Mish's Global Economic Trend Analysis |
- Oil Consumption Analysis: Jobs, Robots, Manufacturing, Gas Mileage Improvement; What's the Explanation for Declining Oil Consumption?
- Platitudes, Promises, and the Failed Pro-Union Policies of Illinois Governor Pat Quinn; Five Recommended Solutions
- Non-News of the Day: "Draghi Says Risks to Downside"; Investigating the Non-Nascent Recovery in Spain; Two Things Spain Needs (and Won't Get)
- Illusions of Stabilization
| Posted: 07 Feb 2013 11:07 PM PST I have posted many charts by reader Tim Wallace that highlight declining oil consumption in the US. James Beck, Lead Analyst, Weekly Petroleum Supply Team for the Energy Information Administration has also chimed in on the subject. For example, please see my September 16, 2012 article Email From Lead Analyst, Weekly Petroleum Supply Team on Possibility of Recession. Some readers have suggested improved gasoline mileage in cars is the primary reason. However, that explanation is faulty (as Wallace and I have pointed out on numerous occasions) because mileage rates have steadily climbed over the years while the plunge in oil consumption happened abruptly at the start of the recession and never recovered. OK, So Why the Drop? Gail Tverberg on the "Our Finite World" blog explains in her excellent post Why is US Oil Consumption Lower? Better Gasoline Mileage? Gail analyzes gas prices, miles driven, increased fuel mileage, and a decrease in industrialization. She concludes ... Summary of Where Oil Savings Comes FromRecession Track We certainly agree regarding the recession track, but our overall analysis is quite similar as well. We do have the timing a bit different. Gail states the "drop in consumption is no doubt related to a rise in oil prices starting about 2004." The price of oil is likely a factor, but I do not show a dip there. Gasoline Usage in Summer Months  click on chart for sharper image The above chart is one of many by reader Tim Wallace from my September 11, 2012 article Petroleum And Gasoline Usage Charts for June, July, August; Unemployment vs. Gasoline Usage. Attitudes and Jobs Are gasoline prices a huge factor now? You bet! Prices are high, unemployment is high, and younger kids have completely different attitudes towards cars, transportation, and debt. Robots and Looking Ahead I gave Gail a call asking about the use of robots. We are in agreement on that score as well. Some manufacturing is in the process of returning to the US. In isolation, that is an improvement in demand. However, if manufacturing returns but the jobs don't (and thanks to robots that is the current state of affairs), then the net effect (for as long as that setup lasts) is for a decrease in oil consumption. For more on robots (with obvious implications on gasoline consumption) please see ...
If you think the return of manufacturing to the US means a guaranteed increase in US demand for oil, please read some of the above links and rethink your position. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com "Wine Country" Economic Conference Hosted By Mish Click on Image to Learn More  |
| Posted: 07 Feb 2013 02:34 PM PST I received an interesting email moments ago from John Tillman at the Illinois Policy Institute, a non-partisan watchdog of the ongoing mess in Illinois. I traced the source back to an excellent article on Illinois Review written by Ben VanMetre, a Senior Budget and Tax Policy Analyst at the Illinois Policy Institute. Please consider a repost of Quinn's Illinois: regulations and cronyism crush entrepreneurship by Ben VanMetre. In Gov. Pat Quinn's State of the State address, he said, "In our Illinois, small business means big business. Driving economic growth for small businesses requires doing all we can to make sure government is not in the way."The Problem in Illinois Illinois is bought, controlled, and owned by public unions and politicians on the take from public unions. The unions do not want reform, nor do they want reasonable budgets. They do want more handouts and higher taxes. Taking control of government in Illinois will not be easy, even with a Republican governor. The only way to treat unions is the way Chris Christie treated them in New Jersey and the way Scott Walker treated them in Wisconsin. Bear in mind, the Walker solution was only the tip of the iceberg of the five things that need to happen. Five Recommended Solutions
