By now, every executive in the American oil patch goes through the day with one eye riveted on the price of oil. And on Monday, West Texas Intermediate plunged once again below $50 a barrel. It has become the nightmare price for Texas manufactures.
The Texas economy grew admirably during the fracking boom. The high price of oil threw money in all directions. Drillers and oil field services companies, along with suppliers of the drilling boom raked in orders and the big bucks. But now the fracking boom has turned into a fracking bust, and the consequences are spreading through the economy.
The Dallas Fed’s February manufacturing index for General Business Activity dropped to -11.2 from the already crummy -4.4 in January, the lowest level since April 2013. In the survey, 22% of the business executives reported that conditions were “worsening” while only 10.8% said conditions were “improving.”
The new orders index swooned to -12.2, the “lowest reading since June 2009.” Growth of new orders hit -16.3, unfilled orders -17.3. The shipments index dropped to -3.3, “a low not seen since 2009.”
This is how companies are reacting: as costs are getting slashed to preserve cash flow, the capital expenditures index dropped to -4.8.
Texas, the job creating machine? The employment index is beginning to stagnate: 15% of the companies reported net hiring, 14% reported net layoffs, and the hours worked index descended into the negative.
But you can’t beat down executive optimism about the future for long. These folks are paid to be optimistic. So the index of future general business activity “shot up” 11.9 points to 5.5, after being in the dumpster in January.
Yet the comments by these optimistic executives about the impact of the oil bust on their businesses in metals and machinery manufacturing are chilling:
There has been a rapid decline in orders over the past 30 days, primarily in energy-related work. Overall, business has declined by 30% in the past month, and our forecasts, based on customer feedback and order volumes, indicate further decline in overall business.
Our work is generally energy related, and the decrease in capital budgets for 2015 and 2016 will have a short- and long-term effect on our production and profitability.
We are starting to feel a slowdown with our oil and gas production equipment customers. We anticipate the slowdown has just started and it will not hit both until another six months because the current backlog is hiding the immediate slowdown that had already started three months ago in well drilling.
We are very much affected by the crash in oil prices.
At the beginning of the month there was a wave of projects that were either cancelled or placed on hold by the customer.
A slowdown in capital spending is happening quickly.
Oil at $50 per barrel is painful. We laid off 25% of our workforce to match labor with demand.
The oil price is driving down drilling activity in North America, and our business is strongly correlated to the number of active drilling rigs. We have a tough couple of quarters ahead.
Customer order activity has slowed a little more than is seasonally normal. We do not know if it is temporary and primarily winter weather related, or a future planning disruption caused by the sharp drop in oil prices.
So how much impact does the turmoil in the oil patch have on the broader US economy?
The Atlanta Fed sees the impact. Its “GDPNow” index models economic growth on a near daily basis by incorporating the most recent economic data. It provides a “nowcast” of GDP long before the official GDP estimate for the quarter is released. It’s not a paragon of accuracy – nothing is – but it’s a pretty good indicator of where the current data might lead.
This “nowcast” for real GDP growth in Q1 fell to a seasonally adjusted annual rate of a very lousy 1.9%, down from 2.2% just a week earlier, and way below the “Blue Chip Consensus” of 2.7%, though that consensus has been easing down from its lofty perch as well. The “nowcast” fell below even the average of the bottom ten forecasts.
The Atlanta Fed blamed the swoon on the industrial production report that included a 10% decrease in oil and gas drilling in January. It caused the growth of nonresidential structures investment – a significant contributor to GDP – to plunge far deeper into the red: from -1.3% down to –10.1%!
The various aspects of the fracking boom, and the well over $1 trillion borrowed to fund it – along with the moneys raised in IPOs and spinoffs – had been big contributors to the US economic “recovery,” however crummy it might have been. Now the oil bust is kicking those aspects in the other direction, and the economic “escape velocity” that had been promised once again for this spring remains elusive.
The fracking bust that is following the phenomenal fracking boom is getting worse relentlessly, week after week, and there is still no respite in sight. But when the heck will oil production finally decline? Read… Fracking Bust Deepens, Sets Records
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The oil market is strategically moving toward the future, which includes a vastly decreased fossil fuel footprint per capita in the United States due to auto, industry and homeowner conservation efforts, a decreased economic capacity, and massively altered lifestyles. Clearly though, sufficient oil supply for the near term future is now locked in for the oil companies, and as a result American consumers.
