Uh oh: YoY gasoline usage down 5%, worst since October 2008

- by New Deal democrat

Last week I noted that weekly gasoline usage was down almost 10% YoY. Because the series can be noisy, it was suggested that the 4 week moving average might be a better guide to the trend. Well, this week's data was released yesterday, and here is the graph showing gasoline demand for the last two years:



The 4 week moving average is now off nearly 5%. In fact, the graph doesn't really do the downturn justice. By compariing the EIA gasoline demand weekly raw data, we can see that demand actually held up quite well (as in, within 1 or 2% YoY compared with 2010) through June. As gasoline prices were near $4 a gallon in April, and up about $1.50 a gallon, or +40% YoY, it made sense that consumers were cutting back.

But the decline in usage intensified in July, and now at -5% YoY is the worst since the mid-September through mid-October 2008 period when we were being told that we faced Economic Armageddon. And like that decline, this one is occurring despite an ongoing decline in gasoline prices (down about $0.50 since April).

Something's happening here, but what it is ain't exactly clear. The most obvious candidates are:

1. demand destruction. But if so, why is consumer spending, as measured by the Gallup daily survey, holding up so well?
2. energy efficiency. But have we really bought so many hybrid vehicles to make that big a difference?
3. the weather. OK, we did have a strange Nor'easter that pummeled the northern and western suburbs of the Megalopolis, but that was one day only.
4. random stuff just happens. Always a possibility, but this seems unlikely given at least three weeks in a row of awful YoY comparisons.

I don't have any single great explanation. But something is clearly going on as far as I can tell, and hopefully some other bloggers will take a serious look for which explanation is the most important.

Measuring the Oil choke collar

- by New Deal democrat

Recently I've begun measuring the impact of energy costs not just by the price of West Texas Intermediate Crude (WTIC) which closed last week just under $80 a barrel, but also by the price of gasoline at the pump. That's because there has been a unique but marked divergence between WTIC and Brent crude in the last 12 months.

Here's a graph showing WTIC (blue) and Brent (red) oil prices in barrels, compared with the price of gasoline at the pump (green, converting gallons into barrels for consistency):



Note the unusual divergence between the blue and red lines in the last year.

Now here is the same data, focusing on the last 7 years, and pricing gasoline in $ per gallon (right scale):



Now here are the peak prices this year and recent prices for Brent, WTIC, and
gas at the pump:

Brent: high $125.36 on 4/29, up 46% YoY
$114.98 on 9/16, off 9% from peak

WTIC: $112.30 4/29, up 33% YoY
$89.22 9/16, off 19% from peak

Gasoline: $3.96 on 5/9, up 34% YoY
$3.60 on 9/19, off 9% from peak

Gas at the pump has clearly been following Brent, not WTIC. Professor James Hamilton previously indicated a 50% YoY increase with the necessity of about $130 Oil to meet his criteria for an Oil shock recession. If we measure in Brent, as opposed to WTIC, we just barely missed those recession criteria.

It is important to note, however, that Professor Hamilton has advised that in his research, he has used the producer price index for crude petroleum, which averages the crudes by their importance to refiners. Further, he notes, if we go by this measure, we were still 7% off the 3-year peak at the end of 2011:Q1.

One of the first places we would expect an Oil shock to turn up is in sales of automobiles. In that regard, here are auto sales for the last 5 years:



Auto sales have indeed behaved as if there was an Oil shock induced reduction of demand beginning in May of this year. Because of the supply chain effects of the tsunami in Japan, we cannot know how much of the fall-off in demand was due to that vs. a reflection of high gasoline prices.

The decline in consumer purchases of durable goods in the last few months has been an important part of the weakening economy. With the effects of the tsunami wearing off, September auto sales reported next week will assume an added importance. Via Calculated Risk and the LA Times, for the first half of the month, sales were encouraging.

Oil Prices and the Recovery (revisited)

- by New Deal democrat

I've been writing about this topic for well over a year, and here we are again.

