Category Archives: business trends

ARIMA models, Box Jenkins forecasts, business trends, retail trends, seasonal variation

Forecasting Holiday Retail Sales

December 14, 2014 Clive Jones

Holiday retail sales are a really “spikey” time series, illustrated by the following graph (click to enlarge).

These are monthly data from FRED and are not seasonally adjusted.

Following the National Retail Federation (NRF) convention, I define holiday retail sales to exclude retail sales by automobile dealers, gasoline stations and restaurants. The graph above includes all months of the year, but we can again follow the NRF convention and define “sales from the Holiday period” as being November and December sales.

Current Forecasts

The National Retail Federation (NRF) issues its forecast for the Holiday sales period in late October.

This year, it seems they were a tad optimistic, opting for

..sales in November and December (excluding autos, gas and restaurant sales) to increase a healthy 4.1 percent to $616.9 billion, higher than 2013’s actual 3.1 percent increase during that same time frame.

As the news release for this forecast observed, this would make the Holiday Season 2014 the first time in many years to see more than 4 percent growth – comparing to the year previous holiday periods.

The NRF is still holding to its bet (See https://nrf.com/news/retail-sales-increase-06-percent-november-line-nrf-holiday-forecast), noting that November 2014 sales come in around 3.2 percent over the total for November in 2013.

This means that December sales have to grow by about 4.8 percent on a month-over-year-previous-month basis to meet the overall, two month 4.1 percent growth.

You don’t get to this number by applying univariate automatic forecasting software. Forecast Pro, for example, suggests overall year-over-year growth this holiday season will be more like 3.3 percent, or a little lower than the 2013 growth of 3.7 percent.

Clearly, the argument for higher growth is the extra cash in consumer pockets from lower gas prices, as well as the strengthening employment outlook.

The 4.1 percent growth, incidentally, is within the 97.5 percent confidence interval for the Forecast Pro forecast, shown in the following chart.

This forecast follows from a Box-Jenkins model with the parameters –

ARIMA(1, 1, 3)*(0, 1, 2)

In other words, Forecast Pro differences the “Holiday Sales” Retail Series and finds moving average and autoregressive terms, as well as seasonality. For a crib on ARIMA modeling and the above notation, a Duke University site is good.

I guess we will see which is right – the NRF or Forecast Pro forecast.

Components of US Retail Sales

The following graphic shows the composition of total US retail sales, and the relative sizes of the main components.

Retail and food service sales totaled around $5 trillion in 2012. Taking out motor vehicle and parts dealers, gas stations, and food services and drinking places considerably reduces the size of the relevant Holiday retail time series.

Forecasting Issues and Opportunities

I have not yet done the exercise, but it would be interesting to forecast the individual series in the above pie chart, and compare the sum of those forecasts with a forecast of the total.

For example, if some of the component series are best forecast with exponential smoothing, while others are best forecast with Box-Jenkins time series models, aggregation could be interesting.

Of course, in 2007-09, application of univariate methods would have performed poorly. What we cry out for here is a multivariate model, perhaps based on the Kalman filter, which specifies leading indicators. That way, we could get one or two month ahead forecasts without having to forecast the drivers or explanatory variables.

In any case, barring unforeseen catastrophes, this Holiday Season should show comfortable growth for retailers, especially online retail (more on that in a subsequent post.)

Heading picture from New York Times

business trends, energy forecasting, gasoline price forecasts, global business forecasts

Oil and Gas Prices – a “Golden Swan”?

October 19, 2014 Clive Jones

Crude oil prices plummeted last week, moving toward $80/Bbl for West Texas Intermediate (WTI) – the spot pricing standard commodity.

OPEC – the Organization of Petroleum Exporting Counties – is a key to trajectory of oil prices, accounting for about 40 percent of global oil output.

Media reports that the Saudi Arabian Kingdom, which is the largest producer in OPEC, is advising that it will not cut oil production at the current time. The US Energy Information Agency (EIA) has a graph on its website underlining the importance of Saudi production to global oil prices.

Officially, there is very little in the media to pin down the current Saudi policy, although, off-the-record, Saudi representatives apparently have indicated they could allow crude prices to drift between $80 and $90 a barrel for a couple of years. This could impact higher cost producers, such as Iran and burgeoning North American shale oil production.

