Jobs Report Suggests Oil Did Fed's Work

Friday's non-farm payrolls came out at a positive 112,000 against expectations of 250,000 or so. Although it was the tenth straight month of growth, the Bush administration is still in negative territory on job creation. And the Fed's 25 basis point rate hike is looking premature. The reason is the rise in oil prices and the effect in business psychology.

Rising inflation and less than stellar job growth smells faintly of the 1970's "stagflation" which followed a quadrupling of oil prices. The global economy is nowhere near that yet, but the rudder of the world's economic ship is pointed in that direction.

Oil, and its kissing cousin natural gas, is the fundamental commodity in the developed world's economy. Nothing happens without oil burning. Farmers can't produce food without it (land is even fertilized with natural gas-based products), that found doesn't get to market without it, and no one watches TV while eating it without an oil-fired electrical generator going. A rise in oil affects everyone. The few producers of oil who benefit need to take care that their windfall doesn't tip customers' into recession -- thereby destroying future revenues.

The oil price rise put business on its guard in May and June, and business leaders don't hire people when they are in a cautious mood. The boardrooms were full of "let's see how it turns out." Now that oil prices are sliding back, there may be a return to the confidence the White House and the Fed (and this journal) want to see. But the hiccup was most certainly there.

The Fed has made it clear that inflation is its main concern and wants to slow down American economic growth. The oil price rise has done just that, and it has left business confidence wobbly. GDP growth is revised downward, job growth isn't what "experts" expected, and the question becomes, "was June a one-off thing or the start of a trend?" Mr. Greenspan believes and hopes it was the former -- it better be, since he just bet the recovery on it.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


Home