Reading the punditry is an excellent exercise in watching cognitive psychology at work. If you are a gold-bug like Mish, then the slowdown is about money printing. The Fed must be abolished and the gold standard re-adopted. If you are the Calafia Beach Pundit (Scott Grannis), then the slowdown is about the failure of Keynesian stimulus. To the contrary, if you are Paul Krugman, then the slowdown is about the inadequacy of the stimulus. And if you are Robert Reich, it is about failure to put spending power in the hands of ordinary Americans.

In short, the slowdown is like a Rohrshach blot onto which pre-existing worldviews are projected.

It ought to be clear that my political sympathies are with Krugman and Reich, but I'm not sure we need a particularly sophisticated explanation for the slowdown. Making use of Occam's razor, we can simply say that it is all about Oil prices. Here is a graph for the last 6 years of inflation-adjusted Oil prices where January 2010 prices = 1, where Oil analyst Steve Kopits' metric of Oil at 4% of GDP = $90 (blue). Real GDP growth is in red (*25 to make use of the same scale):



Over that time period, simply knowing the "real" price of Oil has been an excellent forecasting tool for GDP in the same or next quarter. (You may recall that Prof. James Hamilton found that his energy price shock model explained about half of the decline in the great recession).

As to other suggested contributing factors, Japan has just shifted demand back a quarter or two. If production slows now due to an availability of parts, it will make up the difference once the parts supply returns to normal.

As to Europe, if it were a real problem, we would see financial fear spiking again. To the contrary, as I pointed out last week, both the TED spread and LIBOR are comatose.

So the stop-and-go recovery comes back to a lack of a sustainable strong increase in consumer demand. Part of that is housing still being flat on its back, part of it is stagnating if not declining household wealth and near-deflation in wages. And how much consumers do have to spend in the productive economy depends very much on the wildly fluctuating price of Oil, which in turn is serving as a choke collar, cutting off the oxygen flow every time the recovery starts to run.

Thursday Oil Market Analysis

Last week I wrote the following about the oil market:

Over the last few weeks, with the exception of today, the price action has been weak. There were two strong down bars, three weaker moves higher, another strong downward bar and then a weak up bar. Today's action is the only strong bar over the last 8 trading sessions.

The overall feeling I can't shake is that with gas at $3.84/gallon on average, traders are incredibly sensitive to the effect of higher oil prices on the expansion. This is probably what led Goldman to issue its sell recommendation on commodities last week. In short, I keep thinking we already have a top built into the market caused by economic fundamentals. On that order, consider this chart from the St. Louis FRED:

Click for a larger image

Notice that over the last week, we've had one day of solid gains followed by three days of weaker price action. Additionally, prices have been contained by the 113/114 price level -- this despite the Middle East still being in pretty heavy turmoil. Also note the declining MACD and weak position of the overall MACD line, which shows a remarkable lack of momentum.


Note the remarkable lack of conviction in the overall market on the 5-minute chart. There are very few sharp rallies and prices seem to get stalled in the 113/114 area.

This week, I'm still left with the feeling that traders are sensitive to the overall price of gas. In addition, consider the fact that the oil market has not advanced due to the ongoing problems in the Middle East. And, we're starting to get word of decreased gasoline demand and a possible slowing economy in Q1.

While my feeling is not scientific, I'm still of the opinion there is not much upside room in the oil market, given gas' current price.

Harbingers of the Second Half Stall

- by New Deal democrat

Besides posting here, Bonddad and I not infrequently have phone conversations about the markets and economy (I know, you're shocked). Over the weekend, I noted that almost all of the data started to head south at precisely the same time -- late April. Commodities, stocks, bond yields (more on that below), mortgage applications, the index of leading economic indicators, YoY CPI -- all appeared to stall or began to decline at almost the exact same time.

In fact, here is a graph I posted at the time of ECRI's leading index, which had been on a tear for a year (following their gutsy and correct call that the Great Recession would bottom last summer). As of mid-April, it had slowed from white hot to red hot -- still showing better growth ahead than at any time since 1983:

And yet, 45 days later it had crashed into negative territory:


Unless we are to believe that we will have blazing growth for the next few months and then hit a wall, an index that plummets that fast in 45 days has a problem. Of course, I should qualify that by noting that the we did actually have non-census job growth in both May and June, and real income has been increasing, as has industrial production. So the coincident incidators are still going up. It is really all of the short leading indicators (I include real retail sales in that group) that seemed to simultaneiously roll over.

