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Gas Price Increase Poses Challenge to U.S. Economy – The New York Times

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Experts say a period of costlier fuel is likely to be brief. But if consumers start to assume otherwise, it could mean problems for Biden and the Fed.

As the U.S. economy struggles to emerge from its pandemic-induced hibernation, consumers and businesses have encountered product shortages, hiring difficulties and often conflicting public health guidance, among other challenges.

Now the recovery faces a more familiar foe: rising oil and gasoline prices.

West Texas Intermediate, the U.S. oil-price benchmark, hit $76.98 a barrel on Tuesday, its highest level in six years, as OPEC, Russia and their allies again failed to agree on production increases. Prices moderated later in the day but remained nearly $10 a barrel higher than in mid-May.

Reflecting the increase in crude prices, the average price of a gallon of regular gasoline in the United States has risen to $3.13, according to AAA, up from $3.05 a month ago. A year ago, as the coronavirus kept people home, gas cost just $2.18 a gallon on average. The auto club said on Tuesday that it expected prices to increase another 10 to 20 cents through the end of August.

The rapid run-up comes at a delicate moment for the U.S. economy, which was already experiencing the fastest inflation in years amid resurgent consumer activity and supply-chain bottlenecks. And it could cause a political headache for President Biden as he tries to convince the public that his policies are helping the country regain its footing.

Asked about oil prices at a White House news conference on Tuesday, Jen Psaki, the press secretary, said the administration was monitoring the situation and had been in touch with officials from Saudi Arabia and other major producers. But she suggested that the president had limited control over gas prices.

“There sometimes is a misunderstanding of what causes gas prices to increase,” Ms. Psaki said. “The supply availability of oil has a huge impact.”

Indeed, energy experts said the recent jump in oil prices had more to do with global economic and geopolitical forces than with domestic policies. Global energy demand slumped when the pandemic hit last year, eventually leading the Organization of the Petroleum Exporting Countries and its allies to cut production to prevent a collapse in prices. Demand has begun to rebound as economic activity resumes, but production has not kept pace: OPEC Plus, the alliance of oil producers, on Monday called off a teleconference to discuss increasing output.

The direct economic impact of higher oil prices will probably be substantially more modest than in past decades. Energy overall plays a smaller role in the economy because of improved efficiency and a shift away from manufacturing, and the rise of renewable energy means the United States is less reliant on oil in particular.

In addition, the surge in domestic oil production in recent years means that rising oil prices are no longer an unambiguous negative for the U.S. economy: Higher prices are bad news for drivers and consumers, but good news for oil companies and their workers, and the vast network of equipment manufacturers and service providers that supply them.

Joe Brusuelas, chief economist at the accounting firm RSM, said oil prices of $80 or even $100 a barrel didn’t concern him. Not until prices top $120 a barrel would he start to worry seriously about the economic impact, he said.

“The world has changed,” Mr. Brusuelas said. “The risks aren’t what they once were.”

Still, the costs of higher prices will not be felt equally. Poor and working-class Americans drive older, less efficient cars and trucks and spend more of their incomes on fuel.

Higher oil prices are no longer an altogether bad thing for the U.S. economy, but they are a particular burden to poor and working-class Americans.
Audra Melton for The New York Times

Scott Hanson of Western Springs, Ill., said $40 was enough to fill up his gas tank last year, when he lost his job as an office manager because of the pandemic. Now Mr. Hanson is paying over $60 to fill his Dodge Charger, making trips to take his mother to her medical appointments more expensive. Gas in Illinois is averaging $3.36 a gallon, according to AAA.

“It’s too much for too many people that lost their jobs or have low-paying jobs,” Mr. Hanson said. “Everything bad that could happen is happening all at once.”

Gas prices also remain a potent and highly visible symbol of rising prices when many consumers — and some economists — are nervous about inflation. Consumer prices rose 5 percent in May from a year earlier, the biggest annual increase in more than a decade, and forecasters expect figures for June, which will be released next week, to show another significant increase.

Policymakers at the Federal Reserve have said they expect the increase in inflation to be short-lived, and they are unlikely to change that view based on an increase in energy prices, which are often volatile even in normal times, said Jay Bryson, chief economist at Wells Fargo.

