You Can Always Tell


Leading indicator:  Here’s how you know when an upturn in the economy is beyond its peak, has run its course; that the wolf at the door is actually a bear; that it’s time to head for the exits before they get nailed shut; that the next big thing in this world of, by, and for investors will be options on canned goods and shotguns.  Simple.  Somebody who everybody thinks should know better gets in front of a microphone or phones, a camera or cameras and says something like “This time is different,”  something like “This time the good times don’t have to end.”

On October 4, 2018 that someone was the chairman of the US Federal Reserve Board Jerome Powell, who, in front of microphones and cameras, said that the US is experiencing “a remarkably positive set of economic circumstances.  There’s no reason to think this cycle can’t continue for some time; effectively indefinitely.”

He thought, Mr. Jerome Powell did, that he was lip-syncing his way through Jackie Wilson’s “Higher and Higher,” but when the notes and the words started bouncing around in the canyons of Wall Street, all anybody could hear was one note, E flat, and one word, “Sell!”

Indeed, the US was experiencing a remarkably positive set of economic conditions, paid for by years of layoffs and down sizing; by bank recapitalizations; by QE, QE2; by years of low wage jobs; years of increasing inequality; years of increasing wealth concentration in the top tenth of the top 1 percent of the already wealthy;  years of strangling public education, public health, public transportation, public housing, anything public, and yes, a couple of years of declining life expectancy.  And you know, don’t you, who wanted some credit for the framework on which these good times were hung, like a corpse on the gallows?  Barack Obama, of course.

The last time the economy had growth this fast, this referring to the fourth quarter of 2017 and the first quarters of 2018 was the year 2014 when the growth had been a little bit faster and that without a tax cut.  Back then, the major “positive economic circumstance” had been the upsurge in oil prices accompanying the advance in shale oil extraction in the US.   There was that brief moment when the economy was pulled along in the suction of $100 per barrel oil prices.  Capital spending was rising, even if concentrated in the energy-producing sector; earnings were rising, even if concentrated in the energy producing sector.

Then the price of oil collapsed, falling through floor after floor, breaking $40 per barrel and the “growth” and the capital spending, and the earnings all came to a halt.

Then, once again, the Saudis attempted to instill a little bit of discipline in the chaos of the world markets for petroleum by cutting back production, by establishing quotas, by convincing Russia to march, kind of, in step, kind of, with the quotas, kind of.

Meanwhile changes came rapidly to the US shale industry during the 2016-2017 period.   The field was occupied by the big players – ExxonMobil, Shell, Chevron, ConocoPhillips; big players with big money and access to pipelines.  Secondly, improvements in technology led to a 40 percent drop in the cost of finding, drilling for and extracting the oil from the rock.  Other advances extended the amount of oil that could be recovered from each well. The “break-even” price for shale oil dropped to the $40 per barrel line.  And then?  And then with the continued decay of production in Venezuela, with the threats of action, and the actions taken against Iran, oil prices were back up, accompanied this time by tax cuts (always good for boosting wealth up the social ladder), profit repatriation incentives (always good for stock buybacks and boosting wealth up the social ladder) and……2018 seems like 2014 all over again.

With US oil production at 11 million barrels a day, nearly matching that of Russia, and with Saudi production ramping back up, it seems like 2014 all over again.  Except this time it won’t end with a shadow recession, a near miss.  The results of the declining profitability of oil production, the overproduction will not be confined to the energy sector.

What is it about oil that calls the tune for capitalism?  Is it that petroleum provides 95 percent of the energy consumed in transportation, and price increases cause that vital sector, that arena for the circulation, to accelerate, to turnover ever faster?  Maybe.

Here’s what I do know.  Size.  Size matters in all matters capital.  And the petroleum industry represents the largest single mass of fixed assets, fixed capital,  in the capitalist economy.  Net property, plant, and equipment (PPE) in the petroleum sector (including coal, the NAICS statistics lump, you should pardon the expression, petroleum with coal) has over the recent period amounted to approximately one-quarter of all net PPE embedded in the manufacturing sector of the US economy.  That’s a lot of capital, a little less than $400 billion dollars worth to be less than exact.

Now capital of that size wants to, needs to, struggles to, claim a profit in proportion to its size, so that the capital, over time, can achieve a rate of profit equal to the average rate of profit for all capitalist enterprises.  That’s not an easy thing to do. More often than not, the achievement of that average rate, much less the proportional rate, in the highly capitalized sectors is conspicuous in its absence.  In fact that last time I can recall the petroleum sector achieving profit proportional to the size of the capital was during the oil price blowout of 2007-2008.  That didn’t exactly help the system as a whole, did it?

So can we get a calculation (and remember all calculations are a process of successive approximation) of the profitability of the US petroleum sector in the recent past, and a comparison to the overall profitability of US manufacturing? Yes, we can.  By using data from the US Department of Commerce’s Quarterly Financial Reports (QFR), we can make that initial approximation.

The QFRs are issued every 3 months and provide a detailed look into the financial success or failure of the industries classified as branches of, making up, the manufacturing sector of the US economy.