At the same time, several OPEC members, such as Venezuela and Libya, have called for cuts in output to manage crude prices going forward. And a field jointly maintained by Saudi Arabia and Kuwait just has been shut down, ostensibly for environmental upgrades.

OPEC’s upcoming November 27 meeting in Vienna, Austria should be momentous.

US Oil Production

Currently, US oil production is running at 8.7 million barrels a day, a million barrels a day higher than in a comparable period of 2013, and the highest level since 1986.

The question of the hour is whether US production can continue to increase with significantly lower oil prices.

Many analysts echo the New York Times, which recently compared throttling back US petroleum activity to slowing a freight train.

Most companies make their investment decisions well in advance and need months to slow exploration because of contracts with service companies. And if they do decide to cut back some drilling, they will pick the least prospective fields first as they continue developing the richest prospects.

At the same time, the most recent data suggest US rig activity is starting to slip.

Economic Drivers

It’s all too easy to engage in arm-waving, when discussing energy supplies and prices and their relationship to the global economy.

Of course, we have supply and demand, as one basis. Supplies have been increasing, in part because of new technologies in US production and Libyan production coming back on line.

Demands have not been increasing, on the other hand, as rapidly as in the past. This reflects slowing growth in China and continuing energy conservation.

One imponderable is the influence of speculators on oil prices. Was there a “bubble” before 2009, for example, and could speculators drive oil prices significantly lower in coming months?

Another factor that is hard to assess is whether 2015 will see a recession in major parts of the global economy.

The US Federal Reserve has been planning on eliminating Quantitative Easing (QE) – its program of long-term bond purchases – and increasing the federal funds rate from its present level of virtually zero. Many believe that these actions will materially slow US and global economic growth. Coupled with the current deflationary environment in Europe, there have been increasing signs that factors could converge to trigger a recession sometime in 2015.

However, low energy prices usually are not part of the prelude for a recession, although they can develop after the recession takes hold.

Instead, prices at the pump in the US could fall below $3.00 a gallon, providing several hundred dollars extra in discretionary income over the course of a year. This, just prior to the Christmas shopping season.

So – if US oil production continues to increase and prices at the pump fall below $3.00, there will be jobs and cheap gas, a combination likely to forstall a downturn, at least in the US for the time being.

Top image courtesy of GameDocs

business trends, impacts of offshoring, macroeconomic forecasting

Walmart and China – Icons of the Age

August 8, 2014 Clive Jones

Here’s a puzzle. Why has the rate of new business creation declined fairly consistently for the past 20 or so years? This contrasts with the idea the US is an entrepreneurial nation, that it is the heartland of the “free market” and place where new jobs are created by myriads of startups.

This pattern is well-established, and is validated by several sources, including a recent Brookings report and Letter of the Chicago Federal Reserve Bank.

There are a cluster of causes, but two words are iconic – Walmart and China.

The Big Box store is a major factor behind the decline in small business startups, with Walmart being the leading superstore. And, for the most part, Big Box stores act as conduits for Chinese-made consumer goods.

Superstore Community Impact

In 2012, Walmart employed about 1 percent of the American workforce in its nearly 5000 stores, and clocked sales of $444 billion in the $17 trillion US economy overall. Certainly significant.

The story is that a Walmart comes to town and Mainstreet shutters up, becomes a ghost town. Gone are dozens of small proprietors and, many say, the sense of community. Instead we have endless aisles of cheap products from China – aisles where clerical assistance is scanty and the clerks often seem kind of lost in the vastness of it all.

Well, elements of this story are well-documented.

For example, there is a great website maintained by the Kennedy School at Harvard which updates the impact studies, even linking the coming of Walmart to an increase in obsesity somehow (lower wages, cheaper deep fat fried food?).

The first Walmart, Target, and K-Mart stores opened in 1962 with a focus on deep discounts and suburban locations.

In the five decades since, the American retail landscape and built environment have been profoundly altered. At the end of 2013, Wal-Mart had 4,700 stores in the United States and Puerto Rico, while Target operated nearly 1,800 locations and Kmart just over 1,200. Then there are smaller chains — still huge by any measure — as well as “category killers” and all the diverse residents of the shopping-mall ecosystem.

