Monthly Archives: October 2016
the Employment Situation, September 2016
At 8:30 edt this morning, the Bureau of Labor Statistics released monthly Employment Situation report for September.
The ES estimates the US economy created +156,000 new positions last month. While enough to absorb the average number of people leaving school and entering the job market for the first time, the figure is below the average of +192,000 jobs created over the past three months. Revisions to the prior two months’ estimates were also negative, subtracting a total of -7,000 from prior tallies.
For what it’s worth (not much, in my opinion), labor economists had been predicting the figure would come in at +172,000.
It’s important to remember, though, that the unemployment figures are the result of subtracting the number of job gainers from the number of job leavers. The monthly figure for each is around 3.5 million; the difference between the two is statistically significant only +/- 100,000.
Positives in the report: wages continue to rise at 2.6% annually; employment in the mining industry, which includes oil and gas, may be bottoming after two years of decline.
The real significance of the September ES is in its inoffensiveness. There’s nothing in it that could even remotely be considered as a check on the Fed’s desire to raise short-term interest rates before yearend.
new oil and gas finds in mature areas
a lesson from base metals
A decade of intensive exploration for base metals during the 1970s, on what proved to be the mistaken idea that their consumption must rise in lockstep with global GDP, resulted in a substantial glut of copper, zinc, lead…by the end of that decade.
Miners responded by redirecting their exploration and development efforts in two ways:
— they started looking for gold, for its high value in a small package, and
–they concentrated on areas near existing infrastructure.
This cut costs and almost immediately began to generate much-needed cash flow. In some cases, miners even went back to the tailings (dump heaps) of nineteenth-century mines to extract now-economical gold. Yes, this effort created a glut of gold within a decade, but that’s another story.
the oil industry today
Something similar seems to be going on now in the oil industry in the US. A few months ago, Apache announced a major discovery (3 billion barrels of oil, 75 trillion cubic feet of gas) in an overlooked area near the Permian Basin in Texas. Two days ago, Caelus Energy, a privately-held firm, announced a potentially large find (2.4 billion barrels of light crude) in shallow water in Smith Bay in northern Alaska–close, at least in Alaska terms, to delivery systems from earlier finds by oil majors.
That exploration effort should have shifted in this direction isn’t surprising. The large amounts of oil and gas being uncovered are. Although no one would want to generalize from this small sample, the discoveries do seem to me to call for demands for greater evidence for any claim that oil and gas prices will rise a lot from current levels.
the slow-motion disappearing act of the British pound
Brexit
Just prior to the Brexit vote in June, at a point when sentiment had temporarily swung in favor of Britain remaining in the EU, the British pound reached a high of about 1£ = $1.48. Yesterday the post-vote slide reached a 31-year low of 1£ = $1.27, 14% lower.
What makes the $1.27 level significant isn’t just the continuing fall in national wealth induced by the Brexit vote. It’s also that the UK has now slipped behind France for the title of second-largest economy in the EU.
The cause is the gradual working out of the detailed consequences of something that was, or should have been, well known in general terms before the Brexit vote–that however emotionally satisfying the Brexit vote might have been, there are potentially very large economic costs to the UK from leaving the EU.
They come in two forms:
–London is the financial center of the EU, and as such has tons of banking jobs which may well shift out of the country
–because it is more open to foreign companies than continental Europe, many multinationals have chosen the UK as the home base for their EU operations. Much of that presence–and the associated jobs–may well be leaving now, as well.
US parallels
Two parallels can be drawn between the UK and the US from Brexit.
The first is that the vote in favor of Brexit–since generally regretted in the UK–was driven by an older, rural constituency that felt left out of EU-generated prosperity. There is also an anti-immigrant element in the pro-Brexit camp, though not so overtly racist, I think, than among Trump supporters here.
The second is that in stock market terms the Brexit vote has not been as bad as one might have feared. The currency has since fallen by about 12%. The large-cap FTSE 100 has risen by 10% or so, however, offsetting most of that decline. Many multinationals are actually up in US$ terms.
However, although the same forces driving voters in the UK may well be motivating those in the US, I don’t think the idea that the S&P 500 reaction to a Trump presidency in the US would be similar to the post-Brexit FTSE holds water.
That’s because the two stock markets have very different structures. The UK is a small country with an outsized stock market, dominated (about 3/4 of the market cap) by multinationals headquartered in Britain but doing the vast majority of their business elsewhere. For most of those, a fall in sterling has lowered administrative costs significantly but has had very little negative effect on revenues. For multinationals with their debt in sterling, the advantage is magnified. In additions, because multinationals give access to a stream of hard-currency revenue, they also serve as a modest form of capital flight.
Half the US stock market, in contrast, is made up of purely domestic companies, with another quarter doing business in nations whose currencies are linked to the dollar. So the safe haven effect would be much smaller. In addition, all of his other negatives aside, simply given Mr. Trump’s loony notions about foreign trade, the economic damage he might do is considerably greater.
Keeping Score for September 2016
I’ve just updated my Keeping Score page for September’s S&P 500 performance.