Because we are living in the first deflationary environment in 70 years, we have no idea how most data series perform. There is monthly data from the Roaring Twenties and the Depression Era in a few areas: commodity prices, bond yields, and money supply for example; but the rest was kept on an annual basis if it was collected at all, which is not much help for forecasting or policy analysis. Back when I looked at that data almost two years ago, I did find some trustworthy indicators, but they were frequently coincident or just slightly leading (mainly money supply). I also found comparing YoY commodity vs. consumer changes in prices of some help.

In any event, here are the series I found that rolled over before April, and so are worthy of watching more.

1. The Shanghai stock index.

As Bonddad reiterated yesterday, China now unequivocally leads. It is the global locomotive -- and American consumers are the caboose. As with the US in the late 19th and early 20th Centuries, China is a vast bellows, ultimately blowing hot and cold upon the world's resources. It's stock market now appears to lead the rest. Here is the Shanghai stock index for the last 3 years compared with the S&P 500:

There is simply no question that during that time, Shanghai has been the leader. And it is not comforting that it has not turned back up.

2. Bond yield correlation with stock prices

During the disinflationary 1980s and 1990s, bond yields and stock prices moved in opposite directions. That changed beginning in 1998, and generally speaking, continues now. Bond yields and stock prices have generally moved in the same direction, signalling the pre-eminence of DEflation as a concern. During the 2003-2007 expansion, within that range they did move as mirror images, however. They resumed moving in lockstep shortly before the December 2007 downturn, before resuming mirror image movements in the latter part of 2009.

Beginning last December, the stock market and bond yields again resumed moving in the same direction:


This began at the time of the Dubai sovereign default scare, as bond traders worried (or salivated) over who would be next, and began to focus on Greece. Once again, deflation had moved to the fore. By the way, here is how the same graph looked in late 2007 and 2008:



3. Price growth exceeded wage growth

During the disinflationary/asset bubble period, consumers could either cash out appreciating assets (stocks, housing), or refinance at lower interest rates. No more. Consumers can only spend by building up savings, or if wage growth exceeds inflation. In 2009, wage growth was far in excess of deflation. That changed at the beginning of this year, as mainly due to the price of Oil, YoY inflation again exceeded YoY median wage growth:

Real spending growth in that environment can only happen by tapping savings, and after 2008, that was going to be very limited. This is a modern confirmation of the trend I noted above about commodity prices and consumer inflation from the Roaring Twenties and Great Depression era.

4. Oil prices approached 4% of GDP and 6% of consumer spending.

Back in January, I predicted a second half slowdown due to increased energy prices. It was disconcerting that they had immediately risen past $75/barrel so soon after the turnaround from the deepest global decline since the Great Depression. So long as the economy improved, it seemed sure that Oil prices would continue to increase as well, until they acted as a choke collar on growth. They indeed did so:

They just grazed the 4% threshold of GDP/6% threshold of consumer spending in April. While Oil prices themselves peaked in April along with nearly everything else, it appeared obvious in January that they would trigger a slowdown or reversal sometime this year.

5. Money supply stalled or shrank

This is another area of confirmation of indicators from the Roaring Twenties and Great Depression. After rising briskly for over a year, at the beginning of this year, real M2 began to decline and real M1 stagnated:

The M2 decline was the chief reason for the tailing off of increases in the index of Leading Economic Indicators. Recessions have typically been accompanied by real M2 growth of less than 2.5%, and real M1 declining. We have the first, which may be turning around now. The second has not occurred.

6. Housing permits and purchase mortgage applications

The MBA's index of purchase mortgage applications peaked last November just before the original expiration date of the $8000 home buying credit. Despite the secondary peak in April, it has been generally in decline since:

Similarly, housing permits peaked in December and again in March. Housing permits have been the second biggest source of the tailing off of the advance in the LEI, and most likely the MBA purchase mortgage index has been the primary source of the steep and sudden decline in ECRI's index. Housing is a classic "long" leading indicator, and on an annual basis, did lead the 1929 decline by several years, and bottom in 1933.


That's my list. These 6 items have shown that they bear further watching (and generally I do in my "Weekly Indicators" wrap-up). If anybody knows of anything else, feel free to add it to the list in Comments.