Selling a Cheaper Mousetrap: Wal-Mart’s Effect on Retail Prices shows that Wal-Mart’s price impact is large and can be beneficial to consumers.

The analysis combines data on the opening dates of all US Wal-Mart stores with average city-level retail prices of several narrowly-defined commonly-purchased goods over the period 1982-2002. I focus on 10 specific items likely to be sold at Wal-Mart stores and analyze their price dynamics in 165 US cities before and after Wal-Mart entry. I find price declines of 1.5%-3% for many products in the short run, with the largest price effects occurring for aspirin, laundry detergent, toothpaste and shampoo. Long-run price declines tend to be much larger, and in some specifications range from 7-13%. These effects are driven mostly by relatively small cities, which have high ratios of retail establishments to population.

The redoubtable Jerry Hausman of MIT argues that the Bureau of Labor Statistics (BLS) Consumer Price Index (CPI) calculations should be adjusted downward, when full account of Walmart and other superstores’ impact on retail is folded into the calculation.

The jobs impact has been widely studied and is difficult to assess in a controlled framework, but one thing is certain – pay is generally lower (partly since there are no more owner/operators). See also A Downward Push.

One question is whether this is a race to the bottom. But the antidote, should this be true, is not my immediate focus. Rather I want to try to trace the connections between the Big Box stores and other collateral and linked developments.

Big Box Stores as Channels For Chinese Goods

There’s a scrappy website that sends people to check where the goods in Target, K-Mart and Walmart come from – concluding that the vast majority of goods are made in China.

Again, Walmart is iconic.

The Wal-Mart effect claims that Wal-Mart was responsible for $27 billion in U.S. imports from China in 2006 and 11% of the growth of the total U.S. trade deficit with China between 2001 and 2006

Cargo containers are the innovation which makes this possible, and there is no clearer evidence for the supply sources for the Big Box stores than their record of imports with cargo containers.

This chart shows the number of standard-sized containers going to the top ten container importers.

So the supply-chain extends from Guandong Province to Kansas City, using cargo containers which are first shipped on the ocean, then loaded onto rail cars or trucks and moved to distribution centers, then put out on shelves in the Big Box stores.

China and US Manufacturing

It is no secret that Chinese tools, Chinese-made textiles, and Chinese-assembled electronics generally are cheaper than equivalent goods made in the United States. And it is not just China. There are other low wage supply areas, such as the Malquidores along the border with Mexico and in Guadalahara, as well as contract manufacturers in Vietnam and Eastern Europe.

But, again, China-made consumer goods are iconic, and they have displaced US-made products across a swath of markets.

The Economic Policy Institute (EPI) estimated in 2007 that Chinese-made goods for Walmart alone displaced 200,000 US jobs.

Altogether over the period 2001 to 2006 the US trade deficit with China is estimated to have eliminated 1.8 million US jobs.

Interestingly, this estimate, developed by a left-leaning research institute in the middle of the last decade, is now more-or-less echoed by mainstream economics – or at least by recent research published in the American Economic Review.

The China Syndrome: Local Labor Market Effects of Import Competition in the United States

We find that local labor markets that are exposed to rising low-income-country imports due to China’s rising competitiveness experience increased unemployment, decreased labor-force participation, and increased use of disability and other transfer benefits, as well as lower wages.

Just to be clear, here is a chart showing the dynamics of US manufacturing employment over the last 60 or so years.

US employment in manufacturing has fallen to the level it was in the late 1940’s.

Additionally, about 4 million of the 12 million persons currently employed in manufacturing are administrative and support personnel.

The US Trade Deficit

While we are viewing a collage of graphs on the US condition, let’s not forget this memorable chart of the US trade deficit.

Interestingly, the US balance of trade went south in synch with the activities of the World Trade Organization and agreements on opening trade around the world.

Of course, Walmart is not exclusively or even entirely responsible for these developments, but is part of the story.

Summing Up

Well, I began with the puzzle of the decline in new business formation in the US, focusing on Walmart and then Chinese products. Along the way, I highlight other possible connections, such as decline of US manufacturing employment and lower wages as well as prices.

Any exploration along these lines is bound to seem anecdotal, but at least there are numbers and charts to speak for themselves, to an extent.

