The Unemployment numbers in the United States have remained high for 2 years and all the stimulus spending have not been able to bring it down. While the unemployment rate has always been known to economist as a trailing statistic to GDP it is still not tolerated to be this high by the American public for this long.
Looking more closely at the numbers we can see that the bottom three industries with the highest unemployment rate are construction at 20.6% of the industry is unemployed making up 12.1% of all unemployed persons, manufacturing with 10.6% of the industry and 10.9% of all unemployed, and the leisure and hospitality industry with 12.2% of the industry unemployed making up 10.7% of the total. The best performing industries are financial services, education and health care, and government jobs.
What the government of the United States needs to do is look at each of these areas and address how the numbers got there and what needs to be done. Manufacturing is the hardest sector to fixed. It is entirely based on supply and demand, the government stimulus will not directly impact this industry. A large reason for remaining stubbornly high is companies that laid off worker during the 2008 recession realized that by making a smaller workforce more productive it didn't need to have as many employees as it earlier thought. Manufacturing jobs will not be coming back in the near future. These employees need to be retooled to work in other areas or new manufacturing jobs need to be created by new technologies and products. One thing the government could do is encourage research and innovation. I would even go as far as new government investment on the scale of the "Manhattan Project" needs to happen but for a civil purpose.
Hospitality and leisure jobs will come back in time. Right now Americans are not taking vacations like they used to because of the unemployment and weak economy. In time these jobs will come back, the economy will recover and Americans will go back to taking vacations, I am not worried about this sector. The IEA recently released 60 million barrels of oil to drive prices down which is a temporary fix that might encourage a few families to take that vacation but will not make a significant improvement in my opinion.
Construction unemployment can be easily linked to the housing bubble burst. The housing market still hasn't recovered and the United States will not see new housing developments being built in the near future. The construction industry is where the government can step in and make the biggest difference. The government needs to reintroduce public works projects like those of the Great Depression. Obviously they can't go back to dam building but there are new projects to update America's infrastructure like repairing what was done last time such as roads, bridges, and water systems. Also new technologies like fiber optics and high speed rail could be funded by the government to create thousands of jobs. To pay for this the government needs to look at what it is spending today on unemployment benefits, what it could make from taxing those now employed workers, and any income the rails, toll roads, and any other income sources. As more jobs are created through infrastructure spending, manufacturing jobs should follow closely and leisure jobs just after that.
There, thanks to ideas from FDR and Eisenhower we just fixed the economy.
Wednesday, June 29, 2011
Monday, June 20, 2011
Week of June 20th:
Big news this week: New federal funds rate comes out in the United States on Wednesday. Expected to be between 0 to 0.25% change. I don't expect it to change much. The rate is already very low however the Feds might want to keep money flowing between banks to avoid another Lehman Brothers crisis where the banks stop lending to each other. It is still way to early to worry about controlling inflation so rate will not go up, this will also panic the markets. Rates should stay where there are. Friday durable goods orders and GDP numbers come out. Look for these to either fall short or surpass expectation. If either of these happen the markets should react appropriately. GDP growth is expected to be at 1.9% and I think the economy is in a faster recovery mode than 2%. The dollar is strong, Japan is rebuilding and housing starts were higher than expected.
Now stocks to watch for,
The biannual Paris Air Show took place over the weekend where Boeing (BA $74.16) preview the longest plane every to fly the 747-8. It still seats less than its rival Airbus (EAD.PA $21.44) A380 but it is more fuel efficient and today that is starting to matter more. Boeing was the clear winner at the show. It filled out new orders for the new 747 as well as orders for the brand new 787 Dreamliner, which will start flying commercially this fall. After Airbus has been stealing the market for the last 3 years it looks like Boeing will own the next few with their fuel efficient fleet. I would recommend Boeing and sell Airbus.
With the Greek Debt Crisis still not begin solved the markets are not going to be bullish this week. However for those of you in the United States, stocks and the dollar should fair better than their European counterparts. I do not have and specifics but look for American manufacturing companies that buy a lot of their raw materials overseas. The strong dollar should help them purchase more goods for the same about of money as they did last quarter. I like US Steel (X $41.07) this week on that news.
Now stocks to watch for,
The biannual Paris Air Show took place over the weekend where Boeing (BA $74.16) preview the longest plane every to fly the 747-8. It still seats less than its rival Airbus (EAD.PA $21.44) A380 but it is more fuel efficient and today that is starting to matter more. Boeing was the clear winner at the show. It filled out new orders for the new 747 as well as orders for the brand new 787 Dreamliner, which will start flying commercially this fall. After Airbus has been stealing the market for the last 3 years it looks like Boeing will own the next few with their fuel efficient fleet. I would recommend Boeing and sell Airbus.With the Greek Debt Crisis still not begin solved the markets are not going to be bullish this week. However for those of you in the United States, stocks and the dollar should fair better than their European counterparts. I do not have and specifics but look for American manufacturing companies that buy a lot of their raw materials overseas. The strong dollar should help them purchase more goods for the same about of money as they did last quarter. I like US Steel (X $41.07) this week on that news.