Oil Prices and the Recovery 2

- by New Deal democrat

Last week I said that I was re-evaluating my overall view of where the economy was heading for the first time in over a year. Having put some further thoughts into the matter, and having exchanged several fruitful emails with Professor James Hamilton of Econbrowser and Bill McBride a/k/a Calculated Risk, I do feel that I have a better grasp of the situation.

I do believe the economy is at something of a crossroads. In terms of reading the tea leaves, we may well have the crucial information that will determine its direction within the next several weeks.

In general, the economy is being buffetted by at least 5 more or less coincidental events: the crisis in the Euro, the ending of the home buying credit, the Oil cataclysm unfolding in the Gulf of Mexico, the withdrawal of stimulus from the states and from the long term unemployed, and the aftereffects of the run-up in the price of Oil in the last 18 months from $37 to $88 a barrel.

I've addressed the issue of the crisis in the Euro already, and my thoughts there haven't changed. Today I want to take a further look at the effects of the price of Oil on the recovery.

It has been noted by Oil analyst Steve Kopits, as shown in the graph below, that when the price of Oil causes consumption expenditures to exceed 4% of GDP, a recession has always followed:



That didn't happen now, but we came within a whisker for a few weeks in April. So I wondered if a similar situation -- of Oil approaching but not crossing 4% of GDP -- had occurred in the past. The answer is staring us in the face in the above graph: it did, and it wasn't long ago, either -- a very similar thing happened in 2006.

First off, here is a long term graph of GDP (red) and the inflation-adjusted price of Oil (blue), normalized so that the two lines cross at the 4% mark (which happened exactly at the height of the oil shock in 1990 when Saddam Hussein invaded Kuwait (essentially this shows the same information as the graph above, but in slightly different form, and updated through April 2010):



You can see the two Oil price shocks in the 1970s, and the similar shock in 2007-08. Here is a close-up of the same graph, for the last 5 years:



You can see that the price of Oil came quite close to 4% of GDP in mid-2006 before suddenly declining through November -- a very similar value, and a very similar move to what is happening now (note that since we don't yet have the CPI for May, the Oil price graph does not reflect the nearly $20 decline in the price of Oil last month.

In addition to the price of Oil, growth in "real" M1 and M2 were similar to what they are now:

The difference being that in 2006, real M1 was negative and real M2 was barely positive. This year real M2 is negative, and real M1 is positive but decliningly so since February.

Professor Hamilton has generally indicated that the effects of changes in the price of Oil show up first, after just a few (3 or 4) months, in auto purchases, and PCE's in about 6 months. These in turn have the maximum effect on GDP about 6 months later, or 12 months after the change takes place.

In that regard, here is a graph of the price of Oil (blue) and absolute real GDP (red) for the last 5 years. Note that in 2006 as the price of Oil approached the 4% of GDP mark, real GDP stalled for one quarter, literally growing at almost an exact 0% pace, before accelerating again as Oil prices fell going towards the end of the year:

Although I haven't reproduced the graph here, employment growth also nearly stalled, with several months of about 50,000 in gains just as the price of Oil hit its peak.

In other words, all else being equal, we should expect GDP to nearly stall either this quarter or next quarter in response to Oil prices being in the $80-$90 range in March and April. Should the decline in prices last for at least several more months, all else being equal we should see increase auto sales and a re-acceleration of GDP.

Of course, not everything else is equal, for the reasons stated at the outset of this post. In a day or two, I'll explain what data will be most important to me in the next couple of weeks that may tell us in which direction the economy will likely proceed.

Thursday Oil Market Round-Up

Let's tale a look at the recent sell-off. Click for a larger image.



A.) Prices formed a three day broadening pattern -- a topping/reversal pattern

B.)Prices gapped down twice after forming the top.

C.) Prices hit resistance right around the 200 day EMA

D.) Prices have continued moving lower after moving through the 200 day EMA.

In addition, consider this chart:


A.) Prices are consolidating in a triangle pattern right around the 200 day EMA.

The main issue on this chart is that prices are now below the upward sloping trendline that started earlier this year. Also note that prices are in a "lower highs" situation. Finally, prices and the EMAs are bunched together with no clear direction.


