March 2, 2001

Energy costs outpacing average wages CIBC brokerage outlook: Manufacturing slowdown has not dampened oil prices

Jacqueline Thorpe Financial Post The jump in energy prices is having the same effect on the U.S. economy as oil shocks in the past but this time wage increases are not keeping up, says Jeff Rubin, chief economist of CIBC World Markets.

And while natural gas suppliers are racing to rebuild depleted stocks, a surge in demand from utilities is likely to keep gas prices high. "Say what you want about the reduced energy intensity on the economy, it's looking like the economy is faring no better in this energy shock than it did in 1973-74 or 1980-81," Mr. Rubin said in a recent Webcast, updating investors on the brokerage's 2001 outlook.

"If indeed there is anything different about the economy's response to this energy shock ... it's that we're seeing the full contractionary impact of the shock well in advance of the inflationary impact."

While North American oil prices have retreated from highs of more than US$37 a barrel to about US$27, they have not retreated below US$25, despite the manufacturing recession.

Mr. Rubin added the oil price is enormously levered to global growth and any dramatic pickup could send oil prices to US$40 or higher.

He said natural gas prices have been driven higher by utility demand that is only set to rise in the next few years. Next year alone, he forecasts a 40% increase in gas-fired generating capacity.

While energy costs have been rising, real average weekly earnings have not been keeping up and are now flat for the first time since 1994, Mr. Rubin said. That differs from the 1974 shock when the energy crisis sparked a wage and inflation spiral.

"What is happening is that U.S. wage earners are simply eating the higher energy costs," he said.

At the same time, household wealth has been eroded by the sharp retreat in stock markets and jobs growth has slowed.

Despite the 50% decline in the Nasdaq, the equity market is still out of scale to the size of the economy, he said. It is about three times the 50% historical average.

Average monthly payrolls growth has slowed to about 100,000 from 300,000 two years ago. "Both of these are pointing to more subdued consumer spending," he said.

Mr. Rubin, said there is a risk U.S. growth could turn negative in the first quarter and he forecasts a flat first half that will put growth for the year at 1.6%. He expects the U.S. Federal Reserve to cut another 100 basis points off the 5.5% federal funds rate.

The U.S. slowdown will pull global growth down to 2.6% from 5.0% last year. "That 2.5% growth is for all intents and purposes a global recession, given that even numbers like 3-4% growth imply declining real per capita income in countries like China," he said.

jthorpe@nationalpost.com

http://www.nationalpost.com/financialpost/cadbusiness/story.html?f=/stories/20010302/489280.html

-- Martin Thompson (mthom1927@aol.com), March 02, 2001