If This Is Such a Strong Economy, Why Does This Chart Look Recessionary?

March 2nd, 2012, 07:50 PM

Is the U.S. really a post-oil economy?

One way to gauge the real economy is to look at charts of the GDP, wages, household debt and the price of oil; another way is to correlate all of these on one chart. The following chart (courtesy of frequent contributor B.C.) plots these four metrics thusly: GDP/(wages/household debt)/price of oil.

What pops out of the chart is what happens when oil spikes higher or declines. In 1973, the first oil shock sent the economy off a cliff. Conversely, when oil fell to $12/barrel in the late 1990s while wages were rising strongly, the plotline peaked, reflecting a strong economy.

In 2008, oil spiked to $140/barrel in 2008, household debt reached record heights and wages began stagnating, and the economy fell into a sharp recession. When oil plummeted back to $40/barrel in early 2009, the plotline spiked up.
When oil prices and household debt are high while wages stagnate or decline, the economy sinks to recessionary levels.

Here are B.C.'s observations:

This chart utterly discredits the economics profession and those who claim that the post-industrial economy ("deindustrialization" and "financialization") is not oil-constrained and the service economy is what the rest of the world should adopt as the normative standard at $100+/barrel oil.

The current plotline is hovering just above the recessionary levels of late 2008. Does this reflect a strong economy, or one that is weak? If oil keeps climbing, what will that do to a visibly weak economy? The Bulls are convinced that the U.S. has decoupled from the rest of the world and from the price of oil. This chart makes the opposite case: the price of oil matters, especially when wages are declining and household debt is elevated.

charles hugh smith-Weblog and Essays

March 2nd, 2012, 08:30 PM

This is a good tool of reference. The so called economic recovery is nothing more than a result of central banks around the world constantly figuring out ways to inject liquidity into the system. If the Fed hadn't stepped in back in 2009, where do you think equities would be now? It'd probably be pretty ugly. Speaking of equities, this entire rally wreaks of central bank intervention. Whether it be the ECB's LTRO or the Fed's continued although not talked about much POMO. Equities are now an official central planning tool and appear to be in another bubble. For pure entertainment, I keep an eye on ES every day as it limps higher and higher with it's 5 -7 point daily range and it's endless bid. Sure, you can make a case for fundamental and technical reasons for it but a market with no pullbacks to speak of is getting juiced by something/someone. Sure there's micro retracements but as soon as there's a 10 handle, the BTFD'ippers step in with two hands and their freshly printed Bernank bucks.

The sad thing is what the central banks have now done is created a situation that will constantly require interventions because crises will continue to develop when all of this run up is artificial demand/AAPL. Couple that with the HFT's churning equities all day long higher and we've got a real comedy show. Then there's the current IPO scam's that are coming out. Case in point, Yelp's IPO today. Absolutely hilarious! The trick is, they float a whopping 10% - 12% to create a "high demand" while the current shareholders just have to sit back and watch their shares rip through the roof. "Fakebook" is about to do the same thing.

But hey, I'm doin alright.... Lol! Wasn't that an Andrew Dice Clay saying? Anyway, this will be very interesting to watch pan out as I don't think it will end well.

Cheers,
PB

If This Is Such a Strong Economy, Why Does This Chart Look Recessionary?

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If This Is Such a Strong Economy, Why Does This Chart Look Recessionary?