Could it really have been that fast? Just last week I was writing here in this space that Saudi Arabia was likely to regret its big gamble. The oil-producing giant had bet the world’s fate, seemingly, on the idea the global economy would be strong enough to withstand its crude price manipulations, a constant restraint on supply which sent prices soaring.
The government in Riyadh had clearly been taken in by the allure of the soft landing. Who could blame them? After all, practically everyone else was suckered in, too. Once Jay Powell made such a spectacle chastising the FOMC’s very own staff for having the gall to forecast a recession earlier in the year, publicly stating he never personally believed it, who would ever again challenge the soft landing consensus so strenuously championed by the Federal Reserve’s top echelon.
They’re far more focused on inflation risks and the Saudis were only too happy to try “help” with that.
But, as noted last week, that wasn’t inflation; quite the opposite. Oil shocks throughout modern history either produce or help further the cause of deflation and recession. Energy costs that burst from distinctly non-economy processes – such as supply shocks and restrictions – destroy demand and typically more than enough to send the economy into a tailspin rather than the inflationary spiral so many people have mistakenly associated with them.
As it stands right now as I type, global crude prices topped out last week, a local high made on the 27th. Over the past two days, the benchmarks are down and big.
Supply hasn’t changed, the Saudis yet to publicly state their error, reverse course and plead forgiveness. On the contrary, there is no sign anything will change in that part of the Middle East.
Even so, WTI, the main US oil price benchmark, has dropped $10, a fat decline which bodes very ill should it be maintained from here or continue.
We are being caught in a tug-of-war pitting the world’s oil exporters and suppliers on the one side attempting to keep crude up under the ironic euphemism of “price stability” against global recession on the other. Last year’s surge already pushed much of the world into one and this year’s was merely an invitation to finish the job for everyone else.
What has specifically captured the attention of NYMEX pit traders was this week’s government estimates (EIA) on the amount of gasoline supplied to the economy throughout the month of September. A proxy for how much was used, what the figures show was an economy dead in the middle of winter rather than one supposedly just lit up finishing up a summer season under a robust, recession-free economic sky.
Strictly by the numbers, gasoline demand was lower last month than September 2020.
This isn’t just about crude prices. Assuming everything really is playing out the way it appears right now, including making a guess about the energy markets which isn’t necessarily wise in the short run, the indicated price sensitivity in the gasoline supplied numbers points to far deeper problems.
We’ve observed this disappointment constantly throughout this year, beginning with the Chinese who many had fitted out as the global savior. China’s reopening from last year’s lockdowns were slated to be the big push into recovery or better (worse, from central bank positions thinking it might be “inflationary).
Instead, reopening didn’t even manage a whimper, a complete failure so complete that even before mid-year its biggest proponent at the PBOC, Yi Gang, was quietly sent packing into whatever abrupt CCP-mandated retirement might mean.
And so it has gone everywhere the global soft landing narrative has been applied. German Chancellor Olaf Scholz stated in January Germany would absolutely avoid recession in 2023. Not only was the economy already in recession when he made the claim, all signs today point to it having become a whole lot worse.
You’d think that would’ve registered somewhere among OPEC.
Everyone, mostly, acknowledged 2022 had been a dud, yet very few seem to have been able to figure out why.
As a very recent example, the World Trade Organization (WTO) just yesterday put out its estimates for trade the rest of this year and next year. Surprising to some, the group was forced to substantially cut their 2023 figures this close to the end of the year. They now predict volumes to rise just 0.8% for the entire calendar year compared to 1.7% estimated in April.
Neither of those are good numbers. Even 2022 managed something closer to 3% which was itself only slightly better than the already-pitiful 2.6% average annual increase the eurodollar-constrained world has been trying to live with since 2008 (there’s that year again).
What’s interesting here is what happened to that estimate from last year. A year ago in October 2022, the WTO thought trade volumes around the world would only expand by around 1%. In other words, in the six months between last October and this April, like a lot of mainstream organizations, the WTO raised its assessments.
Why?
