MacroView – The Energy Rally Is Likely Premature

energy rally, #MacroView – The Energy Rally Is Likely Premature

Unfortunately, when the current recession ends, economic growth rates will again run at a slower trajectory. Such will translate into weaker wage growth and suppressed full-time employment-to-population ratios.

“Companies’ fast adoption of technology, along with increased productivity and change in demand, will further retard employment in the ‘New-New Normal.’

To generate economic growth and prosperity, ‘full-time’ employment is critical. After the ‘Financial Crisis,’ the number of ‘full-time’ jobs relative to the population collapsed and only recovered about half of what was lost. We witnessed the same following the ‘dot.com’ crash. It is highly likely that ‘full-time’ employment will take another stop down as weaker demand requires fewer full-time staff.”

energy rally, #MacroView – The Energy Rally Is Likely Premature

Oil Tied To The Economy

Oil is a highly sensitive indicator relative to the expansion or contraction of the economy. Virtually every aspect of our lives impacts oil consumption. The equation’s demand side is a tell-tale sign of economic strength or weakness, from the food we eat to the products and services we buy.

The chart below combines interest rates, inflation, and GDP into one composite indicator to provide a more obvious comparison to oil prices. 

energy rally, #MacroView – The Energy Rally Is Likely Premature

It should not be surprising that sharp declines in oil prices have been coincident with downturns in economic activity, a drop in inflation, and a subsequent decrease in interest rates.

There is also a not so insignificant correlation between oil prices and employment. The energy sector produces many, and some of the highest wage paying, jobs in the country.

energy rally, #MacroView – The Energy Rally Is Likely Premature

When it comes to employment, most of the jobs “created” since the financial crisis has been lower wage-paying jobs in retail, healthcare, and other service sectors of the economy. Conversely, the jobs created within the energy space are some of the highest wage paying opportunities available in engineering, technology, accounting, legal, etc.

Each job created in energy-related areas has had a “ripple effect” of creating 2.8 jobs elsewhere in the economy from piping to coatings, trucking and transportation, restaurants, and retail.

Drilling for oil also requires sizable capital expenditures, which has a large multiplier effect on the economy. (Politicians need to be careful not to “kill the golden goose.”)

energy rally, #MacroView – The Energy Rally Is Likely Premature

With economic weakness gaining traction globally, it is hard to justify an improving outlook for oil given the backdrop of Too much supply. Too little demand.” 

Unfortunately, supply is set to rise.

Drill Or Die

I recently wrote about corporate debt and the rise of “zombie companies” caused by a decade of Federal Reserve interventions and bailouts.

“Given the Federal Reserve’s monetary injections and suppression of interest rates, it is not surprising to see companies leveraging their balance sheets. As interest rates have plunged, corporations have hit a record issuance of debt to pay dividends and other non-productive purposes.” – The Lack Of Value In Value

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