Friday March 7, 2014
A welcome 175,000 jobs were created in February. However, this is despite the loss of -16,000 jobs in information technology. This sector is a major driver of American competitiveness. For more, see Silicon Valley.
This was much better than the 113,000 jobs created in January, and the 75,000 jobs created in December. However, it's a little disappointing after the 274,000 jobs added in November and the 237,000 jobs in October. Slightly more jobs were added than the 150,000 minimum needed for healthy economic growth.
The strength was due to small gains in nearly every sector. Hotels and restaurants added 25,000 jobs, health care gained 14,700 jobs, and wholesale trade grew by 14,800 jobs. Manufacturing added just 6,000 jobs. Construction only added 15,000 jobs, after adding a whopping 50,000 in January. .
Surprisingly, government added 13,000 jobs, after losing 16,000 in January and 2,000 in December. These numbers were also revised up, no doubt taking into account the positive impact from the end of sequestration.
These gains more than offset several sectors that lost jobs. Retail lost an additional 4,100 jobs, as sales continued to disappoint, and this impacted transportation (-3,600).
Temporary help jobs increased by 24,400. This usually indicates that businesses are unsure about the future strength of the economy, and are hesitant to add full-time positions.
The unemployment rate remained at 6.7%, but January's rate was revised down to 6.6%. Basically, not much is changing on the unemployment front, as the labor force participation rate remained at 63%. (Source: BLS, Employment Situation Summary, March 7, 2014)
How It Affects You
The stock market was mixed after this report. Many investors think that economic data won't be clear until after the winter storms subside. However, economic growth was sluggish starting with Halloween retail sales. Expect the market correction to resume in April or May, as investors realize slow growth was not just due to the weather.
Also, many investors think the Fed will beef up its Quantitative Easing purchases if the economy falters. Even though new Fed Chair Janet Yellen is more concerned about unemployment than inflation, the Fed knows it must withdraw liquidity while times are relatively good if it's to have any dry powder ready for another recession.
Thursday March 6, 2014
Russia invaded the Crimean peninsula in the country of Ukraine last weekend. President Vladimir Putin sent 6,000 troops into the area to protect Russia's port access to the Black Sea. Although Putin said he has no intention of annexing Crimea, his troops have blockaded all military bases in the area. He's also called for a local referendum, in 10 days, as to whether Crimea wants to be annexed to Russia.
President Obama said today that the referendum violates international law, and won't be respected. He announced that assets have been frozen and U.S. visas blocked for everyone who has "impeded democracy, contributed to violence or engaged in corruption in Ukraine." In addition, the U.S. Department of Energy may lift bans on exports of natural gas to Europe. The U.S. will allow exports if Putin shuts off Russia's supplies to Europe and Ukraine. Tea Party Republicans in Congress are resisting Obama's request to offer $1 billion in loan guarantees and support loans from the International Monetary Fund.(Source: CNN)
Putin is unlikely to withdraw troops from Crimea, as it holds Russia's only warm-water port. In addition, Crimea contains natural gas reserves, which Ukraine planned to develop in two years in a partnership with U.S. companies. If Ukraine does this, Russia loses one of its largest customers. Putin's goal is to slowly absorb Crimea, keeping the rest of Ukraine in turmoil. (Source: Fox Business News, Interview with former Georgia President Saakashvili, March 4, 2014)
Putin said he took this action now to protect ethnic Russians in Crimea from an anti-Russian sentiment in Ukraine. However, those Russians were moved there by Joseph Stalin 50 years ago to strengthen the Soviet Republic's hold on the area. Putin is responding to the February 23 overthrow of Viktor Yanukovych, who was an ally. The pro-West faction of Ukraine's Parliament took over the government, setting up new elections for May 25, and installing Oleksandr Turchynov as the country's temporary leader.
The crisis occurred because Yanukovych mismanaged the budget, forcing Ukraine to ask for financial help. First, it appealed to the EU, then Russia. The political unrest occurred at this point, because those who want to be closer to the EU objected when that solution was abandoned. Russia's military strike support Yanukovych's return to Kiev and closer ties to Russia.
President Obama spoke with President Putin to discuss allowing the UN to safeguard the Russians in Crimea. If Putin doesn't remove troops, Obama wants to impose the same economic sanctions that weakened Iran. Germany is not too keen on sanctions, since Europe imports much of its natural gas and oil from Russia. Secretary Kerry also mentioned ousting Russia from the Group of Eight.