On the one hand, we have new shopping centers with Big Box stores springing up all over the place, limiting opportunities for smaller businesses in the community. On the other hand, there is decline of US manufacturing, and loss of jobs accessible to persons without college education or special skills, jobs that can pay about double or triple what standard fast food sector jobs pay.

These twin trends clearly drive polarization of the US economy and society, mitigated to a degree by the lower cost of consumer goods supplied under this new system.

Looking ahead, can the magic of cheap imports can go on indefinitely? There are bottlenecks of workers with certain skills now emerging in China, and wages are rising there.

Possibly, contract manufacturers and joint ventures can move on to other locales, like Vietnam or Bangladesh.

But at some point, geopolitical risk and problems of infrastructure may slow outsourcing.

One thing – the rejoicing about “in-sourcing” – factories coming back state-side – seems premature, almost an example of wishful thinking. There are few numbers to back up the happy talk.

In the meanwhile, the slack thinking of American elites to the effect that it’s not necessary and may even be counterproductive to really educate a workforce that will predominately occupy low-paying service sectors jobs may come back to haunt us.

Investments in infrastructure are lagging. Federal spending on medical research has been cut back. Expenditures on R&D are flat to declining in many fields.

Practically the only “deal” available to many younger people without pedigrees or family resources is the US military. And production of defense goods is one area of US manufacturing where high performance activity continues – although offshore contracts there could, in my opinion, sap or even sabotage the ultimate performance of the equipment and material.

I’m working on companion pieces in coming weeks. I want to develop a big picture of the US economy and society at this moment, although I will continue to focus on business forecasting per se in the posts.

Big Data, business trends, IT market analysis, macroeconomic forecasting, technology forecasting

Links early August 2014

August 2, 2014 Clive Jones

Economy/Business

Economists React to July’s Jobs Report: ‘Not Weak, But…’

U.S. nonfarm employers added 209,000 jobs in July, slightly below forecasts and slower than earlier gains, while the unemployment rate ticked up to 6.2% from June. But employers have now added 200,000 or more jobs in six consecutive months for the first time since 1997.

The most important charts to see before the huge July jobs report – interesting to see what analysts were looking at just before the jobs announcement.

Despite sharp selloff, too early to worry about a correction

Venture Capital: Deals Beyond the Valley

7 Most Expensive Luxury Cars

Base price $136,000.

Contango And Backwardation Strategy For VIX ETFs Here you go!

Climate/Weather

Horrid California Drought Gets Worse Has a map showing drought conditions at intervals since 2011, dramatic.

Amazon’s Cloud Is Growing So Fast It’s Scaring Shareholders

Amazon has pulled off a pretty amazing trick over the past decade. It’s invented and then built a nearly $5 billion cloud computing business catering to fickle software developers and put the rest of the technology industry on the defensive. Big enterprise software companies such as IBM and HP and even Google are playing catchup, even as they acknowledge that cloud computing is the tech industry’s future.

But what kind of a future is that to be? Yesterday Amazon said that while its cloud business grew by 90 percent last year, it was significantly less profitable. Amazon’s AWS cloud business makes up the majority of a balance sheet item it labels as “other” (along with its credit card and advertising revenue) and that revenue from that line of business grew by 38 percent. Last quarter, revenue grew by 60 percent. In other words, Amazon is piling on customers faster than it’s adding dollars to its bottom line.

The Current Threat

Infographic: Ebola By the Numbers

Data Science

Statistical inference in massive data sets Interesting and applicable procedure illustrated with Internet traffic numbers.

accuracy of forecasts, business cycle, business trends, macroeconomic forecasting

Prospects for the 2nd Quarter 2014 and the Rest of the Year

July 1, 2014 Clive Jones

Well, it’s the first day of the 3^rd quarter 2014, and time to make an assessment of what happened in Q2 and also what is likely to transpire the rest of the year.

The Big Write-Down

Of course, the 1^st quarter 2014 numbers were surprisingly negative – and almost no one saw that coming. Last Wednesday (June 25) the Bureau of Economic Analysis (BEA) revised last estimates of 1^st quarter real GDP down a -2.9 percent decrease on a quarter-by-quarter basis.

The Accelerating Growth Meme

Somehow media pundits and the usual ranks of celebrity forecasters seem heavily invested in the “accelerating growth” meme in 2014.

