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Unemployment Set to Explode
Townhall.com ^ | October 13, 2012 | Political Calculations

Posted on 10/13/2012 5:39:32 AM PDT by Kaslin

Now that the average price of gasoline in the United States is clocking in at all-time record levels for this time of year, especially in California, what effect will that factor have upon the official U.S. unemployment rate, which just clocked in at its lowest level since early 2009?

Unfortunately, that's the wrong question to be asking today, because it takes roughly two years for a major change in the price of oil and gasoline to play out and fully impact the U.S. unemployment rate. The right question to ask today is: "what was the price of gasoline doing two years ago that put the events in motion that are just now about to affect the U.S. economy?

The answer is revealed in our chart below, in which we've shifted the average price of motor gasoline in the United States forward in time by two years to visually correlate the price of gasoline with the recorded official U.S. unemployment rate for each month since January 1976 (or actually, since January 1978):

U.S. Unemployment Rate and Two-Years-Later Real Motor Gasoline Prices, Jan 1976 to Sept 2012, with Forecast through 2013

Here, we see that the U.S. unemployment rate has been tracking pretty closely with where the two-year time lagged price of gasoline in the U.S. would put it - including the "unexpectedly" low 7.8% unemployment rate that was just reported for September 2012.

The bad news is that if that correlation between the time-lagged price of gasoline and the U.S. unemployment rate continues, the U.S. is about to see a major spike upward in its unemployment rate, corresponding to the sustained surge in gasoline prices that began at the end of 2010.

It's only a coincidence that this surge in unemployment would appear set to take place just as the U.S. government approaches its self-created "fiscal cliff", where the ongoing failure of the Obama administration to negotiate government spending reductions in good faith with the U.S. Congress threatens to push the U.S. directly into recession in early 2013!

To start getting a feel for what the real forces are behind the relationship between oil and gasoline prices and the U.S. unemployment rate, let's turn to the San Francisco branch of the U.S. Federal Reserve's Dr. Econ for an explanation:

What effects do oil prices have on the "macro" economy?

I've just explained how oil prices affect households and businesses; it is not a far leap to understand how oil prices affect the macroeconomy. Oil price increases are generally thought to increase inflation and reduce economic growth. In terms of inflation, oil prices directly affect the prices of goods made with petroleum products. As mentioned above, oil prices indirectly affect costs such as transportation, manufacturing, and heating. The increase in these costs can in turn affect the prices of a variety of goods and services, as producers may pass production costs on to consumers. The extent to which oil price increases lead to consumption price increases depends on how important oil is for the production of a given type of good or service.

Oil price increases can also stifle the growth of the economy through their effect on the supply and demand for goods other than oil. Increases in oil prices can depress the supply of other goods because they increase the costs of producing them. In economics terminology, high oil prices can shift up the supply curve for the goods and services for which oil is an input.

High oil prices also can reduce demand for other goods because they reduce wealth, as well as induce uncertainty about the future (Sill 2007). One way to analyze the effects of higher oil prices is to think about the higher prices as a tax on consumers (Fernald and Trehan 2005). The simplest example occurs in the case of imported oil. The extra payment that U.S. consumers make to foreign oil producers can now no longer be spent on other kinds of consumption goods.

Despite these effects on supply and demand, the correlation between oil price increases and economic downturns in the U.S. is not perfect. Not every sizeable oil price increase has been followed by a recession. However, five of the last seven U.S. recessions were preceded by considerable increases in oil prices (Sill 2007).

Alan A. Carruth, Mark A. Hooker and Andrew J. Oswald connect the macro-economic dots then between yesterday's oil and gasoline prices and today's unemployment rates in their 1998 paper:

Intuitively, the mechanism at work is the following. An increase in, for example, the price of oil leads to an erosion of profit margins. Firms lose money, and begin to go out of business. To restore a zero-profit equilibrium, some variable in the economy has to alter. If labor and energy are the key inputs and interest rates are largely fixed internationally, it is labor's price that must decline.

But there is only one way in which this can happen. If wages and unemployment are connected inversely by a no-shirking condition, equilibrium unemployment must rise, because only that will induce workers to accept the lower levels of pay necessitated by the fact that the owners of oil are taking a larger share of the economy’s real income.

The same kind of process follows any rise in the real rate of interest. When capital owners' returns increase, the new zero-profit equilibrium requires workers’ returns to be lower. In a world where the level of unemployment acts as a "discipline device," higher real input prices lead to lower wages and greater unemployment rates.

This effect is what Obama administration officials are after in part when they state their political objective that the price of fuel must "necessarily skyrocket", as it gives the administration a target to scapegoat (capital owners) while simultaneously increasing their client base of unemployed individuals who will become dependent upon government-provided welfare for their income.

Or maybe they're just a bunch of screwups where all this can all be chalked up to "bad luck"....


