The Unemployment-Demand Connection

June employment data arrived this morning, and, once again, they indicate a sluggish market.

Actual new job creation fell below expectations (which are useless these days), although it was slightly better than the really dismal figures last month.

Oil prices will remain depressed on today’s market because of employment data. The resulting question, again, is, “Why?”

The standard answer is the simplest one – with employment figures remaining flat (the same percentage was employed in June as in May), little additional hiring is taking place, and little added demand for energy is warranted.

Unfortunately, this is misleading.

It is not a question of whether a recession is approaching (though it seems this is more political campaign rhetoric than anything else). Rather, there is little reason for the pundits to expect a rise in energy usage.

Now this often becomes a self-fulfilling prophecy.

If I keep announcing that you are sick, you’ll start expecting to run a temperature.

Except, this is another example of “the-cart-before-the-horse” problem I have been discussing here for some time. Employment does not generate energy demand. It is more the other way around.

Employment Data is a Lagging Indicator

Employment is just about the worst yardstick to use in gauging economic recovery. Jobs data are universally recognized as the most lagging indicator there is. Employment levels turn positive only after a recovery is already in place.

It is a figure that improves only late in the process.

Now, to determine forward prospects for energy use, a number of other standards do a far better job. As I have mentioned before, most of the 11 leading economic indicators (the ones people turn to when trying to gauge where the economy is going) are energy sensitive. That means an upturn in energy usage will be reflected before it hits in the economy as a whole.

Unemployment? That heads the list of lagging indicators.

It tells you the barn door is open well after the horse has left. Trying to use it as a gauge of energy demand is like looking at a detailed tapestry… from the wrong side.

The impact has a built-in lag time. In today’s world, we would like to think that is 30 days. At 8:30 am EST on the first Friday of every month, the government releases its unemployment figures. We are supposed to know it’s important, given how much time TV talking heads chatter about it before and after its release.

But that is not quite the truth. Each month, we also get revised figures for the previous two months.

Why? Because this really has a one-quarter (three-month) lag time; even then the quarterly figures are revisable.

And then there is the disconnect between the government figure and the ADP Employment Report coming out a day earlier. This morning, the government figure was 80,000 jobs created, 84,000 in the private s sector. The ADP yesterday said 176,000 in the private sector. The government figure was 10,000 below the official forecast; the ADP was 71,000 higher.

Why then even bother making so much fuss about such an unreliable figure? Because in this age of expected instantaneous news, we want an immediate explanation.

Even if it turns out not to really tell us very much.

Now, we are looking at a soft second quarter any way one looks at it. Normally, the second quarter averages about 225,000 new jobs each month. This quarter, we averaged 75,000.

But it is how analysts try to translate that into energy use that bothers me.

Simply put: It does not compute.

Unless, of course, you are shorting or fronting futures contracts (depending on which way you want to push the market). This yo-yo approach to using figures is very useful if you want to manipulate the price of a commodity… say, crude oil.

There are other ways of looking at this that provide better handle on what the demand situation is really telling us. One of the snapshots I use, for example, is to compare the refinery capacity usage in the U.S. with the volume of gasoline and diesel fuel imports into the country.

I do this after the Energy Information Administration (EIA) releases its weekly inventory report. That usually come out on Wednesday, although when there is a holiday (as this week), they come out a day later. Those figures give us a view of what the market looked like as of close the previous Friday.

A factor of one or greater in my calculation means the demand is exceeding domestic refinery output.

Last week’s result was 1.7, the highest in the last two months. Some of this was explained by refinery shutdowns for repairs, but that is something normally factored into the capacity usage anyway.

However, when this production-import ratio is compared to what the leading economic indicators are telling us (six of the 11 are now pointing up when it comes to energy usage), that is a better gauge of real market demand.

The problem is, you can’t normally get this out in a 30-second television interview.

That doesn’t stop me from trying, however.

I’ll give it another go this afternoon about 2:50 pm EST on Fox Business.