Thus, in mid-June Mark Zandi of Moody’s tries to back up Moody’s Analytics U.S. Macro Forecast calling for accelerating growth the rest of the year, writing,

The economy’s strength is increasingly evident in the job market. Payroll employment rose to a new high in May as the U.S. finally replaced all of the 8.7 million jobs lost during the recession, and job growth has accelerated above 200,000 per month since the start of the year. The pace of job creation is almost double that needed to reduce unemployment, even with typical labor force gains. More of the new positions are also better paying than was the case earlier in the recovery.

After the BEA released its write-down numbers June 25, the Canadian Globe and Mail put a happy face on everything, writing that The US Economy is Back on Track since,

Hiring, retail sales, new-home construction and consumer confidence all rebounded smartly this spring. A separate government report Wednesday showed inventories for non-defense durable goods jumped 1 per cent in May after a 0.4-per-cent increase the previous month.

Forecasts for the Year Being Cut-Back

On the other hand, the International Monetary Fund (IMF) cut its forecast for US growth,

In its annual review of the U.S. economy, the IMF cut its forecast for U.S. economic growth this year by 0.8 percentage point to 2%, citing a harsh winter, a struggling housing market and weak international demand for the country’s products.

Some Specifics

The first thing to understand in this context is that employment is usually a lagging indicator of the business cycle. Ahead of the Curve makes this point dramatically with the following chart.

The chart shows employment change and growth lag changes in the business cycle. Thus, note that the green line peaks after growth in personal consumption expenditures in almost every case, where these growth rates are calculated on a year-over-year basis.

So Zandi’s defense of the Moody’s Analytics accelerating growth forecast for the rest of 2014 has to be taken with a grain of salt.

It really depends on other things – whether for example, retail sales are moving forward, what’s happening in the housing market (to new-home construction and other variables), also to inventories and durable goods spending. Also have exports rebounded, and imports (a subtraction from GDP) been reined in?

Retail Sales

If there is going to be accelerating economic growth, consumer demand, which certainly includes retail sales, has to improve dramatically.

However, the picture is mixed with significant rebound in sales in April, but lower-than-expected retail sales growth in May.

Bloomberg’s June take on this is in an article Cooling Sales Curb Optimism on U.S. Growth Rebound: Economy.

The US Census report estimates U.S. retail and food services sales for May, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $437.6 billion, an increase of 0.3 percent (±0.5)* from the previous month.

Durable Goods Spending

In the Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders May 2014 we learn that,

New orders for manufactured durable goods in May decreased $2.4 billion or 1.0 percent to $238.0 billion, the U.S. Census Bureau announced today.

On the other hand,

Shipments of manufactured durable goods in May, up four consecutive months, increased $0.6 billion or 0.3 percent to $238.6 billion

Of course, shipments are a lagging indicator of the business cycle.

Finally, inventories are surging –

Inventories of manufactured durable goods in May, up thirteen of the last fourteen months, increased $3.8 billion or 1.0 percent to $397.8 billion. This was at the highest level since the series was first published on a NAICS basis and followed a 0.3 percent April increase.

Inventory accumulation is a coincident indicator (in a negative sense) of the business cycle, according to NBER documents.

New Home Construction

From the Joint Release U.S. Department of Housing and Urban Development,

Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 991,000. This is 6.4 percent (±0.8%) below the revised April rate of 1,059,000 and is 1.9 percent (±1.4%) below the May 2013 estimate of 1,010,000…

Privately-owned housing starts in May were at a seasonally adjusted annual rate of 1,001,000. This is 6.5 percent (±10.2%)* below the

revised April estimate of 1,071,000, but is 9.4 percent (±11.0%)* above the May 2013 rate of 915,000.

Single-family housing starts in May were at a rate of 625,000; this is 5.9 percent (±12.7%)* below the revised April figure of 664,000.

No sign of a rebound in new home construction in these numbers.

Exports and Imports

The latest BEA report estimates,

April exports were $0.3 billion less than March exports of $193.7 billion. April imports were $2.7 billion more than March imports of $237.8 billion…

Here is a several month perspective.

Essentially, the BEA trade numbers suggest the trade balance deteriorated March to April with a sharp uptick in imports and a slight drop in exports.

Summary

Well, it’s not a clear picture. The economy is teetering on the edge of a downturn, which it may still escape.

