Are we watching the second dip arrive?

The weekly unemployment claims number is a statistic that usually means very little. The numbers bounce about week after week and the shift from the week before rarely means anything. Today's number, however, is ominous. Last week there were 474,000 new claims for unemployment. That is a rise of 43,000 from the previous week. It is also the fourth week in a row when the number was over 400,000 which is the level at which unemployment is usually rising. In other words, over the last month, it seems likely that the percentage of the work force that had jobs actually declined. When you couple this with the anemic growth rate of less than 2% in the first quarter, we may actually be seeing the start of a second dip in a double dip recession.

The big culprit in the decline in the economy seems to be the quickly increasing price of energy. Oil prices were up slightly in January and February with a major increase coming in March. That quarter saw a steep decline in economic growth. In April, oil prices rose more rapidly than they did in March, so that rise may explain the huge jump in unemployment claims. At the current elevated levels, it is hard to see the economy come roaring back in the next few months.

Of course, coupled with the high oil prices is the rise of inflation for all items related to commodities or which are imported. Both of these price rises are related to the decline in the dollar, but that is not the only cause. The so-called quantative easing and interest rate policies of the Federal Reserve has pumped funds into the economy while keeping short term rates near zero. As a result, many have borrowed dollars for next to nothing and invested them into commodities, thus driving the prices of those commodities higher. This speculative bubble could burst if there is a slow down now with the result that there will be many speculators left with major losses or worse, unable to pay back their loans. It would be a blow to the economy engendered by the policy of the Fed that could have been avoided.

It is important to point out one other thing before leaving this topic. The reason for the slowdown in the economy is not the budget cuts advocated by the Republicans. First of all, the cuts are tiny compared to the effect of the oil price rise. Total cuts agreed to in the budget deal we just under $40 billion. Little of these cuts, however, have meant that anything less has been spent by the federal government so far. Most of the cuts will come in the future or were of funds that were unlikely to have been spent in any event. On the other hand, the impact of a $25 per barrel price rise for oil means that an extra 80 billion dollars is sucked out of the US just for imported oil each year. In addition, more than that amount is taken out of the economy for domestic oil production. In terms of actual dollars to date, the oil price rise has an impact at least fifty times greater than any of the budget cuts.