Blame Internet for Unemployment

Coming from a macroeconomic standpoint, I ask myself what the internet has accomplished for our business world at large.  Has it navigated us to a better business world? I’d like to explain to you my notion on the internet, which is “the unemployment rate has increased over the passage of time due to the internet.”



Ever heard of middleman? That’s right, that is a word that your kids will be reading about in the history books. Let’s go back in time by about ten years. Ten years ago when you would buy a pearl necklace on 47th street in New York City you were supporting the income of about five to seven middleman. The jeweler on 47th street didn’t have a direct connection with the pearl farm in Asia, and therefore had to go through a chain of middleman. The initial link in the chain would have the connection with the pearl farmer. Then came the importer, the wholesaler etc.



However times have changed. Through the creation of the internet, which has had a direct effect on globalization, it has enabled us, the retailer to have that direct connection with the manufacturer in Asia.  With this being said we can understand why the unemployment rate has increased since the internet came around, and why our kids will be reading about middleman in history books.  We all came to the obvious realization that the closer you get the core of the product, the more profit there is for you.  Hence, cutting out the livelihood of all the middleman, directly affected the unemployment rate.



I would like to recommence my notion by suggesting that the business world is currently in middle of a transformation process of rebuilding and remodeling our business infrastructure to the new internet world.  Over the progression of time the unemployment rate will decrease. This is due to the juxtaposition in parallel between shifting our business onto the internet and time.  The middleman who lost their jobs have came to the realization that the business world has changed and shifted to an internet business world, that has proved to be very useful, lucrative and the wave of the future.  Which explains why the unemployment rate is so high right now. However it will decrease in numbers as we transition ourselves to continue on our remodeling expedition.

The Downfall of the Oil Market

During times of commodity trading, the world tends to pay very close attention to crude oil prices. The price of oil is so important because its price affects the economic ecosystem on so many different levels. When researching crude oil, one will first uncover the true sensitivity oil prices have. Oil pricing is volatile due to government policy changes, fluctuations in the global markets, and fast reactions to news cycles. When listening to basic talks over our economy’s current position, one will hear the price of oil being mentioned. For decades, the price of oil has served as a benchmark to describe the world’s economic state.

 

To better understand the oil market, one should look at the supply and demand factors. When looking at oil supply, it is almost impossible not to stumble over OPEC (Organization of the Petroleum Exporting Countries), an organization that seeks to actively manage oil production to its member countries, by setting production targets. According to their website, OPEC member countries produce about 40 percent of the world’s crude oil. However, equally important to global prices, OPEC’s oil exports represents a rough 60 percent of the total petroleum traded internationally.  OPEC’’s policies are largely affected by geopolitical developments.  Owing to this tremendous market share, OPEC’s actions can, and surely do, influence international oil prices. Historically, crude oil prices have seen increases in times when OPEC production targets are reduced. OPEC's goal is to manage production and maintain targeted price levels. However, member countries don’t always comply with the production targets set by the organization. Oil prices can be affected by member countries' unwillingness to maintain production targets. In addition, unexpected outages can reduce OPEC production. The amount of the disruption, how quickly it occurs, and the uncertainty of restoring the output has considerable influence on oil prices.

 

According to a study done by Forbes in 2014, OPEC’s controlling interest in the oil market have reached a record high 81 percent of the world’s crude oil reserve, particularly their interest in Venezuela and Saudi Arabia, which counts for close to fifty percent of the global reserves. It is for that reason that governments, oil production corporations, speculators, hedgers, investors, traders, and policy makers have always kept an interest in following every move the organization makes.

 

Now, let us take a look at oil demand. One factor in oil demand is often correlated with the global economic performance. Currently, we have something called a global economic slowdown. Recently, China, Brazil and Europe have fuelled a drop in demand. An interesting fact about oil demand is that in 2015 for the first time, the US has leveled out the amount of miles traveled in cars. This is partially due to advance substitute products that are currently being discovered.