After all, in March there was a hiccup in global banking (not just US regionals). Credit was being constrained. At the same time, China was being reopened which was already going badly.
Despite all those, the reason for the upgrade was…disinflation.
As price pressures diminished quite substantially from last year, it helped beleaguered businesses who were pummeled by input costs they were not able to pass along to customers. The reason they couldn’t, consumers couldn’t truly afford it no matter how many times the phrase “labor shortage” was shouted across social media. Wage growth hadn’t been able to keep up with the price imbalance.
Once consumer price gains slowed and producer costs outright declined, the “inflation” noose was loosened just enough to let in some economic oxygen. Even as China’s recovery failed, the rest of the world appeared to (at most) stabilize rather than fall straight into the abyss which was being forecasted even in the Fed’s own econometrics.
The reprieve was more than enough to allow Jay Powell his little stunt.
Those positive feelings, however, didn’t extend past May or June. Whatever bounce from disinflation, more and more the data shows a dark downside developing throughout the world over the summer months. The WTO’s ominous current downgrade now in October merely scratches the surface as weakness once again becomes more pronounced.
“World trade and output slowed abruptly in the fourth quarter of 2022 as the effects of tighter monetary policy were felt in the United States, the European Union and elsewhere, but falling energy prices and the end of Chinese pandemic restrictions raised hopes of a quick rebound. So far, these hopes have not materialized, as strained property markets have prevented a stronger recovery from taking root in China, and as inflation has remained sticky in the United States and the EU.”
“Inflation” has not “remained sticky”, quite the contrary. Even core price measures have become thoroughly disinflationary during the past few months in question. In the US, for example, the core PCE deflator for August increased by the lowest amount since November 2020.
The only real “stickiness” left at this point is thanks to the Saudis.
But they are not to blame for this global predicament, merely in helping make it much worse. Nor is it monetary policies. The problem, as always, will continue to be incomes.
Nominal income growth has completely tapered off in the US and worse in Europe. Household incomes in Japan are actually crashing. We can all wonder what it might really be in China.
Last year, nominal wages and a more complete return to work weren’t enough to keep up with price changes, but they did cushion the blow from rising costs. Once the disinflationary transition period set in, nominal incomes slowed but prices slowed more, loosening the noose and introducing the soft landing.
Contrary to soft landing expectations, however, incomes have continued to slow forcing consumers and businesses back into the rope; only this time there isn’t the nominal increases to provide some breathing room. That’s gone now.
In the US, the BEA says between the end of May and the beginning of September, nominal disposable incomes increase by a measly 0.3%; total, not per month.
Nominal.
With consumer prices still rising even at a much lower rate this year, real disposable incomes during these summer months could only be down substantially as a result. The trend in real incomes portrays the track of the global economy – down in 2022, small bounce to start 2023, then the hammer comes down after mid-year.
Little nominal income growth since May, negative in real terms, along comes the Saudis and their soft landing gamble. Should we really be surprised gasoline use fell off a cliff in September?
The question now and moving forward isn’t whether that will spread beyond filling up personal cars and trucks, but how far and wide. How many businesses are going to be taking a second look at their costs?
If private payroll processor ADP is anything to go by (admittedly, it’s not the greatest data), it was actually big business in September which did the cost cutting, amounting to 83,000 net layoffs in that category (balanced by only enough net hiring in other-sized firms to produce +89,000 total, the least in any month for this survey since 2020).
More and more it is being revealed the soft landing was, get this, a mirage of disinflation. And central banks took that to mean more inflation risks requiring them to hike rates further! Meanwhile, in Saudi Arabia they looked at the purported strength and thought they could get away with squeezing more prices from everyone else.
And now it all comes down in a mess of October.
Even though the WTO’s October outlook was produced close to the end of the year, and you’d think they’d have a good handle on how 2023 will turn out, it might instead end up those already-grim numbers were still too optimistic. The cure for high prices that were not inflation was always going to be those high prices. That’s the course the world has been on ever since the first few months of 2022.
The problem is nothing ever goes in a straight line. Disinflation was never a good sign. It simply confirmed the overall destination even if providing a modest detour along the way.
