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By far the biggest complaint has been the GDP has been exaggerated while inflation is understated. The consensus of minds far brighter than mine is that GDP deflator, in a nutshell does not deflate enough. As Real GDP is equal to nominal GDP minus GDP deflator ( which basically calculates how much of increase in GDP was due to price increases or inflation), decreasing the deflator has the same effect as artificially increasing the real GDP. There are many claims now that actual inflation is running at north of 7% and the US is in a recession. Some have used this as the reason why the president’s ratings are so low in spite of unemployment being at “historic lows”. However there are signs that contradict this doom scenario. Profit growth has been strong and until recently was predominantly due to sales growth and productivity increases. Very few companies have shown that they are able to raise prices at will. So what then is the truth? We (my wife Najma and I) decided to address this problem in another way. We looked at total US oil consumption. Mind you, I said total oil consumption, not just gasoline usage. “Why oil consumption?” you might ask. To paraphrase Al Pacino from “The Devil’s Advocate”, “Because oil my dear puts us in the middle of everything”. From gasoline to diesel to plastics, life in the US is intricately woven around oil. Historically oil usage increase and GDP increase have been highly correlated. Although lately that correlation has slackened ( blame it on peak oil and/or the highly manipulated government statistics), it can still be used to ascertain some basic facts. To do this we simply use 2 basic principles: 1)
Oil usage cannot increase without GDP increasing. 2)
GDP can increase with minor oil usage decrease, although modestly at
best. In a nutshell GDP should at least match increase in oil consumption but will probably trail decrease in oil consumption. So what do the stats say? http://tonto.eia.doe.gov/dnav/pet/hist/wrpupus2w.htm I looked at the 4 week averages at the end of March, April, May and June and compared them to corresponding periods last year. The change year over year was 0%, 0.56%, 3.3% and 1.12% respectively. I know these figures are volatile from week to week but a 4 month period can provide reasonable accuracy to judge a trend. Not a single 4 week period had a year on year decrease. The lowest change was in March where heating demand this year was a lower than last year. The average of the 3 recent months is around 1.65%. Interestingly this is after possible maximum fuel switching. Whichever company can switch to natural gas is doing so as on a BTU basis natural gas is currently a lot cheaper. From this data it is possible to reach only one conclusion i.e. the US economy is still growing, although the 3.5 % year on year official figure is definitely inflated. The data supplied by the government on GDP, employment and inflation may be convoluted as hell but that by itself does not mean that they are completely wrong. The EIA is also a government agency but they have absolutely no reason to overstate demand. If the FED could somehow conspire with the EIA they would do so to drastically understate demand and overstate stocks so as to bring oil prices down and allowing them to stop raising interest rates. Now that’s a good conspiracy theory for paranoid folks out there isn’t it? In the near future this method will lose its usefulness as we hit peak oil. But for now the US dollar still carries some respect and we have been able to outbid less fortunate nations to get our “non-negotiable way of life” share of oil. We are not in a recession yet but we are not far from it either.
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