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Today's Market WrapUp 04.11.2007 Mon Tue Wed Thu Fri Puplava Archive
A New York Times article entitled, “Maybe Developing Nations Are Not Emerging but Have Emerged” (12.30.2006), presented a figure that speaks volumes of the global disparity in economic growth and prosperity. Figure 1
The figure above shows the dichotomy between current account balances as a percent of world GDP between developed and developing countries, with developing countries' current account balances as a percent of world GDP soaring while developed countries’ share are plunging to record negative rates. The left side of the figure also displays the disparity in growth with the US leading developed nations, though only slightly higher than Chile’s real GDP growth rate and well below that of China. The tables have turned dramatically since 1998 as seen in the figure, where earlier in the 1990s developing countries relied on debt to fuel their growth which led to an increase in their current account deficits. This raised the currency risk in these countries where investors grew wary of further lending as the risk of default grew with any sign of economic weakness. An example of this situation was seen with the Asian currency crisis in the latter part of the 1990s which also led to a default by Russia on some of its foreign debt. Fast forward to this decade where the US is borrowing record amounts of debt and our current account balances have ballooned southward as we have used debt to fuel our growth. Indeed, the tables have emphatically turned in just one decade. Developing nations, however, are accumulating wealth with a savings glut and are investing their savings abroad by financing our debt addiction. Developing nations are growing their wealth through several means such as taking advantage of their competitive edge in labor force with urbanization that has led to a surge in exports, and by their rich endowments in commodities at the expense of nations who lack the capacity to meet their nation’s needs, with the US becoming ever more dependent on foreign crude oil imports. Figure 2
There is more than just a shift in population towards urbanization in developing nations such as China and India, but also in education, with a dichotomy seen when comparing the US with China and India that is leading to an outsourcing of technology jobs overseas, as well as manufacturing as we continue to become a predominantly service-driven economy. Figure 3
Figure 4
Figure 5
As the three figures above illustrate, the US is increasing service employment while losing manufacturing (which has dropped off a cliff) and information technology (IT) employment through the globalization surge since the start of the decade. The loss in manufacturing and IT employment has led to the increase in employment in the current expansion to be the weakest growth seen in over three decades. Figure 6
Besides being dependent on the Middle East and our southern and northern trading partners for our energy needs, the US has become more dependent on foreign countries for science and engineering (S&E) college students. There is a clear shift in education when comparing the number of S&E college graduates from 1990/1991 to 2002/2004. In 1990/1991, the US produced more than 300,000 S&E college graduates while China and India produced less than 200,000. In just over a decade, China and India have grown their S&E graduates by 200-300% while the US has grown their S&E graduates by 20%, with both China and India surpassing the US in total S&E graduates. Figure 7
S&E employment through the 1990s rose at an annual average rate of 3.5%, more than three times as fast as the growth in overall civilian employment and greater than the number of S&E degrees conferred in the US, with the shortfall made up through importation of foreign-born scientists. The National Science Board (NSB) conducted a study in 2003 entitled, “The Science and Engineering Workforce Realizing America’s Potential,” to study the long-term trends and policies for the S&E workforce which it began in 2000. Their executive summary is provided below: Science and technology have been and will continue to be engines of US economic growth and national security. Excellence in discovery and innovation in science and engineering (S&E) derive from an ample and well-educated workforce – skilled practitioners with two- and four-year degrees and beyond, researchers and educators with advanced degrees, and precollege teachers of mathematics and science. The future strength of the US S&E workforce is imperiled by two long-term trends:
The National Science Board has examined these issues and finds that national-level action is needed to ensure our country’s capacity in S&E in an increasingly competitive and changing global labor market. The Federal Government has primary responsibility to lead the Nation in a coordinated response to meet our long-term needs for science and engineering skills in the US workforce. The figure below illustrates the decline in S&E degrees, with engineering degrees peaking in the early to mid 1980s (also the peak of the commodity bull market with the decline in engineering degrees coinciding with the bear markets in energy and precious metals), as well as a peak seen in mathematics and physical and geosciences. Figure 8
The decline in S&E degrees has led to the reliance of the US on the global S&E workforce to meet industry, government, and academia needs. According to the NSB study: In 1999, one-third of all S&E PhD-holders working in industry were born abroad. Among computer scientists, the proportion was half, and among engineers it was more than half. For the Federal Government workforce, 16 percent of PhD holders in 1999 were born abroad. Figure 9