Those recommendations would fix problems nationally, not just in Illinois. Numbers 1-3 will bring down labor costs, not just for the state, but for every city and municipality in the state (an if implemented nationally, in every state). Numbers 4-5 are needed to solve massive pension underfunding. Like the Illinois Policy Institute, I do not care if it's a democrat or a republican that gets the job done, but I do care that it does get done. Unfortunately, I fully expect the Illinois pension problem will not be solved until the fund is within a few years of running out of money. However, that may happen far sooner than anyone thinks. Some plans may be broke by 2020 in my estimation. All it will take is another big decline in the stock market with the pension plans overweight the wrong areas. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Posted: 07 Feb 2013 09:45 AM PST Today's non-news that has the currency markets in a flux with a rising dollar and a sinking euro is a revelation by ECB president Mario Draghi that Eurozone Growth Risks are on the "Downside". Really? Downside? Yes, really. It would have been shocking to hear otherwise in spite of all the happy fluff talk that the "worst is behind". Before Draghi spoke I wrote about Illusions of Stabilization, with a spotlight on France and Germany. Please check it out. Let's now dig deeper into the non-nascent recovery in Spain. Spain's Public Debt Doubles to €1 Trillion Since 2007; Debt-to-GDP Ratio Hits 96.2% According to El Confidencial, Spain's public debt crossed the €1 Trillion marker for the first time. Public debt is now $1,015 trillion euros and growing at a rate of €100 billion euros a year. Public debt stood at €503.906 billion in 2007. Recall that the eurozone Stability and Growth Pact places a limit on government deficit at (3% of GDP) and debt (60% of GDP). Spain's Unemployment Rate  Spain's seasonally adjusted unemployment rate is 26.6% according to Eurostat data as mapped by Google. The BBC reports Youth unemployment is a record 55%. Deficit Targets Missed Again and Again Spain was supposed to reduce its deficit to 6.3% by the end of 2012. That number had to be raised twice. On October 1, 2012 EU Economic and Monetary Affairs Commissioner Olli Rehn said Spain's 2012 deficit target achievable. I laughed out loud when I read that. The official results are still not in, but expectations are now in the range of 8%. On the over-under line, I will guess higher. Spain's deficit targets were 4.5% for 2013 and 2.8% in 2014. Odds of success are zero. Not to worry, Brussels extended the deadline and reduced the targets once again. We are now looking at 2015 or 2016 for compliance. At last count, Brussels now expects for 6.1% in 2013. I expect that target will be revised up. It won't matter. Spain will still need more time. Two Things Spain Needs (and Won't Get) Spain cannot recover until it sheds the shackles of the euro and defaults, or Germany and Northern Europe forgive hundreds of billions of Spain's euro denominated debt. Bear in mind neither of those is sufficient. In addition, Spain needs many structural reforms related to work rules, unions, and pensions in addition to one of the above choices. Since none of this is likely in the short-term, Spain will continue to sink. And France with Hollande at the helm is like "going to hell in a handbasket". Simply put, the French economy won't thrive, to say the least. And Germany can hardly rebalance on its own. So ignore all this happy talk about the worst being behind. It's all an illusion based on stabilization of bond rates in Europe, and that won't last either. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Posted: 07 Feb 2013 12:21 AM PST In Germany Rebounds but ... I noted a recovery "of sorts" in Germany, a contraction in France at the steepest rate in four years, and a record decrease in services employment in Italy. Thus, it should be no surprise to see the Markit Eurozone Composite PMI® shows national divergence hits record high. Yet, in aggregate, the eurozone contraction decelerated with the eurozone composite PMI rising from 47.2 to 48.6. So, what's it all mean? Chris Williamson, Chief Economist at Markit offered this interpretation: "The eurozone is showing clear signs of healing, with the downturn easing sharply in January and the region moving closer to stabilisation in the first quarter. ...." No Signs of Healing I disagree with Williamson. Those divergences show the eurozone is getting sicker, not healing. If there was any healing, and certainly if there was any rebalancing, manufacturing and export growth would be picking up in Spain, in Italy, and in France at the expense of Germany. A quick check of the Markit Eurozone Manufacturing PMI will show that is not what's happening.  There are certainly a lot of highs. However, Italy and Spain are still in deep contraction and France is a certified zombie. How much of the recent growth in Germany and the Northern European countries (and a decline in contraction in Italy) is simply a result of shifts due to the unsound economic policies of French president Francois Hollande rather than "stabilization" per se in Germany and elsewhere? Regardless of "why", it's not "stabilization" that's needed, but rather rebalancing, and on that score things are headed in the opposite direction, with France leading the way. Economic Implosion of France The implosion in France was easy to see and I called for it well in advance. June 08, 2012: Hollande About to Wreck France With Economically Insane Proposal: "Make Layoffs So Expensive For Companies That It's Not Worth It". The results are as expected. Companies