Friday, June 17, 2011
OPEC: Cartel Breakup?
Last week, talks between member nations of the Organization of Petroleum Exporting Countries (OPEC) were described as the worst ever as the Saudi representative commented. The group could not come together and set a target production for the future. Could a breakup of OPEC be in the future?
OPEC is a cartel no matter how much they hate being called one. They limit the production of crude oil to keep the prices high. It is well known that member countries could produce more than the allotted monthly quota OPEC gives to each member. Recently Saudi Arabia increased its production when Libya ceased production due to the ongoing conflict. The recent talks broke up because some members wanted to increase production to bring prices down while other, mostly countries without excess capacity that do not want to see prices and profits fall.
Many have argued that oil above $100 is not sustainable. I believe Saudi Arabia and other member who want to increase production understand this. Western Europe, China, the United States, and other oil importers will seek other sources of energy with prices this high. For example, ethanol, a gas substitute costs about $3.50/gallon without government subsidies. When oil prices are higher than $80 is when ethanol becomes economically sustainable. OPEC needs to maintain prices so that the importing countries do not seek new technologies that make oil obsolete. While they may bring in record profits now in the future there may be much less demand for oil.
Take this game theory for example
Assuming what they product now is 28,985/month (April 2011 total production in 1000's of barrels) and a barrel of oil's price remains constant.
Their profits will look like this
This is a very rough explanation of oil markets, there are many other factors but basically you can see it is in OPEC's best interest to keep prices where the importers don't search for alternatives.
So I believe OPEC will begin to either raise production to bring down prices or the countries that understand the game I just explained will leave the oil's allocation and begin to produce on their own. There is another game to explain cheating cartels which I will not get into but ultimately a cartel is only good until someone cheats, that is, produces more than what is agreed upon. For the cheater, record profits will be made as the price remains high due to low supple but soon others will realize the cheat has happened and also begin producing more and the cartel is no more. In this example I look to Saudi Arabia as the cheater, they have the most excess capacity and the best relations with the West. I stand by my $80 barrel by the end of summer, it might even go lower.
OPEC is a cartel no matter how much they hate being called one. They limit the production of crude oil to keep the prices high. It is well known that member countries could produce more than the allotted monthly quota OPEC gives to each member. Recently Saudi Arabia increased its production when Libya ceased production due to the ongoing conflict. The recent talks broke up because some members wanted to increase production to bring prices down while other, mostly countries without excess capacity that do not want to see prices and profits fall.
Many have argued that oil above $100 is not sustainable. I believe Saudi Arabia and other member who want to increase production understand this. Western Europe, China, the United States, and other oil importers will seek other sources of energy with prices this high. For example, ethanol, a gas substitute costs about $3.50/gallon without government subsidies. When oil prices are higher than $80 is when ethanol becomes economically sustainable. OPEC needs to maintain prices so that the importing countries do not seek new technologies that make oil obsolete. While they may bring in record profits now in the future there may be much less demand for oil.
Take this game theory for example
Assuming what they product now is 28,985/month (April 2011 total production in 1000's of barrels) and a barrel of oil's price remains constant.
| Increase Production | Keep Production | |||
| Present | 35,000 barrels/month @ $70 | 28,985 barrels/month @ $100 | ||
| Future | 35,000 barrels/month @ $60 | 28,985 barrels/month @ $40 |
Their profits will look like this
| Profits | ||||
| Present | $2.45 billion/month | $2.8985 billion/month | ||
| Future | $2.1 billion/month | $1.1594 billion/month | ||
| Total | $4.55 billion/month | $4.0589 billion/month |
This is a very rough explanation of oil markets, there are many other factors but basically you can see it is in OPEC's best interest to keep prices where the importers don't search for alternatives.
So I believe OPEC will begin to either raise production to bring down prices or the countries that understand the game I just explained will leave the oil's allocation and begin to produce on their own. There is another game to explain cheating cartels which I will not get into but ultimately a cartel is only good until someone cheats, that is, produces more than what is agreed upon. For the cheater, record profits will be made as the price remains high due to low supple but soon others will realize the cheat has happened and also begin producing more and the cartel is no more. In this example I look to Saudi Arabia as the cheater, they have the most excess capacity and the best relations with the West. I stand by my $80 barrel by the end of summer, it might even go lower.
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