Thursday, September 3, 2015

A Deep Breath and a Step Back: Economic Overview

Money is green, and so is the stock market today as investors with long positions are raking in profits from global rebounds today. Of the many green price trends, both WTI and Brent benchmarks gain today as they approach the $50 and $55 price level respectively. Both the overall stock market gains and the crude increases have pushed the energy sector today to a 2.13% increase. Energy ETFs also swing in favor of the bull today as long positions add to the buying activity that has the markets looking forward today. Current price trends seem so take in account the encouragement by European central banks that stimulus programs are still relevant to policy makers. A particular report came out of the European Central Bank from Mario Draghi which lent to positive movement on the day. As a new month graces the financial markets, ideas about the economy have changed dramatically. We began 2015 with a very volatile market that was responding to major energy slump that began in 2014. For most of the world's economies, petroleum or other energy-related exports are a major source of capital and support the funding needed for social programs and public spending. At the same time, first-world economies like the United States and most of Europe rely on petroleum to fuel vehicles, planes, and factories, without it economic slowdown would be immediate and systemic. The dive in oil prices put a lot of pressure on these balances. Would the shock to the coffers of emerging economies that still rely on petroleum for a majority of their revenue be too much? Or would the price drop enough for worldwide consumption to explode and stimulate extra growth? And for awhile, consumers in the United States, the main stage of the glut, held thicker wallets and spent a few dollars more. So why do we find ourselves looking at central banks for assistance when a year ago, a major energy source cost over 50% more than it did today? It is really hard to say, and many economists since the 2008 crisis are seriously considering long-term growth and where the global economies can go from there. The Federal Reserve has cited issues with low levels of inflation that are being hurt by pressures from low crude oil prices. With respect with monetary policy, consistent low levels of inflation translate into stable growth as unemployment is combatted with the increase in money generation. Low, stable inflation means business investment and more consumer spending. After the 2008 crisis and the subsequent recession lasting through the 2010's, the Federal Reserve has kept interest rates low to allow spending to increase and, in turn, stimulate inflationary pressures in exchange for more employment. With the U.S. pressures mounting, global confidence faltered as the North American country still remains a cornerstone of the financial system. Suddenly, the development of fracking in the petroleum industry has one of the largest oil importers pushing the price down with a supply glut threatening OPEC market share. With energy prices dropping, GDP is in danger of expanding with 2% inflation (suggested by the Fed), and labor markets threaten to rescind from recent growth.

The chart above plots gross domestic product, durable goods, and fixed investment over the past two and a half years. Gross domestic product peaked around Q2 in 2014 at 4.6% but decreased the next three-quarters to 0.6% at the beginning of 2015. These were the periods most affected by low crude oil prices as the slump hurt energy company's projected revenue as well as labor in that sector. Firms deep in the red were shedding jobs to maintain growth as prices dipped into the $50's. Showing this revenue decline is the yellow line which depicts durable goods decline from 13.9% in 2014 Q2 to 2.0% in Q1 2015. Because deflationary pressures left energy firms strapped for cash and the labor market struggling to growth, fixed investment levels dropped from its peak at 7.5% to 3.3% this year as well. What does all this mean? Low crude oil prices contributed to a deflated economy that was already hurting from struggling employment numbers and sluggish wage increases. While this continued, the stock market traded at record levels at the beginning of 2015 as it constantly produced movements from highs to lows and back to even higher highs. Investors could detect something unsettling behind the volatility, and the Federal Reserve echoed this insecurity in its reluctance to increase the federal fund rate. Petroleum prices rebounded to help improve 2015 Q2 economic data, but it wasn't enough to justify the speculative bubble that sat on top of the U.S. stock market. The correction did not come because of the devaluation of the yuan or the crash of the Chinese stock market. Those factors played a role in getting the ball rolling, but there were deeper problems in the U.S. financial sphere. Stocks crashed because investors realized they had been betting on value that wasn't really there. The absence of inflation decreased exports and caused the record a stock prices to be too high compared to the firms they represented. This was especially the case in the energy sector, but prevalent across the market. Globalization forced Chinese and U.S. stock trends on European and other Asian markets, but that is all. There won't be much of a recession in normal economic life because those figures weren't speculated. This stock market crash was, instead, a correction that reestablished confidence in value and solid investments. Increasing economic data in Q2 as well as rising crude oil prices will help inflation to rise and, therefore, GDP to grow. The Fed and investors will be looking at payroll data as well as more economic indicators to justify a bull market, and their newfound confidence to increase volume. How will crude oil price affect the economy in the near future (last two 2015 quarters)? Increases or a stable price around $50 should provide enough pressures to maintain a 1.5-2.0% rate of inflation. Decreases, which are expected as the glut still remains large, could cause the job market to limit its growth while keeping interest rate hikes undesirable for the rest of 2015. For now, the lifting of restrictions on exports should create a bullish pull on WTI price as well as its competition with the Brent benchmark. On top of that, OPEC production cuts will be important to monitor for crude oil price projections as well as the health of the global economy.

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