Last week the government released two important economic figures, one good and one bad. Firstly the good: Productivity in Q3 2009 saw a 9.5% gain, its largest quarterly increase since 2003. If combined with Q2’s 6.9% increase, it leads to the largest six month productivity gain since 1961. And the bad news: unemployment as a total of the workforce rose above the psychologically important 10% level for the first time since 1983, clocking in at a larger than expected 10.2%.
In the last few days comments on both figures have been a dime a dozen, but speaking from our directional focus, what effect can we expect to see in the energy markets?
Firstly, we accept that with such all-encompassing figures there is an inherent lag between relationships. Thus, the high productivity figure in Q3 may not say much for unemployment rates in Q3, but once workers reach the upper limits of productivity, more workers are slowly hired under the assumption that there’s a lot of work needing to be done.
As illustrated in the chart in today’s issue of , the instantaneous correlation co-efficient between productivity and the unemployment rate is 0.253, but after one quarter it rises to 0.285, as we’d assume.
Thus, Friday’s 10.2% unemployment rate is worrying for the economy considering Q2’s 6.9% increase in productivity should have stemmed the growth in Q3’s unemployment rate, which it failed to do, and Q3’s 9.5% productivity rate hasn’t helped the first month of Q4 either. This could be a fundamental shift in the relationship, but more importantly does this mean weaker energy prices in the short term?
Not quite.
The correlation between crude oil prices and the unemployment rate is slightly positive in the short term, and largely positive five or six quarters later. We saw this in 1999-2001, when unemployment dropped for four consecutive quarters between Q4 ‘99 to Q3 ’00, from 4.06% to 3.9% before rising sharply to 5.7%. Six quarters later, crude oil prices dropped for four consecutive quarters from 26.29 to 19.84 before rising sharply to 31.2.
More recently, unemployment started rising in Q1 2007, and crude oil prices started rising again six quarters later in Q3 2008. Possible causes for this effect could be large levels of unemployment leading to a more mobile work force, covering greater distances in search of or in service of employment.
Alternatively, unemployment leads to stimulus incentives by the government, which causes inflation and a devaluation of the dollar, leading investors to hard assets as a hedge against inflation. This is especially true in response to the recent recession.
The exact causes may be too wide to pinpoint, and of course, large amounts of variation exist in crude oil prices, right down to the intraday level. But taking a long term view, the last several quarters of rising unemployment imply several quarters more of strength in the crude oil contract.
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Stephen Schork is the Editor of, and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.