Clearly, real growth in Q2 has to be at least 2.9 percent in order to counterbalance the drop in Q1, or else the first half of 2014 will show a net decrease.

CNN offers this with an accompanying video –

Goldman Sachs economists trimmed second quarter tracking GDP to 3.5 percent from 4.1 percent, and Barclays economists said tracking GDP for the second quarter fell to 2.9 percent from 4 percent. At a pace below 3 percent, the economy could show contraction for the first half due to the steep first quarter decline of 2.9 percent.

top picture http://www.bbc.com/news/magazine-24045598

accuracy of forecasts, business trends, forecasting turning points, global business forecasts, predicting recessions

Surprising Revision of First Quarter GDP

June 29, 2014 Clive Jones

I showed a relative this blog a couple of days ago, and, wanting “something spicy,” I pulled up The Record of Failure to Predict Recessions is Virtually Unblemished. The lead picture, as for this post, is Peter Sellers in his role as “Chauncey Gardiner” in Being There. Sellers played a simpleton mistaken for a savant, who would say things that everyone thought was brilliant, such as “There will be growth in the Spring.”

Well, last Wednesday, the US Bureau of Economic Analysis released a third revision of its estimate of the 1^st quarter 2014 real GDP growth – down from an initial estimate of a positive .1 percent to -2.9 percent growth at an annual rate.

The BEA News Release says,

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 2.9 percent in the first quarter of 2014 according to the “third” estimate released by the Bureau of Economic Analysis….

The decrease in real GDP in the first quarter primarily reflected negative contributions from private inventory investment, exports, state and local government spending, nonresidential fixed investment, and residential fixed investment that were partly offset by a positive contribution from PCE. Imports, which are a subtraction in the calculation of GDP, increased.

Looking at this graph of quarterly real GDP growth rates for the past several years, it’s clear that a -2.9 percent quarter-over-quarter change is a significant size.

Again, macroeconomic forecasters were caught off guard.

In February of this year, the Survey of Professional Forecasters released its 1^st Quarter 2014 consensus forecasts with numbers like –

Some SPF participants do predict 2014 overall will be a year of recession, as the following chart shows, but they are a tiny minority.

A downward revision of almost 3 percentage points on the part of the BEA and almost 5 percent change for the median SPF forecast is poor performance indeed.

One hears things sped up in Q2, but on what basis I do not really know – and I am thinking of tracking key markets in future posts, such as housing, consumer spending, and so forth.

My feeling is that the quandary of the Fed – its desperate need to wind down asset purchases and restore interest rates to historic levels –creates an environment for a kind of “happy talk.”

Here’s some history on the real GDP.

accuracy of forecasts, business trends, celebrity forecasters, developed country forecast, developing country forecast, emerging market forecasts, energy forecasting, predictive analytics

Highlights of National and Global Energy Projections

June 17, 2014 Clive Jones

Christof Rühl – Group Chief Economist at British Petroleum (BP) just released an excellent, short summary of the global energy situation, focused on 2013.

Rühl’s video is currently only available on the BP site at –

http://www.bp.com/en/global/corporate/about-bp/energy-economics/statistical-review-of-world-energy.html

Note the BP Statistical Review of World Energy June 2014 was just released (June 16).

Highlights include –

Economic growth is one of the biggest determinants of energy growth. This means that energy growth prospects in Asia and other emerging markets are likely to dominate slower growth in Europe – where demand is actually less now than in 2005 – and the US.
Tradeoffs and balancing are a theme of 2013. While oil prices remained above $100/barrel for the third year in a row, seemingly stable, underneath two forces counterbalanced one another – expanding production from shale deposits in the US and an increasing number of supply disruptions in the Middle East and elsewhere.
2013 saw a slowdown in natural gas demand growth with coal the fastest growing fuel. Growth in shale gas is slowing down, partly because of a big price differential between gas and oil.
While CO2 emissions continue to increase, the increased role of renewables or non-fossil fuels (including nuclear) have helped hold the line.
The success story of the year is that the US is generating new fuels, improving its trade position and trade balance with what Rühl calls the “shale revolution.”