For all degree levels from 1990 to 2000, the share of US S&E occupations filled by scientists or engineers born abroad rose from 14% to 22%, with the share rising with higher degree levels. The share in bachelor degrees rose from 11% to 17% and from 24% to 38% at the doctorate level, illustrating the decline in US S&E graduates at the same time foreign-born graduates continues to increase. However, this trend reversed after September 11th with higher refusal rates for F-1 student visas. Between 2001 and 2002, the number of F-1 student visas issued dropped by 20.1%, and counting just the period through September 14th of each fiscal year, student issued visas fell 27% in 2003 over the peak that was seen in 2001. The U.S. Department of State’s refusal rate for F-1 student visas rose from 27.6% to 35.2% since fiscal year 2001. Figure 10
The concluding remarks from the extensive study conducted by the NSB in 2003 from their study, The Science and Engineering Workforce Realizing America’s Potential (NSB 03-69), are presented below. The United States has for many years benefited from minimal competition in the global labor market for S&E personnel. As our economy and high-technology industry grew, a fortuitous set of circumstances gave our Nation the benefit of some of the best minds in the world from other countries to help us build and sustain US world leadership in science and technology. The Federal Government has played a crucial role as sponsor of science and engineering research and advanced education, by means of which many foreign scholars and professionals have been drawn to our shores to study and work and many of our own students have pursued science and engineering degrees and careers. The ready availability of outstanding science and engineering talent from other countries is no longer assured, as international competition for the science and engineering workforce grows. Threats to world peace and domestic security create additional constraints on employment of foreign nationals in the United States. Moreover, demographic data indicate that participation of US students in science and engineering studies will decline if historical trends continue in S&E degree attainment by our college-age population. At the same time, retirements of scientists and engineers currently in the workforce will accelerate over the coming years. The United States is in a long-distance race to retain its essential global advantage in S&E human resources and sustain our world leadership in science and technology. For international students and workers, attractive and competitive alternatives are emerging around the world. We must develop more fully our native talent to meet opportunities and needs of the workforce capitalizing on and expanding successful efforts undertaken throughout our society. The Federal Government must enact policies and programs that include:
The decline in S&E graduates in the U.S. resulting from a decline in US college students as well as a decline in foreign students will likely have several implications. One of the likely implications is a fall in productivity. The peak in S&E graduates had a delayed impact on productivity gains in the US through technological innovation when looking at Figure 8 and Figure 11 below. The lag in productivity was likely the result of the time it took for the surge in S&E graduates to gain experience that would later translate into productivity gains. Figure 11
A shortage in the pool of S&E professionals will increase in the future as Baby Boomer S&E professionals retire and are replaced with fewer domestic and foreign born graduates. Figure 11 above shows the correlation in population age demographics with productivity, with the future path of productivity to fall in line with a declining population of experienced (age 35-49) to relatively inexperienced (age 20-34) population. Some of the effects from a lack of S&E workers are already surfacing in various areas of the economy, principally the energy and mining sectors. Examples of this from several articles are included below: Oil Industry’s Mega-Projects Face Looming Labor Shortage Good project managers in the oil industry may be like rock stars, but they're becoming just as rare. As an aging generation of workers retires, industry experts say the resulting shortfall in skilled labor could lead to an increase in delays and problems on mega oil and gas projects. The industry suffers from an "if we can problem," said David Hobbs, an analyst at Cambridge Energy Research Associates, speaking at the consultancy's annual conference, referring to chronic delays plaguing mega-projects around the world. Hobbs, who made the rock star comment, noted that deepwater oil production is set to rise from 4 million to 11 million barrels a day by 2010, if the industry can avoid too many delays. Service costs, up 53% since 2004, are helping companies focus on sticking to timetables, he said. But industry officials faced with just that task offer a more sobering assessment. Over the next decade, a wave of retirements will strip the industry of its most skilled project managers, just as some of the most complex operations ever attempted are supposed to come on stream. The combination, they said, could very well lead to an increase in delays. At the same time, the industry's biggest growth is expected to come from once unthinkable sources. Jack, Chevron Corp.'s (CVX) recently announced successful find in the Gulf of Mexico, will involve drilling at twice the depth reached by Royal Dutch Shell PLC's (RDSB.LN) Mars platform, the height of deepwater technology 10 years ago. Canada's oil sands region is also undergoing a massive expansion, while Russia has only scratched the surface of vast reserves locked under the Siberian tundra. Even Kuwait and Saudi Arabia are looking to advanced techniques to expand on their easy-to-access reserves. "We're putting people in challenging roles on unprecedented projects," said Jack Hartung, manager of benchmarking and cost engineering at Chevron Corp. (CVX.) Hartung said it is "quite possible" that quality issues on new projects will become more common in the future. The industry is also meeting its manpower shortage through the "accelerated advancement" of professionals, which could put some engineers in charge of projects before they're ready, he said. Onslaught Of Retirements The median age at oil companies is between 48 and 52, Hartung said. Service companies are also expecting a similar onslaught of retirements in the next decade. Several deepwater projects have already had their completion dates pushed back, in some cases more than once. A design flaw pushed back the start date of BP PLC (BP)'s Thunder Horse platform in the Gulf of Mexico from 2006 to 2008, for example. The problem isn't confined to the international oil majors. Kuwait National Oil Company Chairman Farouk Al-Zanki listed skilled labor as a main obstacle for Project Kuwait, a plan to increase of production capacity from 2.7 million to 4 million barrels a day by 2020. Rising Service Costs The worldwide personnel shortage stands in contrast to rising service costs and other obstacles currently affecting the completion date of some projects, said Nigel Wright, functional head of project cost and planning with Shell Global Solutions International BV, a consultancy operated by Royal Dutch Shell PLC (RDSB.LN). Wright said he agreed that the manpower shortage could cause production problems in the future. But equipment shortages and the rising costs associated with the lack of resources are more fleeting. "Projects okayed in 2005 and 2006 are enough to keep costs up through 2009," but the industry should see some moderation after that, he said. Labor Shortage Pushes Mining Companies to Recruit and Pay MoreMs. Gogilis, a 34-year-old mother of two, was a dental assistant until last May. Now she drives a mammoth dump truck at one of Rio Tinto’s iron ore mines, hauling 230 tons of rock and dirt across the scorching Pilbara region in the outback of Australia. “They need the bodies,” she said. “And so if there’s a body, they don’t care if it’s male or female as long as it can drive the truck.” From the pits of Australia to the coal fields of Wyoming, mining companies like Rio Tinto are hunting for people to address a dire shortage of workers. A decade ago, with prices slumping, the sense of mining as a sunset industry left it with a work force with a lot of gray hair under its hardhats. But these days the industry is struggling to meet rapidly growing global demand for iron, copper and other essential commodities. Skills shortages have become a common feature of the global economy, particularly in aging countries. Nurses are scarce; engineers, too. What makes the mining industry’s shortages so severe is that the commodities boom caught it more or less by surprise. “The industry was suffering a depression, and the best and brightest didn’t join,” said Marcus Randolph, the chief organization development officer at BHP Billiton, the world’s largest mining company. As commodity prices languished, students pursued better-paying careers elsewhere. Mining schools shrank. The average age of a production worker in mining crept up to 50. Then came the China economic boom, and India’s. The Minerals Council of Australia, in a recent report, estimated that by 2015 Australia alone would need 70,000 employees on top of the 120,000 it has now to keep up with demand. Mining recruiters say industry salaries have climbed 20 percent in the last two years. Yet mines are so short of workers that projects are being delayed as production costs rise. Even the recent slide in commodities prices has failed to dent the boom. Mining companies also offer scholarships to potential employees. Anglo American, for example, is paying to put 1,000 South Africans through universities this year. Immigration is another solution. Australia is creating new visas for temporary workers, enabling companies to recruit from countries like the Philippines. BP workers in Alaska say a labor shortage raises safety concerns Long hours are the norm at the Prudhoe Bay oil field, but veteran workers for the field operator, BP, said a labor shortage had made conditions ripe for fatigue-related accidents similar to one that killed 15 employees in the company's Texas refinery in 2005. The dearth of highly skilled technicians at well pads and oil collection centers coincided with an increase in construction and pipeline inspections after two spills at Prudhoe Bay last year. The company has failed to fill about a dozen vacancies for highly skilled technicians, despite repeated requests from its union since September, said Kris Dye, president of Local 4959 of the United Steelworkers union. Labor Shortages in the Resource Sector Some of the largest construction projects on the planet are currently underway in Fort McMurray, Alberta. Canada’s oil sands, long recognized as a “fuel of the future”, are no longer a theoretical energy source but a critical