Hello. Today we look at the OPEC impasse, how some Americans may lose benefits as trade assistance legislation ends and how millions of graduates hitting China’s labor market will keep a lid on inflation.
Testing Times
The breakdown of talks to boost crude oil production among OPEC members and their allies has introduced a new wrinkle into what’s already a challenging environment for economic forecasters.
Without the prospect of a near-term pickup in supply, crude oil prices aren’t expected to retreat meaningfully from their recent seven-year highs. U.S. shale producers aren’t likely to help either, given their scars from over-investment that caused more than $300 billion of losses in the last decade.
``They’ve got their hands tied behind their back a bit – either by their bankers or by their investors, who are not interested in hell-for-leather growth. They’re interested in dividends and very considered levels of production growth,’’ says Fiona Boal, head of commodities at S&P Dow Jones Indices LLC.
For the U.S. economy, that means no investment bump but all the more pressure on consumer prices as the cost of gasoline and other crude derivatives reflect the supply concerns.
Maeva Cousin and Ziad Daoud of Bloomberg Economics conclude that, for the U.S. and Europe, the hit to GDP “is small in the context of the very strong growth expected as they emerge from the Covid crisis.”
“The effect on inflation would be a lot more pronounced,” sending inflation higher in coming months before an eventual uptick in production in 2022 depresses price gains next year, the duo wrote Tuesday.
The Rise and Fall of Oil Price Pressures
The biggest danger is if this latest bump up in costs — alongside escalating housing and food prices, along with those for homes — prompts households to conclude that we’re now in a new inflationary era, making it harder for central banks to hold off on withdrawing stimulus.
Recent economic history suggests little such risk. The U.S.-China trade war, during which American tariffs on Chinese imports soared to an average of over 19% from little more than 3%, had no noticeable lasting impact on U.S. inflation.
Monthly consumer price index readings averaged 1.8% during 2019, less than the 2.1% recorded in 2017, before the tariff hikes.
Goldman Sachs Group Inc. economists discounted inflationary fears in a July 5 note:
“The prices of food and gas are particularly salient for many households and do have an outsized impact on short-run inflation expectations. But crucially, unlike in the 1970s, in recent decades even extreme fluctuations in commodity prices have had only small effects on longer-term inflation expectations, and we expect this to remain the case through the current commodity boom.”
The Economic Scene
President Joe Biden’s pledge to refrain from pursuing new trade deals is leaving a key training and assistance program for workers without a clear path for renewal.
Biden on July 1 officially lost Trade Promotion Authority -- the fast-track deal-making ability Congress delegates to a president -- after he didn’t ask for its renewal. TPA expiration coincided with the end of enhanced Trade Adjustment Assistance -- a program renewed along with the fast-track authority six years ago.
TAA provides aid for Americans who lose their jobs or whose hours and wages are cut due to competition from imports. An estimated 48,000 workers, primarily in service industries, will lose eligibility for benefits over the next year, according to the Department of Labor.
Today’s Must Reads
- Coming up | The record of the Federal Reserve’s last meeting, which surprised investors with a hawkish pivot, will be scrutinized today for any hints on when the central bank will pare back its stimulus.
- Europe upbeat | Officials markedly raised their outlook for the euro-area economy and said there’s a higher risk of inflation taking hold as loosening virus restrictions allow demand to snap back.
- More help | Japanese Prime Minister Yoshihide Suga is likely to unveil another economic stimulus package worth at least $180 billion within the next few months, according to a Bloomberg survey.
- Desperate times | Vietnam is going to extraordinary lengths to protect its reputation as a vital cog in the tech supply chain, with workers sleeping on factory floors to curb virus disruptions.
- Tax tussle | The U.S. is pressing Europe to reconsider plans for a new digital tax across the bloc in a dispute that threatens to undermine progress made toward a global corporate-tax agreement.
- Peter Coy | It’s conventional wisdom that labor’s share of the U.S. national income has plummeted. But by carefully accounting for stock-based compensation, three economists have found that the decline is smaller than is commonly assumed.
Need-to-Know Research
China’s long-term inflation outlook is getting some help from the surging number of graduates in the economy, according to HSBC Holdings. The country will have more than 50 million new university graduates over the next five years, boosting the size of its workforce with tertiary education by 23%, economists led by Qu Hongbin said in a report.
The estimates are based on official forecasts that top 9 million university graduates this year and 10 million in 2022. Since growth in salaries for new graduates has lagged productivity, the massive supply of skilled labor will keep wage inflation in check, the economists said.
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What's Happening in the World Economy: The fight over oil is a new economic risk - Bloomberg
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