|
|
|
ONLINE FEATURES
Book Reviews
BW Video
Columnists
Interactive Gallery
Newsletters
Past Covers
Philanthropy
Podcasts
Special Reports
BLOGS
Auto Beat
Bangalore Tigers
Blogspotting
Brand New Day
Byte of the Apple
Economics Unbound
Eye on Asia
Fine On Media
Green Biz
Hot Property
Investing Insights
Management IQ
NEXT: Innovation
NussbaumOnDesign
Tech Beat
Working Parents
TECHNOLOGY
J.D. Power Ratings
Product Reviews
Tech Stats
Wildstrom: Tech Maven
AUTOS
Home Page
Auto Reviews
Classic Cars
Car Care & Safety
Hybrids
INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads |  |
MARCH 21, 2005
U.S.: Job Creation Isn't A Problem, But Oil Might Be Gas has hit $2 a gallon -- and the summer driving season hasn't even begun For anyone who still felt a little uneasy about the health of the U.S. economy in early 2005, the government's report on the February job markets, which showed companies added 262,000 new workers last month, was the perfect elixir. The surprisingly strong gain in payrolls means that demand by both consumers and businesses is on solid footing and that the economy in the first quarter may well be speeding up from the fourth quarter's 3.8% annual rate of growth. But if you absolutely must have something to worry about, keep a close eye on the potential impact of the latest surge in oil prices on households and corporations in the second quarter. Last year about this time, a sharp runup in the cost of oil and gasoline took a big bite out of consumer spending and caused many businesses to hesitate over their ordering and hiring. Some effect on U.S. growth seems likely, given that crude oil touched $55 per barrel on Mar. 9, and analysts predict it will go higher amid few signs that world demand is moderating, especially in the oil-guzzling economies of China and India. Crude prices are already some 45% higher than a year ago, and according to the U.S. Energy Information Administration, the national average for regular gasoline has already hit $2 per gallon, up from about $1.75 this time last year. And that's even before the demand surge that accompanies the spring and summer driving season. How high can gas prices get? Given the historical relationship between the quarterly averages of crude and gas, oil at $53 per barrel implies gasoline retailing at about $2.10 per gallon. If oil and gas prices follow last year's trajectory, then pump prices would hit about $2.35 at the end of May, right as U.S consumers begin their traditional driving season. If oil reaches $60 per barrel, gas prices could near $2.50. It's important to note that fuel prices will still be less than those seen during the 1980 oil shock. Gas would have to cost $3.50 a gallon today to equal the inflation-adjusted price of back then. But a higher energy tab could drag down demand and job growth. Policymakers at the Federal Reserve have taken notice. In a Mar. 8 speech, Fed Governor Ben S. Bernanke listed a jump in oil prices as one wild card in his 2005 economic outlook. JUST LOOK AT WHAT HAPPENED last year. In the first half of 2004, the rise in oil prices diverted $35 billion away from other household spending and toward energy bills. And since that money went for higher prices, not more fuel, price-adjusted consumer spending slowed sharply in the second quarter. Real outlays rose at an annual rate of just 1.6%, after surging by 4.1% in the first quarter. As demand drooped, businesses cut back on their hiring plans. Job growth averaged 223,000 in the first five months of 2004, only to slow to a 158,000 pace in the following five months.  This year, assuming oil prices don't spike to $70 or $80, the effects may be smaller. First, the shock value of $50 oil and $2 gas has lost some of its oomph, and many consumers and companies have already adjusted their budgets to accommodate costlier energy. Since last July, oil has averaged $48 per barrel and regular gasoline has averaged $1.93 per gallon. Yet consumers in the second half of 2004 managed to increase their spending by the fastest two-quarter pace in nearly five years, and businesses boosted their outlays for new equipment at the fastest clip in more than seven years.Second, the expansion is now well into its fourth year and even more firmly established. Businesses are more confident in the future and are going ahead with capital spending projects and hiring plans. Households are also more upbeat as job prospects brighten, and incomes are growing a bit faster. THE STRONGER TONE of the labor market is the best sign around that both consumers and businesses will be up to this year's energy challenge. Companies are ready to expand their operations in terms of both capital and labor, and the additional income helps the household sector cope with costlier fuels. In addition, the February jobs report confirms the message from other recent data on retail sales, factory orders, and business activity surveys: The economy retains a good head of steam in early 2005. Moreover, several labor-market indicators, especially the recent lurch downward in weekly unemployment claims, suggest another sizable advance in March payrolls should not be a surprise. To be sure, some of last month's job jump reflected a bounceback from a modest January increase of only 132,000 jobs, a gain that was depressed for weather-related reasons. In particular, construction payrolls rebounded with a gain of 30,000, after no increase in January. Manufacturing jobs rose by 20,000, exactly reversing January's loss. And retailing posted a jump of 30,000 slots after a slim January gain. Altogether, January and February gains averaged 197,000 per month, a shade faster than the 190,000 per month average during the fourth quarter. BEAR IN MIND THAT while energy is a hefty cost for many businesses, labor is still the biggest expense. And although hiring has picked up over the past year, companies appear to be managing that added cost with ease. Profit margins remain high, and expectations of earnings growth early this year may well be too low. That's true even though productivity growth has slowed sharply during the past year, a trend that is putting upward pressure on unit labor costs. Output per hour worked in the fourth quarter grew at an annual rate of 2.1% from the third quarter, a sizable upward revision from the originally reported gain of 0.8%. But over the course of the year, productivity growth slowed to 2.8%, down from 5.5% during 2003. Because hourly wages and benefits continued to grow a bit more than 4% in 2004, the productivity slowdown means that unit labor costs ended the year by growing 1.4%, the fastest pace in more than three years. However, prices rose an even faster 2.2%, suggesting profit margins continued to expand from their year-ago levels.  For 2005 the latest data show companies are still keeping a step ahead of rising costs. Pricing power appears to have picked up further in the first quarter. And hourly wages for production workers did not rise at all in February, indicating that unit labor costs are probably not accelerating in the first quarter. Fat margins will help businesses to absorb both rising labor costs and higher energy costs. The upshot: Profits are likely to come in much stronger in the first half of 2005 than analysts now expect, especially in the first quarter, given that analysts are currently looking for an advance of only about 7% from a year ago.As with so much other recent data, the February employment report carried with it a positive surprise about the U.S. economy. Indeed, this expansion looks to have enough momentum that, barring further unexpected surges, even lofty oil prices shouldn't be able to knock it down.  By James C. Cooper & Kathleen Madigan
BW MALL
SPONSORED LINKS
Get BusinessWeek directly on your desktop with our RSS feeds.
Buy a link now! Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
 Copyright 2005, by The McGraw-Hill Companies Inc. All rights reserved.Terms of Use | Privacy Notice |
Printer-Friendly Version