This is a great example of a pennant pattern. Notice how prices starting falling at the end of June followed by a counter-rally in July. But now prices have moved through the lower trend line and have moved through the EMAs.

Let's take a look at the fundamental picture.


Even though inventories have been decreasing, oil inventories are still above historical norms.


Gas demand has picked up leading to

higher prices.

Thursday Oil Market Round-Up

Click on all images for a larger image


On oil's weekly chart, notice that prices are still in an uptrend but they are right at crucial technical support levels. In addition, the MACD is close to giving a sell signal and prices have run into resistant from the 50 day EMA. Let's coordinate that data with the daily chart.


On the daily chart prices are below a trend line and are running into upside resistance at the 10 day EMA. Also note the shorter EMAs have crossed below the 50 day EMA. However, the MACD (which is declining) is moving into a position where it might give a sell signal.

Bottom line: there are equal weightings for the bull and bear argument right now.

Thursday Oil Market Round-Up

Click on all images for a larger image


The weekly chart is still very bullish. The MACD and RSI are still rising. Prices are still advancing and have moved through all the EMAs. The 10 and 20 week EMA are both moving higher and the shorter EMA is above the longer EMA.



On the daily chart the situation is still mostly bullish with one caveat: the MACD is about to give a sell signal. Aside from that prices are still moving higher and and currently consolidating in a bull market pennant pattern. The RSI is pegged at a high level, but has been for some time. All the EMAs are moving higher and the shorter are above the longer. Prices are using the EMAs for technical support.

Let's look at the fundamental side.

Oil stocks are high but decreasing


Gas demand is increasing an d

that is leading to an increase in gas prices.

Thursday Oil Market Round-Up

Click on all images for a larger image


The weekly chart is still very bullish.. Prices have continued to rally after a consolidation at the end of last fall's sell-off. The MACD and RSI are still very positive. The 10 and 20 week SMA are still rising and prices are still above them. In addition, prices are still moving towards the 50 week SMA; crossing same would be another bullish development.


As with the weekly chart, the daily chart is also bullish. The price/SMA alignment is the most bullish possible: prices are above the all the SMAs, all the SMAs are rising and the shorter SMAs are above the longer SMAs. Finally, both the MACD and RSI are rising as well. The only negative on the chart is the RSI has been over 70 a bit of the last few weeks and the MACD is approaching levels where it previously reversed.

Now -- let's take a look at the fundamentals


Oil supply is still above average; but



Gas supply is dropping like a stone. In addition,


Gas demand is rising, leading to

An increase in prices.

Thursday Oil Market Round-Up

Click on all images for a larger image


The weekly chart is still very bullish. Notice the MACD and RSI are still moving higher. The RSI still had room to run before it hits 70 and higher -- a level where it can stay pegged for some time. Prices are above the 10 and 20 week SMAs. In addition, those SMAs are both moving higher with the shorter above the longer.


The daily chart is also strong, although it could indicate we're nearing a topping out point. First, notice prices have been moving higher since late February. They have con consolidated twice. Also note the price/SMA relationship is the most bullish possible -- prices are above the SMAs, the shorter SMAs are above the longer SMAs and all the SMAs are rising. But also note the RSI is now above 70 and the MACD may also be nearing a topping out place.

Let's see how this plays out against the fundamental backdrop:

Crude oil stocks are still way above average


Regular prices are increasing because


Demand is inching up

Thursday Oil Market Round-Up

Click for a larger image

The weekly chart continues to show strong, bullish tendencies. The MACD and RSI are still rising. Prices continue to advance. In addition, prices are above the SMAs, the 10 week SMA is above the 20 week SMA and both are advancing.


The oil market has been advancing since mid February. Notice how prices have continually moved higher. They have formed two bull market flag patterns to consolidate gains only to return to higher price action. Also notice the incredibly bullish price/SMA alignment -- prices are above all the SMAs, the shorter SMAs are above the longer SMAs and all the SMAs are moving higher. This is a bullish chart, plain and simple.

Let's look at some of the fundamentals:

Oil stocks are still at high levels, although they have decreased over the last few weeks.

Oil demand remains steady, but

Prices are edging up.