Clients have known that jobs-related activity would broach estimates. In fact, it is just this activity which will fire much needed gains in hours and wages, thus gains in spending, 2012. Thursday’s Claims print fit our anchor – holding the new cycle low and reaffirming the sustainability of improvement in employment.
Other evidence has fit well, including a January survey of small business owners, where confidence hit a 4 yr high. Many in fact are having trouble filling vacant positions for goodness sake. The National Federation of Independent Business said its optimism index rose to 93.9 in January, the highest level since Dec 07 when the recession started. And it was the fifth straight month of gains.
So it is easy for economists to report now to their clients that job creation is improving. It was something else however to recognize that reality 4 months ago when the rest were looking elsewhere. We are not overly modest and so must admit we are rather pleased with this result.
There is a caveat however and that would be oil. We had crude prices as tied to potential violence in the Mid East, as a wild card for several months. It is no longer a wild card, but an event.
The translation of higher incomes to spending is then at risk for H1.
There is the temptation to apply the past to the future in building strategy. This exercise is easy, but it rarely works. Thus, the impact of higher crude prices last spring will not be the same as now. This time we have a faster conversion speed, from crude to gasoline. Yet we have a consumer more resilient this time than last. So we must blend the two.
When that is done, our very early and rough estimate is for $4.50 / gallon average to shave retail activity by perhaps 0.2%. Gasoline at $5 for any extended period will shave retail activity by 0.4%. Something significantly over that, for an extended period, will put GDP at zero, or worse.
According to the Oil Price Information Service, Americans spent 8.4% of their household income on gasoline last year when gasoline averaged $3.51 / gallon, an all-time high. They will pay an even larger percentage this year is the guess of this organization’s chief oil analyst Tom Kloza, and this, notwithstanding the popularity of more efficient cars. Thus, craziness from Iran can be enough to put us over the edge, to launch gasoline and stop the world’s number one engine, the US consumer, dead in its tracks.
Our view is that Iran wants nuclear as a tool to blackmail, not to incinerate; thus, she will always exaggerate the pace and potency of her program to gain concessions. The theocracy knows its days are numbered; it knows the next bit of domestic unrest may well be successful. So key is to remain in power by wringing all the concessions possible, then stop the belligerence just an hour or two before the Israelis take off. Some of the masses will then be appeased by concessions gained; others will be fooled by Tyrant’s Rule #1 – when in trouble domestically, create an enemy offshore.
The real risk is that we will see gasoline at $4.50 - $5.00 over the intermediate term but not $8 which is possible, even likely given violence in that region.
Robert Craven
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