But if rising oil prices lead consumers and businesses to believe that faster inflation will continue, that could be a harder problem for the Fed. Economic research suggests that prices of things that consumers buy often, such as food and gasoline, weigh particularly heavily on their expectations for inflation. With public opinion surveys showing increasing concern about inflation, rising oil prices increase the risk of a more lasting shift in expectations, said David Wilcox, a former Fed economist who is now a senior fellow at the Peterson Institute for International Economics in Washington.

“I don’t expect the price of oil to be the last straw on the camel’s back, but it is another straw on a camel’s back that’s already carrying a fair amount of baggage,” Mr. Wilcox said. “There is a much greater risk today of an inflationary psychology taking hold than I would have said three to five years ago.”

Republicans have seized on rising prices to criticize Mr. Biden’s energy policies, including his decision to cancel permits for the Keystone XL oil pipeline and his pause on selling new oil leases on federal lands, a move that a federal judge has blocked.

“Bad policy is already creating conditions like higher gasoline prices that we haven’t seen in a very long time,” Senator John Barrasso, Republican of Wyoming, wrote in an opinion essay last week. (Energy experts say Mr. Biden’s policies have had no meaningful impact on oil prices.)

Ms. Psaki noted that Mr. Biden had consistently opposed an increase in the federal gas tax, which some Republican senators and business groups had advocated to help fund spending on infrastructure. The deal Mr. Biden reached with a bipartisan group of senators last month did not include a gas tax increase.

“Ensuring Americans don’t bear a burden at the pump continues to be a top priority for the administration writ large,” Ms. Psaki said. “That’s one of the core reasons why the president was opposed — vehemently opposed — to a gas tax and any tax on vehicle mileage, because he felt that would on the backs of Americans. And that was a bottom-line red line for him.”

Domestic oil production is expected to rise in coming months as higher prices and rising demand lead companies to step up drilling. But any rebound is likely to be gradual. U.S. oil companies have been cautious about investing in new exploration and production over the last year, even as oil prices have roughly doubled from the first half of 2020, when the pandemic punctured demand. Company executives say they are focused on share buybacks and debt reduction as sales rise.

The Energy Department predicts that production will average 11.1 million barrels a day this year and 11.8 million barrels a day in 2022, 400,000 barrels a day less than in 2019.

Even without a surge in domestic oil production, many forecasters doubt that prices will continue to rise at their recent pace. OPEC members generally agree that production should increase; they just disagree about how much. And a new nuclear deal with Iran or a thawing of U.S.-Venezuela relations could bring a flood of new supplies. Iran alone could potentially add 2.5 million to three million barrels of oil daily on the global market, or roughly a 3 percent addition to supplies.

At the same time, the spread of new coronavirus variants has led some countries to reimpose or tighten restrictions on activity, which could dampen demand for oil. Capital Economics, a forecasting firm, said on Tuesday that it expected oil prices to peak at about $80 a barrel before falling back as supply increases. But the firm said that a collapse in prices or a further spike both remained possible.

Reporting was contributed by Coral Murphy Marcos, Stanley Reed, Michael D. Shear and Jim Tankersley.

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China's economy didn't bounce back in the second quarter, China Beige Book survey finds – CNBC

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China’s exports surged by 16.9% in May from a year ago, two times faster than analysts expected. Pictured here on June 15, 2022, are workers in Jiangsu province making stuffed toy bears for export.
Si Wei | Visual China Group | Getty Images

BEIJING — Chinese businesses ranging from services to manufacturing reported a slowdown in the second quarter from the first, reflecting the prolonged impact of Covid controls.

That’s according to the U.S.-based China Beige Book, which claims to have conducted more than 4,300 interviews in China in late April and the month ended June 15.

“While most high-profile lockdowns were relaxed in May, June data do not show the powerhouse bounce-back most expected,” according to a report released Tuesday. The analysis found few signs that government stimulus was having much of an effect yet.

Shanghai, China’s largest city by gross domestic product, was locked down in April and May. Beijing and other parts of the country also imposed some level of Covid controls to contain mainland China’s worst outbreak of the virus since the pandemic’s initial shock in early 2020.

In late May, Chinese Premier Li Keqiang held an unprecedentedly massive videoconference in which he called on officials to “work hard” — for growth in the second quarter and a drop in unemployment.