component of global energy supply. These giant accumulations of tar and sand cover an area greater than the state of Florida. The estimated reserves of these accumulations exceed 174 billion barrels of oil, second only to the oil riches of Saudi Arabia. Construction of these projects requires huge amounts of capital. Over 100 billion dollars will be invested on oil sands projects over the next 10 years… This developing demographic squeeze is going to influence resource investments and one should expect cost overruns and delays for mining, pipeline, refinery, upgrader and oil sands projects. There is a shortage of the skilled labor required to build these projects and to field experienced drill crews. The expertise required to find and develop new mineral deposits and oil and gas fields is also lacking. The commodity bull market has a bright future because it is going to be exceedingly difficult to increase commodity supplies with current manpower levels. As seen from the article excerpts above, the shortage in S&E workers is leading to rising costs for the mining and energy sectors as they have to increase the pay to these workers to attract and to keep them. With surging demand for commodities stemming from strong global growth and voracious appetites from China and India, the commodity boom is likely to continue with surging wage inflation contributing to rising costs to bring commodities to the market place. For the US to maintain its technological edge as well as advance its own energy infrastructure, policies need to be enacted to increase S&E college graduates. The NSB’s final concluding remarks in their publication, “The Science and Engineering Workforce Realizing America’s Potential (NSB 03-69),” are presented below. The Federal Government has a primary responsibility to lead the Nation in developing and implementing a coordinated, effective response to our long-term needs for science and engineering skills. US global leadership and future national prosperity and security depend on meeting this challenge. TODAY'S MARKET - Economic Reports MBA Mortgage Applications Survey – Week of 04/06/07 Mortgage demand fell 0.4% last week led by a 4.0% decline in refinance applications while purchase applications rose 2.7%. The decline in refinance activity was likely the result of rising mortgage rates as the contract rate on the 30-year FRM increased 3 basis points to 6.16% while the 1-year ARM rose 2 basis points to 5.88%.
Oil & Gas Inventories – Week of 04/06/07 Crude oil inventories rose 0.7 million barrels last week, well below expectations of a 1.5 million barrel increase. The big story was gasoline inventories, which experienced another huge drop, falling 5.5 million barrels, well above expectations calling for a 1.4 million barrel decline. Distillate inventories were essentially flat, rising 0.1 million barrels while expectations were for a 0.6 million barrel drawdown. All three energy levels are below last year’s levels, with gasoline inventories down the greatest (-4.5%) followed by crude (-2.9%) and distillates (-1.1%). Refinery activity rose to 88.4%.
As mentioned above, the big story within the report was another large consecutive decline in gasoline inventories, which have now pulled US gasoline inventories to below the average range. The decline in gasoline stocks has resulted from imbalances in supply and demand, with demand rising (and above last year’s levels), while supply is falling (falling production and flat imports).
The Markets Stocks fell today on the release of the minutes from the FOMC’s March 20/21 meeting that revealed the Fed is not ruling out an interest rate hike to curb inflationary pressures, commenting that "A persistence of inflation at recent rates could eventually have adverse consequences for economic performance." The Dow, S&P 500, and NASDAQ were all down on the day with the Dow posting nearly a triple-digit loss, falling 89.23 points to close at 12484.62, the S&P 500 lost 9.52 points to close at 1438.87, and the NASDAQ declined 18.30 points to close at 2459.31. Investors sold Treasuries today with the 10-year note yield at 4.739%, rising 1.5 basis points. The dollar index was down on the day, falling 0.06 points to close at 82.64. Advancing issues represented 31% and 33% for the NYSE and NASDAQ respectively, with up volume representing 32% and 27% of total volume on the NYSE and NASDAQ. Energy prices were mostly up on the day after release of petroleum inventories. The large drawdown in gasoline led to a 4.84% spike in refining margins (3-2-1 crack spread), with gasoline one month futures rising 1.65%, while West Texas Intermediate Crude (WTIC) rose 0.19%. The biggest energy commodity move on the day came from uranium, whose price jumped $18.00 a pound to $113/lb, up 18.95%. Precious metals were mixed with gold falling $1.05/oz to $676.85/oz (-0.15%) and silver down $0.01/oz to close at $13.86/oz (-0.07%). Base metals were mostly up with copper showing the greatest strength on the day (+1.65%) while nickel displayed the weakest performance (-2.86%).
Overseas markets were mixed up with China’s Shanghai index putting in the strongest showing, up 1.48%, while Mexico’s Bolsa index was down 0.80%. The decline in the markets was broad based as all ten of the S&P 500 sectors were down, with defensive sectors such as health care (-0.21%) and utilities (-0.47%) putting in the smallest declines and the weakest sectors on the day were telecommunications (-1.11%) and technology (-0.92%). Chris Puplava Copyright © 2007 All rights reserved.
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