Although the U.S. Department of Labor’s official January 2015 5.6% unemployment rate would tend to indicate the best labor force addition since before the Great Recession, peaking in March 2009, U.S. economic growth cannot absorb the total U.S. employment increase. The labor force participation rate, which measures the percentage of employees holding jobs (including full-time and part-time workers), is closing in on the low of 60% of available employees.
However, just as important is the shortage of skilled workers and technicians needed for the implementation of the technological breakthroughs that the United States is now experiencing. The growing number of such skills is partially mitigated by a quota of foreign U.S. university graduates, but not enough of the millions needed, which are establishing new deficit records every month.
In addition to this shortfall, it is estimated that an excess of increasing millions have given up looking for jobs, which is the reason why labor force participation is at its lowest since these statistics were first constituted more than 50 years ago.
It is unfortunate that the federal government is not addressing the national infrastructural development in conjunction with the private sector. This could put thousands of construction workers back on the job, in addition to the facility of roads, dams, bridges and an anticipated modern maze of pipelines to handle the increasing volume of oil and natural gas that is on tap for future accessibility.
One aspect is certain. With the Mideast, Russia and Venezuela desperately requiring additional energy revenues to balance their budgets, the current combination of OPEC overproduction to stifle U.S. fracking successes and as yet undefined geopolitical turbulence could quickly change the world’s current oil price depression.
Negative effect of U.S. dollar strength
While the current muscular strength of the U.S. dollar should be applauded as the highest regard in which global investors of all types hold the American currency, this sign of respect for U.S. economic strength imposes problems for multinationals, especially those that depend on foreign markets for a substantial component of their overall revenues and profits.
To fully understand the ongoing growth of dollar strength, the following points are noted as major factors:
1.A substantial majority of worldwide transactions of all types are consummated in dollars, which adds to the global volume of greenbacks used.
2.Since the World Bank’s revised 2015 forecast has limited its upward revision for this year to the U.S. and India, the growing majority of investment dollars from financial institutions and sovereign wealth funds are focused on those two nations. What is particularly remarkable is the popular 10-year note of the Treasury debt yield curve (from six months to 30 years) recently hit the lowest interest rate in years. This is due to America’s reputation for safety, security and regular interest payments, as well as prompt return of principal.
Only Germany’s treasury debt, which is actually charging negative interest rates, and Japan’s yen match the respect that U.S. currency enjoys.
3.Unfortunately, the dollar’s incomparable strength has imposed a negative effect on U.S.-bound travel and a growing segment of exports due to the purchasing power parity in dollars. This is required by commodity purchases such as oil, copper and other U.S. outbound commodities based on dollar payments. Also, with the inventory oil glut that has been amassed, the growing value of the dollar has contributed to the world price crisis enveloping the dynamic U.S. energy sector.
The incredibly strong dollar also is the foundation of a U.S. disinflationary environment. This comes at a time when America’s steadily improving economy, and the end of the Federal Reserve’s October quantitative easing, should have produced the early flickers of inflation.
At this point in time, however, such phenomena as the Euro crumbling and the free-floating Swiss franc on the loose would indicate a continuation of the current dollar strength. It would also affect disinflationary benefits, as well as the purchasing power parity liabilities that go with them.
When the German mark — once the near equal to the United Kingdom’s pound, the Japanese yen and the U.S. dollar — vanished, a new era emerged. Hoping to become the champion of the United States of Europe in 1999, thereby erasing the sins of the past, the euro was born to present this new European currency as an equal to other world-class exchange rates.
The only major deterrent to this burial of the mark within the Eurozone inferior currency was the United Kingdom. The wily Anglos realized that the once great British Empire (on which the sun never set) was the only real value left to London, after two destructive wars dismembered the Empire and drove the British Isles into near bankruptcy. They realized that without the global transactional attraction of the pound, little would be left of the grandeur of Buckingham Palace and the royal family.
With great flourish and the backing of most central and western European nations, the euro emanated in 1999, with a value that took $1.17 USD to equal. After almost 16 years of more downs than ups, the euro finds itself at parity with the almighty dollar. This not only telegraphs the global transactional strength of the dollar, pound and yen, but sends the message that the failure of the once mighty mark had been reduced to the only currency that, under the guise of euro, has kept the Eurozone and its financial members dangling at the edge of disintegration.
Even the crafty Swiss transmitted its power as it brought the euro to its knees, after taking the lid off 1.20 Swiss francs to the euro. This caused the Swiss franc to reduce the euro to par with the dollar for the first time since the Euro’s inception, and caused the Euro Bank to commence quantitative easing by purchasing 60 million euros a month up to an eventual trillion euros.
At this juncture, the fantasy of a United States of Europe is an idle dream, turned into a nightmare, and warrants an even bet that the German financial viability will be threatened as the euro fades into oblivion. When and where this will happen will depend on the possibility of a European recovery that doesn’t look too promising right now.
While the news of fracking contract “mothballing,” expansion cutbacks and a halt in forthcoming initiatives is becoming increasing troubling, regional banks with recent substantial loans collateralized by expanding shale oil and natural gas excavation — especially in Texas, Oklahoma and Louisiana — are increasingly concerned.
The bad news for several mid-sized regionals already has been reflected by such otherwise solid financial institutions, averaging a downward value change in share prices, even before financial fourth-quarter results have been revealed.
Such otherwise well-positioned banks as BOK Financial, Hancock Holding, Green Bancorp and MidSouth Bancorp are in the low double-digit percentage range of energy loans outstanding. But due to the growing concern with the future of fracking, what seemed to be a solid plus earlier last year has now reached a liability status.
While a 55% price drop, based on domestic and overseas crude oil prices, shocked oil industry participants and observers alike, the current price bust came so quickly as to prompt exaggeration.
Although the extremely low prices of oil and its derivatives will appear ever worse in the midst of the present storm, the severe cutback in overall production now starting to take place in fracking will spread to more traditional production. It’s my belief that this will work off the glut and shift the balance back to production shortages by the time the second quarter has ended.
In the meantime, even such artificial stimuli as the Euro Bank buying 60 million euros each month until further notice, plus increasing demand already manifesting itself in Southeast Asia, will bring the supply/demand balance back to normal, moving higher prices along with this normalization.
When looking at the longer term, hydraulic fracking will be back on track, as China and its southeast Asian neighbors, generating increased size and demand of indigenous populations, will likely return the global oil and natural gas sector to a rebounding degree of normalcy.
While it would be foolhardy to predict America’s GDP growth under these circumstances, the 2.5% to 3% expansion for 2015 still seems like a rational number to anticipate.