Russia is one of the emerging markets that suffered a currency meltdown earlier this year. Forex traders abandoned these markets when the Federal Reserve began tapering its Quantitative Easing program, reducing credit around the world.
Russia waged wars in the past in Chechnya in the early 2000s. He annexed Ossetia in Georgia in 2008, and the Western world didn't really intervene. He also successfully launched a cyber-attack on Estonia. However, Ukraine is larger and borders the EU directly. (CNN, Interview with Chairman of House Intelligence Committee Mike Rogers (R-Mich.)
3 Ways It Affects You
- Gas prices rise -- Oil prices initially rose $2 a barrel, but eased later this week. Further volatility will drive up gas prices over the next few weeks. Commodities traders are using this uncertainty as an excuse to boost oil prices, which they do every year at this time. Prices will drop by April.
- Stock prices drop --The invasion triggered an across-the-board sell-off on Wall Street, sending the Dow down 158 points. Stock prices recovered on Tuesday and hit new highs on Thursday. Bond prices rose, which lowered the yield on the 10-year Treasury note to 2.6%. However, the crisis isn't over yet. Until it is, expect potential further downturns next week.
- Import prices drop -- Investors fled to safe-haven assets likes gold (up $28), the U.S. dollar and Treasuries. Surprisingly, the euro is also becoming a safe-haven investment. As the dollar strengthens, it makes the prices of many imports higher. This may also slow economic growth for this quarter, as a stronger dollar makes it more expensive for U.S. exporters.
Sunday March 2, 2014
The government revised its estimate of Gross Domestic Product for the fourth quarter (October-December) of 2013. The economy only grew 2.4%, down substantially from last month's first estimate of 3.2% growth. What caused the Bureau of Economic Analysis to become more pessimistic? Personal consumption grew just 2.6%, instead of the first estimate of 3.3%.
This is in keeping with the disappointing retail sales. Most of the decrease was from revised estimates for automobiles, washing machines and other big-ticket items financed by low-interest rate loans. Spending on these durable goods only rose 2.5%, instead of the initial estimate of 5.9% in growth.
Another huge drag on growth was housing construction, which was down a whopping 8.7%. If you think that's just because of cold weather, construction grew 19.8% during the same time period in 2012.
This revised estimates is still within the 2-3% ideal growth rate. This is enough for the Fed to continue tapering its QE program. (Source: BEA, GDP Second Estimate, February 28, 2014)
How It Affects You
The economy is growing at a healthy rate, but it's slow. Consumer spending hasn't picked up as you would expect at this phase of the business cycle. That's because people aren't really feeling prosperous. Many are working at jobs that pay less than the ones they lost during the recession. Although home prices have improved, many have lost their homes and can't afford a new one soon. Those who kept their homes know the value hasn't recovered to 2006 levels.
For years, economists warned that the Americans were took on too much debt, and didn't save enough. Now we are correcting our own financial houses, and that's a good thing. However, don't expect economic growth to coming roaring back. We may continue like this for another year or so. For more, see U.S. GDP Outlook.
Friday February 28, 2014
A reader writes:
I'm a coop student working at a petrochemical company in Saudi Arabia. I've read some of your articles about oil prices. I'd like to ask you a question: If the price of gasoline is fixed from the government, this will affect any company that relies on oil products since the crude oil price is fluctuating. I'd like to hear your thought about this situation and if you have any suggested solution to it.
The demand for gasoline is fairly inelastic, which means it doesn't change a lot based on price changes. That's because the amount of gas people used is based on their commute to their job, their need for supplies, and the type of car they drive. These factors can't be changed quickly, even if prices rise dramatically.
Meanwhile, as you said, the price of oil will fluctuate, based on the actions of commodities traders. They usually bid up the price of oil each spring. They know demand for gasoline will increase as families take to the road for summer vacations. They also bid up oil prices if there is a potential interruption of oil from the Middle East or Africa due to political turmoil.
Oil prices normally make up 71% of the price of gas. If oil prices rise, and gas prices don't, at some point it's not worthwhile for refineries to buy the oil and create gasoline. This will create a shortage, which will obviously drive down demand. That will eventually drive down the price of oil. Of course, it would create great hardship, as the U.S. experienced in the 1970s with long gas lines.
What if oil prices dropped? Then refineries would reap large profits. They would buy more oil contracts at the lower price, hoping to maintain this improved margin. The lower price wouldn't last long, as increased demand for oil contracts would boost oil prices.
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