Transportation, construction companies aren’t telling you they’re getting new products. They’re telling you they’ve slowed investment, their new projects have actually slowed.
Shehzad H. Qazi
Managing Director, China Beige Book

Between the first and second quarters, hiring declined across all manufacturing sectors except for food and beverage processing, according to the China Beige Book report.

The employment situation likely won’t start to improve until China stimulates its economy more in the fall, China Beige Book Managing Director Shehzad H. Qazi said Wednesday on CNBC’s “Squawk Box Asia.”

So far, there’s been little sign that stimulus has kicked in, especially in infrastructure, said Qazi who is based in New York.

“Transportation, construction companies aren’t telling you they’re getting new products,” he said. “They’re telling you they’ve slowed investment, their new projects have actually slowed.”

Inventories surge, orders drop

Unsold goods piled up, except in autos. Orders for domestic consumption and overseas export mostly fell in the second quarter from the first. Orders for textiles and chemicals processing were among the hardest-hit.

The only standout domestically was IT and consumer electronics, which saw orders rise during that time. Orders for export grew in three of seven manufacturing categories: electronics, automotive and food and beverage processing.

“Weak domestic orders and expanding inventories indicate the presumed second-half improvement will be unpleasantly modest,” the report said.

The authors noted the services sector saw the greatest reversal. After accelerating in growth in the first quarter, services businesses saw revenue, sales volumes, capex and profits drop in the second quarter.

Across China, only the property sector and the manufacturing hub of Guangdong saw any year-on-year improvement, the China Beige Book said.

Official second-quarter gross domestic product figures are due out July 15. GDP grew by 4.8% in the first quarter from a year ago.

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U.S. Economy Shrank Worse-Than-Expected 1.6% Last Quarter As Recession Fears Grow – Forbes

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Topline

The economy last quarter posted its worst annualized showing since the pandemic-induced recession in 2020, the government said in an updated release Wednesday, blaming an unexpected decline in economic activity on the omicron variant of Covid-19 and decreased government assistance.

Key Facts

The U.S. economy shrank at an annual rate of 1.6% in the first quarter of 2022—the first decline since the second quarter of 2020, the Bureau of Economic Analysis reported Wednesday in a worse-than-expected update to last month’s figure, which showed a decline of 1.5%.

The update primarily reflected softer-than-expected spending on business inventories and residential investments, which was only partially offset by an uptick in consumer spending, the government said.

In the first quarter, a record wave of Covid-19 cases spurred by the omicron variant resulted in continued restrictions and business disruptions, while government assistance programs including forgivable loans to businesses and social benefits to households expired or tapered off—further preventing growth, according to the release.

Broad declines in exports, government spending and business inventories, along with increased imports, spurred the overall decline, the government said.

The overall drop stands in stark contrast to the economy’s better-than-expected growth of 6.9% in the fourth quarter, the fastest rate in nearly 40 years, thanks in part to a jump in exports and increased inventory investments by car dealers.

What To Watch For

Economists are widely calling for a return to growth this quarter, thereby avoiding the two consecutive quarters of negative GDP growth that constitute a technical recession, but a growing wave of experts have warned odds of a recession next year are growing. In a research note on Monday, analysts at S&P Global Ratings said aggressive Federal Reserve policy to combat ongoing price spikes will usher in low economic growth this year and potentially risk a recession, warning: “What’s around the bend next year is the bigger worry.” S&P put the odds of a recession in 2023 at 40%—more than the 35% odds Morgan Stanley issued last week.

Key Background

Though the economy quickly bounced back after the Covid recession in 2020, the Fed’s withdrawal of pandemic stimulus measures, Russia’s invasion of Ukraine and lingering Covid restrictions have heightened market uncertainty this year. Last quarter, the stock market posted its worst showing since the market crash in early 2020, with the S&P falling 5% and the tech-heavy Nasdaq 9%. “Recession risks are high—uncomfortably high—and rising,” Mark Zandi, chief economist at Moody’s Analytics, said in a recent note. “For the economy to navigate through without suffering a downturn, we need some very deft policymaking from the Fed and a bit of luck.”

