The US economy is in the middle of 35-year-long period with depressed economic conditions

A year and a half ago we presented a description of secular fall in the labor force participation rate, LFPR, measured by the Bureau of Labor Statistics. The LFPR (the portion of people in labor force) for the working age population (16 years of age and over) has been on a long-term decline since 1995. We predicted the fall down to 59% by 2025. Here we revisit this projection and find that our forecast was correct – the rate has decreased by 0.7% (from 64.4% to 62.7%).

Following the Kondratiev wave approach (Russian economist Kondratiev introduced long-period (50 to 60 years) waves in economic evolution – see Figure 1) we interpolated the observed LFPR curve by a sinus function with a period of ~70 years. We added 18 LFPR readings published since July 2013 and show the updated curve in Figure 2. New data follow the predicted curve up.  Figure 3 illustrates the past 15 years. The trough of the model function is expected in 2030 and the bottom rate in 58.5%.

The US economy is in the middle of the 35 years long period with depressed economic conditions. Any recovery can be just transient.  Do not trust good news – the US economy is still stagnating as low GDP growth rate and very low inflation prove.  

Figure 1. The Kondratiev wave

Figure 2. The actual LFPR curve (red) and that predicted by sinus function with a period of ~70 years.

Figure 3. Same as in Figure 2 for the past 15 years.

WBH Energy Files For Bankruptcy What's next?

This shale oil company is down. It was well foreseen in view of the dramatic oil price drop. And we expect oil price to fall further into 2015 and 2016 down to $20. Then many more shale oil (then natural gas) companies will follow WBH. Moreover, this is just the first step in the "falling domino" sequence. There is an industry  oriented to horizontal drilling and chemicals involved. This is the next candidate to suffer. Then many segments of financial sector, which are linked to shale and other oil companies also suffering severe problems with falling oil price,  will face "no-return" crisis similar to that during the subprime crisis. I would call the new crisis "sub-shale".  

Дума 2016

Основные вызовы для власти:

1. Значительное снижение реальных социальных выплат/пособий/пенсий электорату ЕР вследствие падения ВВП, резкого спада промышленного производства и  доходов экспорта, инфляции цен, а также отсутствия социально значимых товаров из-за санкций/контрсанкций
2. Снижение реальных зарплат в бюджетной сфере (медицина/образование/культура/наука) по тем же причинам.
3. Опережающий рост безработицы в дотационных регионах с очень высокой поддержкой ЕР
4. Рост экономического неравенства и поляризация доходов -дворцы/хижины
5. Политико-экономическое давление извне.

Monop-oil-y

Saudis initiated a number of processes, like larger discounts to oil price, which have to return the changing oil market to its long-term status. Historical oil producers (OPEC, Russia, ...) had a ten-year period of monopoly producing the highest profit for the countries with the lowermost net cost. The market was shared between the main producers. This was a good example of maximized monopoly profit. 

Shale oil is not a challenge to monopoly profit, but bears some danger for the main producers to lose their market shares at the price level of $100. The response to this challenge was very well measured. Saudis waited before the investments in expensive energy technologies, like shale, oil Canadian tar, offshore Arctic, renewable energy, etc., reached the stage of mass production with the highest debt to be paid back. The expected effect of  low oil price (we forecasted the possibility  of $22 per barrel in 2016) is complete destruction of alternative oil/energy sources. Moreover, Saudis made it clear to investors that energy projects beyond conventional oil extraction are risky for decades. European countries with costly renewable energy paid from taxes (i.e. from consumer demand) will suffer most by suppressing investments in profitable businesses. I admire Saudis. They effectively use monop-oil-y.

Russia and Brent - the history of love and fall

It is common place that the Russian economy critically depends on oil price. It this short post we present a simple forecast of the Russian real GDP per capita in 2015 as based on the link between the evolution of the Russian GDP and Brent price. We have borrowed the GDP data from the Total Economy Database (available on Briefing.com) and FRED .

Figure 1 presents the growth rates of Brent price and Russian GDP per capita since 1991.  To the Brent curve, we have added the expected oil price in 2015 - $60. This makes the growth rate in 2015 of -0.4 1/y, i.e. a 40% drop. Figure 1 demonstrates that the Russian economy is more stable than oil price. However, the influence of oil price fluctuations is clear. To illustrate the level of tradeoff between the change in Brent price and the growth of Russian economy we normalize both curves in Figure 1 to their respective (absolute) maximum values after 1995. (Before 2000, Russia passed through a ten-year period of fast recovery after the fall caused by the transition to capitalism since 1991.)  Figure 2 depicts both normalized curves. Here we see almost one-to-one correspondence between the major peaks in two curves, e.g. in 1999  (love history) and 2009 (decline and fall) .   When it comes to the largest changes, the Russian GDP per capita follows the Brent curve with a coefficient 1/6, i.e. the change of 6% in oil price is converted into a 1% change in the GDP per capita. 

Having the estimate of 40% fall in oil price in 2015 (this is a conservative estimate and some experts do not exclude $30 per barrel) one obtains a 7% fall in the Russian economy in 2015.

Figure 1. The growth rate (1/year) of Brent price and real GDP per capita in Russia. 

Figure 2. The growth rate (1/year) of Brent price and real GDP per capita in Russia normalized to their peak values after 2000. 

Germany – economic driver or vampire?

Euro was introduced (as notes and coins) in 2002. Since that time, the evolution of GDP per capita in European countries has been demonstrating distinct signs of separation between the countries within the Euro area and those which retain own currency.  Figure 1 below shows real GDP per capita (borrowed from the Total Economy Database on Briefing.com) normalized to the level observed in 2000 for several European economies. Sweden, UK, and Switzerland (dashed lines) have been growing faster than any of biggest European countries, except Germany.  We do not show smaller economies and the countries joined the Euro area later than 2002.  

Formally, Germany is the driver of the Euro area economy. But several countries outside the Euro area are doing much better than their neighbors joined the Euro area.

Might it be that Germany is not the driver of economic growth but kind of economic vampire?