 

Since certain countries without reserves have to import their oil, this creates a global oil market, which is susceptible to price fluctuations.  Roughly twenty years ago, the demand for oil from developing countries grew significantly. A shortage in production, plus growing tensions in the Middle East, caused oil prices to skyrocket. Eventually, the world found new sources of oil, reducing the dependents in the Middle East to Venezuela, Nigeria, Canada and Mexico. In 2014, Iran started exporting oil again and China’s economy took a nosedive, which means the global market now is able to access oil that’s cheaper than ever. One might ask if this is true, why is it that prices have not changed drastically for the average US consumer? Since oil is a key value in India’s economy, any failure to keep prices under control would result in a domestic market that would be just as volatile as the international one. Obviously, this is of benefit to no one. For this purpose, the government levies taxes to keep prices consistent. When international prices are low, the extra money is used by India’s government to pay off the country’s debt and helps for domestic expenses.

 

Taking this information, let’s try to analyze the past six months of oil prices. Firstly, in the past six months, the global demand is slowing down. One main reason for this is due to surging global supply, which has led oil prices to lower than it has been in a decade. The collapse in prices has taken a heavy toll on Asian oil companies. In a rare move, the largest state controlled oil producers of China and Malaysia have both announced they are cutting production and spending to cope with the low prices. Additionally, the global oil demand is slowing down, particularly in China. China is the second biggest oil consumer in the world. Analysts say that as China moves away from a heavy industry based economy to a more service oriented one the country’s oil demand is likely to slow down. Another factor is the recent warm weather experienced in North America and Europe, which hurts the demand for oil. These factors lead corporations to cut jobs and capital spending. Oil companies worldwide have been cutting their investments to keep their cash flow high. The Wall Street Journal quoted BP saying that they will cut four thousand jobs, while Chevron purposed cutting six to seven thousand jobs.

 

Worldwide, people are wondering, will there be a rebound? With too much oil and little demand, a price rebound may still not seem optimal just yet. Goldman Sacks predicts prices falling as low as twenty dollars per barrel before producers will be willing to cut production. Morgan Stanley says the rapid appreciation of the US dollar could possibly push oil prices down to about twenty dollars per barrel. With a fall of oil demand, let us hope this won’t decrease our GDP immensely.  

 
 

Business alerts on practically every news station incorporate the unemployment rate in the US. One might wonder why this is. To an extent, this is because it gives the country a clear picture of how strong the country’s ecosystem is working. Currently, the unemployment rate is at 5%. Let us take a deeper look at what this rate really means to the country.

 

To be clear, when the unemployment percent rate is being quoted, one cannot forget the true calculations that go into that number. There are currently 308.9 million people in America and of that, roughly 285 million people are over sixteen years of age and counted in the equation of eligible workers. However, there is a subset of this as well. Of the amount of people that are sixteen years and older, not all are necessarily employable or looking for work, going to school, retirement, army service, etc. Therefore, the government came up with an additional subset called the labor force, which counts for roughly 159 million Americans. Now, the country counts the unemployed people in the labor force (only if they want to and are willing to work), and divides them by the overall labor force, and this is how the country finds its unemployment rate.

 

There are four types of unemployment, these being frictional, structural, cyclical and seasonal. Frictional is when someone has been fired and is looking for a job. Structural is the change in demand for the type of job; for example, if the market demand changes and there are a different set of skills needed to fulfill the job. Cyclical comes about with business cycles. Businesses that are either closing or if there is simply less of a demand for their services. Lastly, seasonal is when someone’s job is only needed for a certain season, such as a lifeguard who only works in the warmer seasons.

 

Now that we have established the parameters of the count, let us take a look at the real numbers. The unemployment rate includes those that are technically looking for work, even if they are not actively pursuing it, and even if they give up looking. These people are called discouraged workers and currently count for two point one percent. Most of all, the number includes part time workers, meaning people who may be working only a few hours a week. Due to this, the unemployment number can be very misleading and the unemployment rate can seem far lower than what analysts would expect it to be.

 

In other words, for every statistic out there, one can find a different statistic that tells a slightly different story, with more nuances. The jobless rate is at 5% but the unemployment rate, juiced by 6 million part-time workers who want full time jobs, is a considerably less comfortable 9.7%. There is no question that wages are on the rise, but the major source of real income growth over the past year has been low inflation. Paychecks are not growing so fast, as much as prices have been growing a lot more slowly.