So what data do we need to make our calculation?  We need to know net PPE, measured at the beginning and end of the year, because this is the fixed capital that participates fully in the production process, while at the same time only transfers a fraction of its value in the valorization process.  We need to know the depreciation claimed at the end of the year, as that represents the value of the PPE lost through wear and tear in the production process.  Then, if we find the difference between the net PPE at the beginning and end of the years, and add to that the sum lost in depreciation, we can figure how much new investment in the means of production there was during the year.  This change, this delta, gets added to the net PPE reported in the first quarter to give us the fixed capital portion of the constant capital, “c,”  that makes up the denominator in the formula rate of profit  (K) = s/c+v.

The other portion of “c” is comprised of the costs of the materials used in production, and the QFR provides that information in its “all other operating costs.” In the QFR this includes the cost of labor.  So we have “c” and “v.”

And for “s”?   We can sum the quarterly information provided by the QFR, in its “income (loss) from operations” line item.   To be sure, operating earnings do not cover all the income of manufacturing industries in the US.  In some industries, operating earnings amount to less than half of the total income, but operating earnings are the ones that count in the petroleum industry.

So….. here’s the short version in a table, comparing the entire manufacturing sector to the petroleum sub-sector.  Column E includes labor. The rate of profit (K) is calculated as K= F/(B+D+E).  All numbers, except the rate of profit, represent billions of dollars and are rounded.  Numbers for 2018 are for the first and second quarters only.

A (Deprec) B (Net PPE 1Q) C  (Net PPE 4Q) D (C-B) +(A) E (All costs) F (Operating Income) K (Rate of Profit)
2014 Man 182 1490 1530 222 6189 540 6.8%
2014 Pet 32 376 388 44 1212 33 2.0%
2015 Man 190 1544 1581 237 5727 511 6.8%
2015 Pet 34 386 393 41 787 17 1.4%
2016 Man 195 1619 1644 220 5573 505 6.8%
2016 Pet 35 394 386 28 650 .407 .038%
2017 Man 202 1653 1705 254 5820 530 6.9%
2017 Pet 35 393 393 35 783 15 1.2%
2018 Man 101 1723 1736 114 3056 282 5.8%
2018 Pet 17 402 402 17 463 18 2.0%

Well, it sure does look like 2014 all over again.  Finally, with improved earnings, the petroleum sector has reascended the ladder and managed to achieve a rate of profit fully equal to less than one-third of that achieved by all of manufacturing.  This before the Fed Chairman Powell uttered the unmentionable, spoke the unspeakable, and the price of oil responded with a swan dive that turned into a belly flop.

Although…it’s not exactly 2014 all over again.  Despite the “stellar” earnings reported in 2018 by US corporations, despite the acceleration of output among manufacturers, despite the hiring, the rate of profit has turned down for the entire manufacturing sector.  Marx wrote in Chapter 15 of Capital, Volume 3,  that the “fallen rate of profit and over-production of capital originate from the same conditions.”   Indeed, they do originate from the same condition, the productivity of labor, and the replacement of living labor by fixed assets in the production process.  Then, inevitably, the overproduction and the diminished rate of profit overwhelm the valorization process and capital resumes its long, and brutal, decline.

November 18, 2018

4 thoughts on “You Can Always Tell”

  1. Excellent! Thank you.

    “price increases cause that vital sector, that arena for the circulation, to accelerate, to turnover ever faster? “. Ever faster turnover of capital in transportation sector? Could you expand on this please?
    “That didn’t exactly help the system as a whole, did it?”. So higher oil prices and consequently higher rate of ROP for the oil capital is achieved at the expense of lower ROP for all other capitals. I suppose then that the mass of profits in the last two quarters of 2018 should decline considerably compared to the 282 for the first two. If so, and it appears that it will, then that would be the onset of the next downturn as you are suggesting. It also appears that corporate debt will trigger it.

    BTW, this being the shopping season there were a lot of ads on which I clicked not for the purpose of buying anything.

    1. Actually, that– about transportation– was more posing a possibility than anything else. I recalled that after the first OPEC price spike in 1973, the “recovery” in the US from 1976-1979 was fed, after the breaking of the 1974 strike wave, by the recycling of “petro-dollars” through US banks into agriculture and industry. And I recalled that after 2012, when the price of oil staged another recovery from the lows of 2009, maritime shippers adopted a policy of “slow steaming” both to reduce fuel costs, and in an attempt to lengthen cycle times per ship, so that more ships could be utilized to handle cargo– a response to the overcapacity in the industry.

      So I thought, maybe the reverse is possible, that the whip of oil could stimulate or require transportation to increase its velocity to allow for better utilization of assets, less “down” or idle time, and provide a boost to capacity. Now maybe that’s happening in the US, with the “shortage” of trucks, and particularly container chassis for handling cargo at ocean terminals, and the increased volumes on US railroads — anyway, I was just considering the point “out loud” so to speak. Haven’t looked into it in greater detail, yet

      1. Thank you.
        In November, orders for new Class-8 trucks plunged nearly 50% from July and August and 35% from October. Short lived shortages of trucks caused likely by preempting the “trade wars” that has culminated in build up of inventories. Compared to November 2017, imports in November 2018 at the Port of Los Angeles, the busiest container port, decreased 8.8 percent while exports also fell 14.3 percent.
        Looks like once again overcapacity in the industry. Slow steaming on its way.

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