Economy starting to increase paychecks
Tight labor markets and rising minimum wages are leading to real pay increases for lots of Americans.
The tightening job market was one of the hidden stories of the early stage of the recovery from the great financial crisis. Once the unemployment rate fell below 5 percent in early 2016, economists and others began recognizing what was more or less inevitable.
This has helped workers in the middle of the wage distribution, while new laws raising minimum wages are helping laborers at the bottom of the economic strata.
Let’s take a closer look at why wages are rising, and what it might mean for the broader economy.
Begin with the minimum wage. For the past 10 years, labor organizers have been advocating for a national minimum wage of $15 an hour. Although they have been unsuccessful at the national level — the federal minimum wage has been $7.25 since 2009 — they have achieved increases at the state and city level. In 2018, 18 states have (or are scheduled to) raise their minimum wages. In addition, 22 cities will similarly raise wages.
The strongest argument in favor of raising the minimum wage nationwide is that it has failed to keep up with inflation and productivity. Had it done so, minimum wages would be at $11.62 or $19.33, respectively. The strongest argument against is that the country is a collection of smaller, varied regional economies; by definition, some are much more prosperous than others. Poorer areas cannot be expected to pay the same wages of richer states and cities.
But here’s what’s interesting about areas that can justify rising minimum wages: First, there is a modest increase in wages across the lower end of the pay scale. It is more than just the minimum-wage workers seeing their pay rise; the more senior employees who were previously getting more than the minimum suddenly find themselves at parity with newer, junior employees. They often request increases to compensate for this — or switch jobs for higher pay.
Second, wage increases typically lead to a modest uptick in the local economy. Theoretically, this leads to more job gains, and a virtuous cycle. Despite forecasts of doom and rising job losses, higher minimum wages have gone hand in hand with improving conditions in cities such as Seattle, Portland and San Francisco.
In other words, whether minimum wages have increased because of legislation in your state or city is almost irrelevant in markets with little labor slack.
Currently, the national unemployment rate is 4.1 percent. You have to go back to the tail-end of the dot-com era to find a lower rate; the lowest was 3.8 percent in April 2000. This leaves employers who need to hire with two options. One is to entice employees from the competition with promises of better working conditions, wages, stock options, benefits, perks and so on. The alternative is to find ways — again with higher pay and the like — to bring those who have left the labor force back into the fold.
Thus, what we are starting to see in the broader economy is the culmination of several trends that date back to 2010 or so. Hourly average wages were up last month at an annualized rate of 2.5 percent. Don’t be surprised if that rises faster as the economic recovery continues apace.
U.S. refiners are off to a strong start in 2018, even as competitors elsewhere are hitting harder times.
Independent refiners are poised to cash in on President Donald Trump’s U.S. tax reform. Oil market fundamentals are also looking bright. Gulf Coast refiners ran at record-high levels in the last week of December. The party is set to continue as planned shutdowns will be 45 percent lower this quarter from a year ago, according to data compiled by Bloomberg.
Analysts are bullish with good reason. While some Mediterranean refiners are taking losses on each barrel of crude they process and Asian fuel makers face more competition from China, margins at some Midwest plants reached $40 a barrel in late December. Gasoline and diesel are leaving Valero Energy Corp. and Marathon Petroleum Corp.’s Gulf Coast plants at a record pace as Mexico and Brazil seek increasing amounts of fuel.
“Refiners have a few factors working in their favor right now,” said Sam Margolin, lead analyst at Cowen & Co. “Economic indicators point to strong gasoline and diesel demand in 2018. Secondly, the rally in oil prices could be helpful to U.S. refiners.”
“Unlike other areas of energy, refiners not only have U.S.-centric operations but are largely in the black and cash taxpayers,” which will strengthen earnings once policy changes, said Blake Fernandez, an analyst at Scotia Howard Weil.
U.S. refiners have the advantage not only of close proximity to abundant crude supply from Texas, North Dakota and Alberta, but cheaper supplies of natural gas and hydrogen that are vital to running their plants.
“If you wrap that together, you get a margin in the U.S. which is quite a bit better than almost all the other large manufacturing centers in the world,” Dan Romasko, chief executive officer of Motiva Enterprises, said at the Argus Americas Crude Summit in Houston.
U.S. crude approached $65 a barrel this month for the first time in more than three years, and the government increased its estimate for oil output to more than 11 million barrels a day in late 2019.
Higher prices “could lead to accelerated U.S. crude production growth, which gives domestic refiners access to lower cost feedstock,” Margolin said from New York.
Refiners’ margins for producing diesel are now outperforming gasoline by more than $10 a barrel, reviving a typical seasonal pattern that didn’t show up the past two winters, Bank of America Merrill Lynch said in a research note. Refiners maximized their diesel production at the end of last year, boosting output of the heavy-duty distillate fuels to a record 5.6 million barrels a day.
The backwardation in the forward curve, in which near-term delivery of diesel is at a premium to later contracts, points to continued record refinery rates. The longer-term price outlook points to continued low inventories and higher volatility, Bank of America Merrill Lynch said Jan. 5 in a note led by Sabine Schels.
“Low inventories mean the diesel market could be posed for a lot more volatility ahead, as any supply disruptions will reverberate through the market more quickly than previously,” she said.
Still, today’s high times for refiners may be hiding tougher days ahead. Greater competition from refiners from China to Saudi Arabia threatens U.S. hegemony in the Latin American fuel market. Record U.S. operating rates may result in a fresh glut of products as its biggest customer, Mexico, produces more of its own fuel.
Margins in Europe have drooped, and even turned negative at some less-sophisticated plants in the Mediterranean, according to Oil Analytics data. In Asia, China’s fuel exports are set to soar this year, according to the nation’s biggest energy producer.
U.S. refiners’ opportunity to keep expanding production depends largely on Latin American demand. In 2017, Brazil and Mexico were first in line to purchase American-made diesel, helping boost July exports to a record-high 1.7 million barrels a day.