Make No Mistake, the Oil Slump Is Going to Hurt the US Too

Submitted by Marin Katusa  –  Casey Research

If you only paid attention to the mainstream media, you’d be forgiven for thinking that the US is going to get away from the collapse in oil prices scot free. According to popular belief, America is even going to be a net winner from cheaper oil prices, because they will act like a tax cut for US consumers. Or so we are told.

In reality, though, many of the jobs the US energy boom has created in the last few years are now at risk, and their loss could drag the economy into a recession.

The view that cheaper oil automatically boosts US GDP is overly simplistic. It assumes that US consumers will spend the money they save at the pump on US-made goods rather than imports. And it assumes consumers won’t save some of this windfall rather than spending it.

Those are shaky enough. But the story that cheap fuel for our cars is good for us is also based on an even more dangerous assumption: that the price of oil won’t fall far enough to wipe out the US shale sector, or at least seriously impact the volume of US oil production.

The nightmare for the US oil industry is that the only way that the market mechanism can eliminate the global oil glut—without a formal agreement between OPEC, Russia, and other producers to cut production—is if the price of oil falls below the “cash cost” of production, i.e., it reaches the price at which oil companies lose money on every single barrel they produce.

If oil doesn’t sink below the cash cost of production, then we’ll have more of what we’re seeing now. US shale producers, like oil companies the world over, are only going to continue to add to the global oil glut—now running at 2-4 million barrels per day—by keeping their existing wells going full tilt.

True, oil would have to fall even further if it’s going to rebalance the oil market by bankrupting the world’s most marginal producers. But that’s what’s bound to happen if the oversupply continues. And because North American shale producers have relatively high cash costs (in the $30 range), the Saudis could very well succeed in making a big portion of US and Canadian oil production disappear, if they are determined to.

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It’s Not What You Think When They Have to Totally Reconfigure The Savings Rate

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

There is a lot to say about the latest GDP revisions, particularly as it relates to the breakdown of the measure in comparison with something besides itself. The headline was all that was needed to “confirm” the best economic growth in decades, though.

“There is a positive feedback loop going on at the moment,” Mike Jakeman, global analyst for the Economist Intelligence Unit, said in a note. “Job creation is running at the strongest rate for 15 years. More people in work means more income, which means more private spending, which means more business investment, which means more hiring.”

That last part is the trickiest, as GDP is synonymous with “national income” but is strangely crafted in how “that side” of the ledger is balanced. You would think there would be evidence of this “more income” somewhere, as though second derivatives were as good as actual results.

The jump in growth was less dramatic on an annual basis. Economic output in the third quarter climbed 2.7% from a year earlier, up from 2.6% growth in the second quarter.

In other words, the baseline comparison of Q/Q was established for this “best growth in forever” in the feverish downward revisions of Q1. That makes it all the more difficult to tell exactly what GDP is saying about the economy. A full part of the downward revisions then were due to the high degree of uncertainty (meaning no prior data upon which to statistically model) surrounding healthcare spending.

That is the primary drawback of measuring economic progress from an expenditure standpoint. GDP treats all spending as roughly equal in terms of true growth when that is decidedly not the case. Government spending is the most egregious addition to the statistic, but perhaps only one step away is insurance, as in health insurance.

The Quarterly Services Survey (QSS), released on December 10, showed 5.4% growth in spending on health care services in the third quarter of 2014 (July – September) compared with the same quarter in 2013. This is substantially higher than the 3.7% rate reported for the second quarter and the 3.9% rate experienced for all of 2013. For October 2014, total health spending, of which services is the largest component, grew an estimated 4.5% over October 2013…
“The third quarter acceleration in healthcare services spending reported in the QSS is in line with expectations, but with a delay,” said Charles Roehrig, director of the Center. “While it is too early for definitive conclusions, this may well represent the predicted ramping up in spending by the estimated 10 million individuals gaining coverage in early 2014 under the Affordable Care Act.”

Would anyone (other than a Keynesian) say that the economy is much “better” if a tax were imposed to directly finance government spending on something? Redistribution can occur without direct involvement of the Treasury Department. If millions of people have to pay double for car or home insurance next year, GDP might be positive but at the expense of something else.

The effects of this increase in estimated spending are obvious on the trajectory of Personal Consumption Expenditures (PCE). Revisions even to the monthly data series are significantly higher in direct proportion to what was “found out” in the QSS (Quarterly Services Survey). The QSS changes were really narrowed to healthcare, accounting for 69% of the increase in the PCE revisions (if you add financial services the proportion was 79%, meaning a lot of spending on two of the three segments with the lowest “multiplier” effect).

ABOOK Dec 2014 Inc Spend Real PCE

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The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

SF Fed Warns US Stock Values Will Be Cut In Half In Next Decade (Zero Hedge)
Dipping Into Auto Equity Devastates Many US Borrowers (NY Times)
First Oil, Now US Natural Gas Plunges Off The Chart (WolfStreet)
China Eases Again, Sets Non-Bank Deposit Reserve To Zero (Zero Hedge)
Russia Says Ruble Crisis Over As Reserves Dive, Inflation Climbs (Reuters)
Reuters Objectively Sees Russia’s Options as Losing or Losing Badly (Beversdorf)
Japan No A Longer Nation Of Savers, For First Time Ever (MarketWatch)
Japan’s Savings Rate Turns Negative, Wages Fall in Abe Challenge (Bloomberg)
Japan Struggles to Escape Recession as Production Drops (Bloomberg)
Greece to the Eurozone’s Rescue (Bruegel)
Is George Osborne A Closet Keynesian? (Project Syndicate)
Ukraine Peace Talks Focus on Prisoner Swap Before New Year Break (Bloomberg)
Ukraine’s Anti-Corruption Agency Could Be Led By US Citizen (TASS)
Correcting Scrooge’s Economics (Mises Inst.)
Waiting for the Sunrise (John Michael Greer)
World War I’s Christmas Truce, 100 Years Ago (Klein)
CDC Reports Potential Ebola Exposure In Atlanta Lab (WaPo)
Sierra Leone Declares Three-Day Lockdown In North To Contain Ebola (BBC)

Continue Reading: Debt Rattle Boxing Day 2014 – The Automatic Earth