The BP Statistical Reviews of World Energy are widely-cited, and, in my mind, rank alongside the Energy Information Agency (EIA) Annual Energy Outlook and the International Energy Agency’s World Energy Outlook. The EIA’s International Energy Outlook is another frequently-cited document, scheduled for update in July.

Price is the key, but is difficult to predict

The EIA, to its credit, publishes a retrospective on the accuracy of its forecasts of prices, demand and production volumes. The latest is on a page called Annual Energy Outlook Retrospective Review which has a revealing table showing the EIA projections of the price of natural gas at wellhead and actual figures (as developed from the Monthly Energy Review).

I pulled together a graph showing the actual nominal price at the wellhead and the EIA forecasts.

The solid red line indicates actual prices. The horizontal axis shows the year for which forecasts are made. The initial value in any forecast series is nowcast, since wellhead prices are available at only a year lag. The most accurate forecasts were for 2008-2009 in the 2009 and 2010 AEO documents, when the impact of the severe recession was already apparent.

Otherwise, the accuracy of the forecasts is completely underwhelming.

Indeed, the EIA presents another revealing chart showing the absolute percentage errors for the past two decades of forecasts. Natural gas prices show up with more than 30 percent errors, as do imported oil prices to US refineries.

Predicting Reserves Without Reference to Prices

Possibly as a result of the difficulty of price projections, the EIA apparently has decoupled the concept of Technically Recoverable Resources (TRR) from price projections.

This helps explain how you can make huge writedowns of TRR in the Monterey Shale without affecting forecasts of future shale oil and gas production.

Thus in Assumptions to AEO2014 and the section called the Oil and Gas Supply Module, we read –

While technically recoverable resources (TRR) is a useful concept, changes in play-level TRR estimates do not necessarily have significant implications for projected oil and natural gas production, which are heavily influenced by economic considerations that do not enter into the estimation of TRR. Importantly, projected oil production from the Monterey play is not a material part of the U.S. oil production outlook in either AEO2013 or AEO2014, and was largely unaffected by the change in TRR estimates between the 2013 and 2014 editions of the AEO. EIA estimates U.S. total crude oil production averaged 8.3 million barrels/day in April 2014. In the AEO2014 Reference case, economically recoverable oil from the Monterey averaged 57,000 barrels/day between 2010 and 2040, and in the AEO2013 the same play’s estimated production averaged 14,000 barrels/day. The difference in production between the AEO2013 and AEO2014 is a result of data updates for currently producing wells which were not previously linked to the Monterey play and include both conventionally-reservoired and continuous-type shale areas of the play. Clearly, there is not a proportional relationship between TRR and production estimates – economics matters, and the Monterey play faces significant economic challenges regardless of the TRR estimate.

This year EIA’s estimate for total proved and unproved U.S. technically recoverable oil resources increased 5.4 billion barrels to 238 billion barrels, even with a reduction of the Monterey/Santos shale play estimate of unproved technically recoverable tight oil resources from 13.7 billion barrels to 0.6 billion barrels. Proved reserves in EIA’s U.S. Crude Oil and Natural Gas Proved Reserves report for the Monterey/Santos shale play are withheld to avoid disclosure of individual company data. However, estimates of proved reserves in NEMS are 0.4 billion barrels, which result in 1 billion barrels of total TRR.

Key factors driving the adjustment included new geology information from a U. S. Geological Survey review of the Monterey shale and a lack of production growth relative to other shale plays like the Bakken and Eagle Ford. Geologically, the thermally mature area is 90% smaller than previously thought and is in a tectonically active area which has created significant natural fractures that have allowed oil to leave the source rock and accumulate in the overlying conventional oil fields, such as Elk Hills, Cat Canyon and Elwood South (offshore). Data also indicate the Monterey play is not over pressured and thus lacks the gas drive found in highly productive tight oil plays like the Bakken and Eagle Ford. The number of wells per square mile was revised down from 16 to 6 to represent horizontal wells instead of vertical wells. TRR estimates will likely continue to evolve over time as technology advances, and as additional geologic information and results from drilling activity provide a basis for further updates.

So the shale oil in the Monterey formation may have “migrated” from that convoluted geologic structure to sand deposits or elsewhere, leaving the productive potential much less.

I still don’t understand how it is possible to estimate any geologic reserve without reference to price, but there you have it.