TOPICS: Business/Economy; Culture/Society; Editorial
KEYWORDS: 2012issues; bhoeconomy; layoffs; salamalmarayati

1 posted on 10/13/2012 5:39:34 AM PDT by Kaslin
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To: Kaslin

“Unemployment Set to Explode”

Only if Mitt wins.

The Hussein Heads will be emboldened by their current manipulations to pay America back once again for electing the “wrong man”.


2 posted on 10/13/2012 5:43:24 AM PDT by treetopsandroofs (Had FDR been GOP, there would have been no World Wars, just "The Great War" and "Roosevelt's Wars".)
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To: Kaslin

you dumba**es in California, you just keep voting for Democrats and you’ll WISH you had fallen into the sea.


3 posted on 10/13/2012 5:43:49 AM PDT by Ann Archy ( ABORTION...the HUMAN Sacrifice to the god of Convenience.)
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To: Kaslin
Obama is trying to keep all of the proverbial shit from hitting the fan until November 7th. On Benghazi, the economy, Fast and Furious, etc and then if he wins we'll have Hugo Chavez in office who could care less what he's accused of creating. They'll be 4 more years of golf, executive orders and vacations.
4 posted on 10/13/2012 5:47:36 AM PDT by MacMattico
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To: Kaslin

I’m skeptical about this correlation. First of all, if you look closely at the graph it doesn’t look all that correlated. Secondly, there are so many factors involved in unemployment that comparing it to any single other variable has to introduce the chance of a certain amount of coincidence in any correlation that you do think you see.

Bottom line: kill Obamacare and watch employers start hiring again, regardless of the price of gas.


5 posted on 10/13/2012 5:48:33 AM PDT by samtheman (Obama. Mugabe. Chavez. (Obamugavez))
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To: Kaslin

I’m not skeptical. Cheap energy has been the underlying factor in our economic booms for the past 200 yaers. It’s not different this time. Cheap energy is a psychological gift that allows us to make spending decisions.


6 posted on 10/13/2012 6:39:17 AM PDT by cicero2k
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To: Kaslin

I’m not skeptical. Cheap energy has been the underlying factor in our economic booms for the past 200 yaers. It’s not different this time. Cheap energy is a psychological gift that allows us to make spending decisions.


7 posted on 10/13/2012 6:39:49 AM PDT by cicero2k
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To: samtheman
"First of all, if you look closely at the graph it doesn’t look all that correlated"

huh? which graph are you looking at? This is an incredible correlation

8 posted on 10/13/2012 6:41:13 AM PDT by Mr. K ("The only thing the World would hate more than the USA in charge is the USA NOT in charge")
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To: cicero2k

Exactly right. Peak oil was misnamed. It should have been titled peak CHEAP oil ... ditto any other form of energy you care to name. If it is not cheap to capture, it’s going to be a problem for our economy as currently structured.


9 posted on 10/13/2012 6:46:55 AM PDT by Lorianne (fedgov, taxporkmoney)
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To: Kaslin

A surge in fossil fuel prices also encourages development of marginal recovery projects. Low interest rates, shale recovery, and high gasoline prices will combine to boost spending and employment to take advantage of the spread between oil recovery costs (shale) and the high price for refined products like gasoline. Money spent on gasoline instead of whatever does not disappear. Why is it bad to spend money at the Chevron station instead of Safeway? Economic growth is about finding something relatively worthless, processing it, and selling it in a useful form.


10 posted on 10/13/2012 6:50:57 AM PDT by sefarkas (Why vote Democrat Lite?)
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To: All

They just need to keep jimmying the numbers until December when it will no longer matter.


11 posted on 10/13/2012 6:53:23 AM PDT by newnhdad (Where will you be during the Election Riots of 2012/2013?)
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To: Mr. K

First, they do not tell you the source of gasoline price data. National average? Who pays the national average? Employment is also quite regional in America. Even with the two year shift in the plot, the correlation is hardly perfect. Note that correlation is not cause. GDP is a function of many variables, lagged or not. It is difficult to represent the largest economy on Earth with a two dimensional graph/model.


12 posted on 10/13/2012 7:02:31 AM PDT by sefarkas (Why vote Democrat Lite?)
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To: Ann Archy
you dumba**es in California, you just keep voting for Democrats and you’ll WISH you had fallen into the sea.

I am a "You" and I do live in California, has never voted for a demorat nor do I wish to fall into the sea, but as to a "dumba**, I am not.

Were you aware that Free Republic originates in California started by your termination, dumba**es or are you simply too much of a "smarta**" to know this.

13 posted on 10/13/2012 7:08:46 AM PDT by Two-Bits (Failure to know history is sadly a way to repeat some of the most evil ever done.)
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To: newnhdad
Oh, should Romney win, the unempolyment numbers will be in the news again come January. And they will be the actual numbers also. And there will be a member of the propganda ministry ,a/k/a the mainstream media , staking out every gas pump railing about the high gas prices are all Romney's fault.