that cannot fire workers will not hire them in the first place. July 16, 2012: Peugeot Has 51% Chance of Debt Default; Hollande Says France Will Not Let Peugeot Lay Off Workers October 03, 2012: French Economy Implodes As expected, at least in this corner, the French economy has started to implode. Service sector business activity is dropping at fastest rate since October 2011.October 4, 2012: "Pigeon" Tax Protest Goes Viral in France I received an interesting email today from Andrea, who is from Italy but now lives in France. The email is about "pigeons", a movement started by French entrepreneurs in protest of president Francois Hollande's tax policies. The "pigeon" movement has gone viral on Twitter. ....October 31, 2012: "Google Law" Yet Another Warped Policy by Hollande; Government Motors French Style November 29, 2012: French Unemployment Highest in 14 Years (And It's Going to Get Much Worse) Hollande Threatens to Nationalize Steel Plants Over LayoffsDecember 20, 2012: France Faces Growing Pension Deficit; French Youth Lose Hope; Politicians in Denial; Bond Market Patience Can't Last Illusion of Eurozone Stabilization There is no real stabilization and there is no healing. Rather, the policies of Hollande are so disastrous that some output has shifted to Germany and elsewhere, (coupled perhaps with some inventory replenishment and a temporary stimulus-fueled increase in demand in Asia). Even that cannot last. How can it? US growth has stalled (at best) and 2% payroll tax cuts will tip the US into recession (assuming it's not there already). With employment sinking in France, Italy, and Spain, precisely who will buy German exports? Properly rebalancing will require a shift in production from Germany to the rest of Europe as well as a shift towards more consumption in Germany from the rest of Europe. That cannot and will not happen with the destructive polices of Hollande, and the lack of reforms in Spain and Italy. Moreover, and as I have noted on many occasions, the entire Euro construct is flawed. Until those flaws are fixed, there is only the illusion of stabilization, and that based on more unbalanced growth. The only thing that has stabilized (for now) is interest rates, and even that won't last. What About Spain? It will be of no net benefit if Spain heals but France goes down the gutter. Indeed, it would be a net loss as France is the eurozone's second largest economy, with Spain a distant fourth. But is Spain about to heal? The PMI shows a slowing rate of contraction. However, the contraction is still steep and Spain is nowhere near meeting its budget deficit targets. Any positive divergence is Spain (mostly imaginary) must be viewed in light of missed budget targets, rising unemployment, and falling tax collections smack in the face of higher tax rates. So don't expect much more from Spain, even as France worsens. Something has to give. And it's something very few people see coming. Germany Will Pay a Steep Price One way or another Germany will pay a huge price. These are the only two eurozone recovery options
Until one of those things happens, signs of stabilization are nothing but an illusion. Failed Experiment The Eurozone is a failed experiment. Structural flaws were too great initially, and they have increased over the years. No currency union in history has ever survived unless there was also a fiscal union. Current politics says it cannot happen, on meaningful terms. Breakup Inevitable, But How? A breakup is inevitable, just as it has been from the beginning. The key is to manage a breakup in the least destructive manner. Breakup Options Option 1: If Germany (and the northern states) left the eurozone, the Deutschmark (and respective currencies) would immediately be credible. The downside to Germany (and the northern states) is debts to German banks would not be paid back in Deutschmarks but rather deflated (but not worthless) Euros. Option 2: The second option is a piecemeal, destructive breakup. Should Greece and Spain leave first, those countries might experience a complete loss of faith in currency resulting in hyperinflation. The Northern states would be paid back in worthless notes, if they were paid back at all. Germany Suffers Regardless Note that Germany and the Northern creditor nations suffer regardless. Either they keep ponying up bailout money, there is a managed breakup, or a piecemeal destructive breakup. It would be best for all involved if Germany left the eurozone and went back to the Deutschmark. There are no other options, and no other choices. Meanwhile, imbalances grow and German taxpayers keep funneling tax dollars to the Southern states to keep them afloat. How long German citizens are willing to put up with this sorry state of affairs (in addition to the shenanigans of the Mario Draghi ECB) remains to be seen. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com "Wine Country" Economic Conference Hosted By Mish Click on Image to Learn More |
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