I plan to move on to more manageable energy aggregates, like utility power loads and time series forecasts of consumption in coming posts.

But the shale oil and gas scene in the US is fascinating and a little scary. Part of the gestalt is the involvement of smaller players – not just BP and Exxon, for example. According to Chad Moutray, Economist for the National Association of Manufacturers, the fracking boom is a major stimulus to manufacturing jobs up and down the supply chain. But the productive life of a fracked oil or gas well is typically shorter than a conventional oil or gas well. So some claim that the increases in US production cannot be sustained or will not lead to any real period of “energy independence.” For my money, I need to watch this more before making that kind of evaluation, but the issue is definitely there.

business trends, new business formation, technology forecasting

Links, middle of June

June 14, 2014 Clive Jones

Optimizing the current business setup does not appear to be triggering significant new growth – more like a convergence to secular stagnation, as Larry Summers has suggested.

So it’s important to document where the trends in new business and venture capital, as well as patents, are going.

The good news is you are looking at this, and via the Internet we can – with enough fumbling around – probably find a way out of this low to negative growth puzzle.

Declining Business Dynamism in the United States: A Look at States and Metros– Brookings Institution research shows more firms exited than entered business in all states and in virtually all metropolitan areas for more than a decade.

Job reallocation is another measure of new business formation, since startups mean new hires. It has fallen too.

The Atlantic monthly blog on this topic is a nice read, if you don’t go through the Brookings report directly. It’s at The Rate of New Business Formation Has Fallen By Almost Half Since 1978.

The policy recommendation is reforming immigration. Apparently, about half Silicon Valley startups over some recent period were headed by entrepreneurs who were not born in the US. Currently, many positions in US graduate schools of engineering and science are occupied by foreign students. This seems like a promising proposal, but, of course, drat, Eric Cantor lost his bid in the Virginia Republican primary.

The Kauffman Foundation has an update for 2013 – Entrepreneurial Activity Declines Again in 2013 as Labor Market Strengthens. There is an interesting report attached to this story exploring the concept that people starting new businesses is related to the level of unemployment.

National Venture Capital Association statistics show that venture capital funding recovered from the Great Recession and has stabilized, but by no means has taken up the slack in new business formation.

There’s also this chart on venture capital funds –

Of course, EY or what used to be called Ernst and Young produces a fairly authoritative annual report on venture capital activity globally. See Global Venture Capital Insights and Trends, 2014. This report shows global venture capital activity to have stabilized at about $50 billion in 2013.

U.S. Firms Hold Record $1.64 Trillion in Cash With Apple in Lead – meanwhile, the largest US corporations amass huge cash reserves, much of it head abroad to take advantage of tax provisions.

Apple, whose cash pile surged to $158.8 billion from $5.46 billion in 2004, now holds 9.7 percent of total corporate cash outside the financial industry..

Firms in the technology industry kept $450 billion overseas — 47 percent of the total corporate cash pile held outside the U.S.

Federal Spending on Science, Already Down, Would Remain Tight

The Obama administration, constrained by spending caps imposed by Congress, suggested on Tuesday a federal budget for 2015 that would mean another year of cuts in the government’s spending on basic scientific research.

The budget of the National Institutes of Health, the largest provider of basic research money to universities, would be $30.4-billion, an increase of just $200-million from the current year. After accounting for inflation, that would be a cut of about 1 percent.

Three other leading sources of research money to universities—the National Science Foundation, the Department of Defense, and the National Aeronautics and Space Administration—also would see their science budgets shrink or grow slower than the expected 1.7-percent rate of inflation.

Over all, federal spending on research and development would increase only 1.2 percent, before inflation, in the 2015 fiscal year, which begins on October 1. The portion for basic research would fall 1 percent, a reduction that inflation would nearly triple.

Latest Patent Filing Figures – World Intellectual Property Organization The infographic pertains to filings under the Patent Cooperation (PC) Treaty, under covers the largest number of patents. The World Intellectual Property Organization also provides information on Madrid and Hague System filings. Note the US and Japan are still at the top of the list, but that China has moved to number 3.

In general, a WIPO report for 2013 documents, IP [intellectual property] filings sharply rebounded in 2012, following a decrease in 2009, at the height of the financial crisis, and are now even exceeding pre-global economic crisis rates of growth.

Business Forecasting