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):
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"....
“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”.
you dumba**es in California, you just keep voting for Democrats and you’ll WISH you had fallen into the sea.
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.
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.
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.
huh? which graph are you looking at? This is an incredible correlation
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.
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.
They just need to keep jimmying the numbers until December when it will no longer matter.
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.
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.
Since they found this stuff worked on President Bush, expect a double dose daily for four years daily once Romney is sworn in.
Uh...because high fuel costs drive the prices up at Safeway too?
NObama Countdown Clock
Thanks Kaslin.
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.
Unless you voted DEMOCRAT it didn;t apply to you, *******....OMG!!
<gasping>
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