Crucial Quote

In an email after April’s initial report, which estimated a 1.4% decline despite expectations for 1% growth, Bankrate analyst Mark Hamrick said the lackluster performance serves as a reminder of the “volatile and complicated times in which we live,” but that the contraction is “less worrisome” because key drivers of economic growth, such as consumer and business spending, have been holding up despite the widening trade deficit and big swings in business inventories.

Further Reading

Cathie Wood Claims Economy Already In A Recession—Warns Inflation And Inventories Pose ‘Big Problem’ (Forbes)

Unemployment Will Rise And ‘Extreme’ Price Pressures Continue As Fed Hikes Risk Recession, S&P Warns (Forbes)

Major Bank Is First To Forecast A Recession—More Could Follow (Forbes)

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Sudan’s economy dominated by military interests: Report – Al Jazeera English

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C4ADS report says crackdown on patronage networks was a contributing factor to last October’s coup.

The Sudanese military and security forces have a sprawling monopoly over the country’s economy, a system that must be tackled to restore the country’s transition to democracy, a report has concluded.

The report, by the Center for Advanced Defense Studies (C4ADS), was published on Wednesday alongside a database that identifies 408 entities controlled by security elites, including agricultural conglomerates, banks, and medical import companies.

Under Sudan’s former civilian-military transitional government, which was tasked with guiding Sudan’s transition towards democracy, an anti-corruption committee was formed to confiscate assets from figures who made a fortune under the former President Omar al-Bashir.

Observers have argued that the confiscations struck at the core of the military’s patronage networks and played a significant role in compelling senior officers to topple the civilian administration in a coup last October, which has been followed by months of protests.

But C4ADS said that countries that seek to support democracy in Sudan have the tools to weaken the country’s “deep state”.

“Governments, non-governmental organizations (NGOs), and private companies have a role in dismantling Sudan’s deep state through economic sanctions, de-risked aid, and increased due diligence around private investments,” the authors of the report said.

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Economic Monopoly

The report zoomed in on two major banks, Omdurman National Bank (ONB) and Khaleej Bank, which the military and security forces use to access global financial networks, respectively.

The military – through a web of front charities – owned 86 percent of the shares in the former, according to the report.

Khaleej Bank, meanwhile, was controlled mainly by joint ventures that belong to the United Arab Emirates and the Rapid Support Forces (RSF) – two players that have strong political and economic relations.

The latter is a paramilitary force that evolved out of tribal militias that rebel forces called the Janjaweed, which committed massacres in the western province of Darfur.

The report estimated that the family of RSF leader Mohamad Hamdan Dagalo – better known as Hemeti – controls 28.35 percent of the shares in Khaleej Bank.

The report also reviewed Zadna International Company for Investment Ltd, a majority-army-owned agricultural conglomerate, on whose board of directors Hemeti’s brother, Abdel Rahim Dagalo, sits.

The company has run numerous irrigation schemes and leased out plots of land to private investors, according to Suleiman Baldo, an expert on the predatory economy in Sudan and the founding director of the Sudan Transparency and Policy Tracker.

“The story about Zadna is that it was a public company that was simply taken over by the military, which is monopolising its revenue and not giving the ministry of finance access to any of it. That’s the problem with Zadna,” Baldo said.

Reputational Damage

The spokesperson for Sudan’s military, Nabil Abdullah, denied accusations that the army has a monopoly over civilian sectors in the economy, and said that Sudan’s former civilian administration was unwilling to assume partial control of military-owned companies.

“[The army] has no economic control [of the country]. This is a lie and misleading,” Abdullah told Al Jazeera.

The report by C4ADS said otherwise. The nonprofit followed policy experts, rights groups, and United States officials in calling for targeted sanctions on enterprises owned by the military and the RSF.

Baldo acknowledged that such a move could unintentionally hurt everyday civilians who are already struggling to survive after billions of dollars worth of development assistance and debt relief were halted in response to the coup.

He added that sanctions may not be necessary since the US has already released a business advisory that warns of reputational risks to Western companies that try to partner with military enterprises in Sudan. The findings published by C4ADS could further deter foreign companies and institutions from conducting business in the country.

“Even without the sanctions, the deterrence effect that sanctions cause already exists,” Baldo said.

[embedded content]

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