR……..But

Happy New Year… but get ready for what lies ahead. Extrapolating trends with a ruler –or a computer- is not always the best way to forecast. And the trends, they are a-changing. Lower oil prices are a symptom of what is going wrong, not a savior. 

Bob Brusca, PhD, Chief Economist,  FAO Economics, New York