Since they found this stuff worked on President Bush, expect a double dose daily for four years daily once Romney is sworn in.

14 posted on 10/13/2012 7:11:59 AM PDT by sport
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To: sefarkas
Why is it bad to spend money at the Chevron station instead of Safeway?

Uh...because high fuel costs drive the prices up at Safeway too?

15 posted on 10/13/2012 7:13:00 AM PDT by Right Brother
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NObama Countdown Clock

NObama Countdown Clock

16 posted on 10/13/2012 7:13:06 AM PDT by SunkenCiv (https://secure.freerepublic.com/donate/)
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To: AdmSmith; AnonymousConservative; Berosus; bigheadfred; Bockscar; ColdOne; Convert from ECUSA; ...

Thanks Kaslin.


17 posted on 10/13/2012 7:13:09 AM PDT by SunkenCiv (https://secure.freerepublic.com/donate/)
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To: Ann Archy
you dumba**es in California, you just keep voting for Democrats and you’ll WISH you had fallen into the sea.

Wow. I couldn't have said that better myself!

Now, can we do something about the moron's in Illinois that keep voting Democrat? I'm for shipping them to California or better yet, just cutting Chicago off from the rest of the state and letting it sink into the middle of lake Michigan.

18 posted on 10/13/2012 7:37:54 AM PDT by usconservative (When The Ballot Box No Longer Counts, The Ammunition Box Does. (What's In Your Ammo Box?))
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To: Two-Bits

Unless you voted DEMOCRAT it didn;t apply to you, *******....OMG!!


19 posted on 10/13/2012 9:56:18 AM PDT by Ann Archy ( ABORTION...the HUMAN Sacrifice to the god of Convenience.)
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To: Kaslin

.. which just clocked in at its lowest level since early 2009



<gasping>




20 posted on 10/13/2012 9:58:58 AM PDT by tomkat
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To: Ann Archy
you dumba**es in California, you just keep voting for Democrats and you’ll WISH you had fallen into the sea.

Bless your heart. For someone who wrote previously in another thread, a statement that should be entered in the Freepers' Hall of Fame, I am surprised you did not "comprehend" your proclamation in which I as a proud Californian, responded to.

Unless you voted DEMOCRAT it didn;t apply to you, *******....OMG!!

Where in your original statement does it state for those that just vote democrat? I read "you dumba**es in California". I guess I should have read what you meant not what you wrote.

Get a grip, you received some deserved criticism. If you recall, I also posted a compliment to you on a previous post you wrote. Not a big deal. You've been a freeper long enough to know not to take it personally. A simple apology would have been thoughtful to all of us California Freepers but instead you throw another insult. OMG Life goes on. I'm not going to lose any sleep over this neither should you.

21 posted on 10/13/2012 11:12:45 AM PDT by Two-Bits (Failure to know history is sadly a way to repeat some of the most evil ever done.)
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To: Kaslin

Considering the States have been SLOW to accept new unemployment insurance claims, I suspect the day after the election those claims will magically get processed and the first time unemployment insurance claims will jump several million.


22 posted on 10/13/2012 11:16:54 AM PDT by CodeToad (Padme: "So this is how liberty dies... with thunderous applause.")
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To: Two-Bits

You have proven yourself to be what you are. Thanks....couldn’t have said it better myself.


23 posted on 10/13/2012 12:24:59 PM PDT by Ann Archy ( ABORTION...the HUMAN Sacrifice to the god of Convenience.)
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To: Ann Archy
You have proven yourself to be what you are. Thanks....couldn’t have said it better myself.

Lets just leave it that you had the last word but whatever you do, don't congratulate yourself too much. You're not that good.

24 posted on 10/13/2012 5:15:33 PM PDT by Two-Bits (Failure to know history is sadly a way to repeat some of the most evil ever done.)
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To: Right Brother

Money spent at Safeway, money spent by Safeway, money spent at the Chevron station all local businesses. Not all costs are passed to the customer. Price is a matter of supply and demand. Cost of production — or in this case — cost to put it on the shelves at Safeway is a factor to manage. People will not pay more for a product than it is worth to them no matter the cost to the business supplying it. Same thing goes for gasoline. It must be worth 4.35 or whatever per gallon because someone is buying gasoline at that price.


25 posted on 10/13/2012 7:32:22 PM PDT by sefarkas (Why vote Democrat Lite?)
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To: sport
the unempolyment numbers will be in the news again come January

Phrases scheduled to make a MSM comeback in 2013:

homeless problem

recovery for Wall $treet but not Main Street

McJobs

26 posted on 10/13/2012 7:35:20 PM PDT by nascarnation (Defeat Baraq 2012. Deport Baraq 2013)
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