 

One might ask why the unemployment rate has gone down in this struggling economy. The simplest answer is that more people have dropped out of the labor force, while the number of unemployed people has barely changed at 7.9 million. This can be contributed to a changing economy. The world’s technological advances have left so many service industries bare from jobs, while the Internet has also cut out ‘the middle men”, due to globalization. This would further raise the question about what the current unemployment rate truly is.  

The Misleading Unemployment Rate
 

When researching and analyzing the United States’ inflation rate, one will come across the Consumer Price Index, also known as the CPI. The CPI is considered to be the benchmark guide for inflation in the United States economy. The CPI is a statistical estimate, which uses a method with a ‘basket of goods’ approach that aims to compare a consistent base of the value of products from year to year. These items are what we call ‘sample of representative’ items, similarly by statistics.

 

There are four steps to calculating the CPI.  The first step is to select a base year for the consumer price index. The PCI (per capita income) of the base year is always set to 100. Moving onto step two, we elect a basket of goods and add the prices of all the goods in your base year. For instance, if you choose 2011 as your base year and choose a gallon of milk, a sandwich and a haircut as your basket of goods, add the prices of these three goods in the year 2011. Step three, select the year for which you want to calculate the CPI and add the prices of all the goods in your basket of goods for that year. For instance, if you want to calculate CPI in 2015 using the basket of goods in the example, one would add the prices of a gallon of milk, a sandwich and a haircut in 2015. Lastly, step four, divide the price of the basket of goods in the year for which you are calculating CPI by the price of the basket of goods in the base year and multiply the result by 100 to calculate the CPI in that year. For instance, if one’s basket of goods cost $50 in 2011 and $55 in 2015, one would divide 55 by 50 and multiply the result by 100 to calculate that the CPI in 2015 is 110. This means that prices have increased 10 percent from 2011 to 2015. However, to be more exact, the CPI can be broken down into regions and seasons as well. The CPI is also used to identify places and times of inflation and deflation. 

 

Let us delve into the mechanics of the CPI further. First, let us define inflation. On a simple level, inflation is the increase in price level. As prices go up, which they do historically year after year, even the prices for the same exact product do, this reduces one’s purchasing power. What one can get for the same amount of money becomes reduced. For example, if one make a 1,000 dollars a year and goes to buy a couch for 100 dollars, then the next year one buys the same couch for 150 dollars (because prices constantly go up), one’s purchasing power has been reduced. Now, let us say that one’s wages have had an increase of 10% and now one make 1,100 dollars a year, he still is worse off because in our illustration, prices have risen by 15%. That leaves one with a 5% power loss.

 

Measuring inflation and being able to harness inflation is informative and helps us to understand our prices and output, which enables us to compare year by year. This gives us a glimpse on how the macro economy is doing. We measure price changes in a price index hence we have the CPI. 

 

The government has a true impact on inflation through their control on monetary policy.  When the Federal Reserve has low interest rates, people tend to take advantage, which leads to a greater demand for goods and services. This also pushes wages and other costs higher, because of the higher demand for workers and materials needed for a now increased production market. The Federal Reserve tries to aim for a steady 2% inflation rate but sometimes over or underestimates the effect of their actions. However, in these struggling financial times, our current inflation rate falls below the much-aspired 2%. This has become a major focus for our current Federal Reserve chairwomen, Janet Yellen. Most major research teams project the inflation rate staying below the 2% mark for many years to come, possibly for even another decade. However, in a recent speech by Janet Yellen, she expressed her and the board’s optimistic belief of reaching 2% rate by the end of the year.

 

Common factors have contributed to the low inflation not just in the US but globally in recent years. First, in the aftermath of the financial crisis and during the slow recovery from the Great Recession, global demand was to say the least, weak. Even more so, over the 2009-2011 period, one wonder for policymakers was actually not why inflation was low, but why wasn’t it even lower. More recently, inflation has been kept down by the decline in energy and other commodity prices and in the U.S., a rise in the value of the dollar, which puts downward pressure on the prices of imports into the U.S. Though, the United States had tremendous economic growth since 20111.

 

So a valid question is, where does your belief fall in regards to the future inflation rate?  Are you as optimistic as the Federal Reserve chairwomen, Janet Yellen?

Future Inflation Rate?
 

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