And also clearly, prices eventually will have to rise, once markets begin to be solidly monopolized again. For the time being though, this is an adjustment period, a period whereby U.S. oil manufacturers gauge the depth of the market, and find ways to make the economics of the new market reality, pay regular American-style dividends for corporate investors.
This is not about the U.S. becoming a net oil exporter, and disrupting world markets. U.S. companies like Exxon/Mobil control the worldwide market with oil they drill in other areas of the world, not our U.S. oil fields. (Like every other oil manufacturing region, Exxon/Mobil still is very active in the Russian market, despite the ongoing spoof of U.S.-Russian tensions over Ukraine. That’s all just an ongoing coldwar, nuclear headfake. Nikita Khrushchev was born in the Ukraine!)
World markets are suffering due to a systemic malaise of adjustment to the new market realities, which are steadily shifting. China is in all-out commodity-need retreat, and India and Malaysia are in rapid commodity-need advance. But neither India nor greater Malaysia will ever become the rabid commodity importers the Chinese were during their clumsy ascendancy.
The worldwide markets for manufactured goods are generally in a deflationary decline. This is the new market reality, a reality foreseen and encouraged to a degree by entrenched western oligarchs. The dollar is going up for a reason. We ALREADY are fifteen years into the New American Century everyone has no doubt read about. So, get used to it.
Over the next ten years, after this current consumption decline, it is not manufacturers who are going to have the world by its tail. It is those countries that can best maintain and grow their middle class, their consumer class. In the worldwide economic paradigm in which we all now live, there is going to be strength not in manufacturing, but in steady consumption. The consumer is what is desirable, not the things the consumer might absorb out of an increasingly competitive manufacturing marketplace.
In other words, the union of consumers represented by the buying power of entities such as Walmart, Amazon and others, will increasingly call the tune the world’s manufacturing pipers will be forced to play, BECAUSE, just as with oil producers, there are WAY TOO MANY manufacturers in the world today, way-way-way too many, really.
Be thankful you are an American. Because NOW, not only is oil cheaper here than just about anywhere else in the world, so are manufactured goods cheaper here. Food too, is generally cheaper here. And the chances that you as an American will have the income to purchase the necessities of life, and a few trinkets along the path of your life, have really never been better.
The whole world is seemingly perpetually and increasingly desperately dependent upon it, your steady consumption.
In America, you don’t even have to work for a living to be a steady consumer. Being a consumer is seemingly becoming an American birth-right. And your endless consumptive appetite virtually ensures the New American Century.
Even though the standard of living for young Americans today is greatly reduced from the living standard of Americans born fifty years ago, there are twice as many of you, and still you’re acting just as cool as every generation of Americans. The obscene hubris of your collective desire and your worldwide consumer-dominance are the envy of much of the rest of the rotting world.
And while you likely do not agree that you deserve more of the world’s limited resources, that surely does not mean that you, collectively, are not going continue to make the same graven demands upon it.
Over the next ten years, after this current consumption decline, it is not manufacturers who are going to have the world by its tail. It is those countries that can best maintain and grow their middle class, their consumer class. In the worldwide economic paradigm in which we all now live, there is going to be strength not in manufacturing, but in steady consumption. The consumer is what is desirable, not the things the consumer might absorb out of an increasingly competitive manufacturing marketplace.”
Oh, where to start…
Never has the globe been smaller, denser, and more empowered. More than 40% of the world’s population are stuck in the EM’s, which are in decline precisely because the western consumption machine, all tapped out on easy credit games, while still stuggling with declining incomes, can’t do it anymore. It will be at least a couple of generations before we see the other side of the madness begun 40+ years ago.
And that’s IF we hit a real bottom soon. We can’t find our way out of this until we do. The incredible seismic shift that western outsourcing-engendered demise has wrought may well inspire a new world NO ONE can imagine. The only thing we can say for sure, is that one is on its way, one way or another.
For all we know, “consumption”, as we know it, may well pass into the pages of history. After all, how well has it ultimately served us? Much of the world ends in deeply indebted want, with productive capacity in abubdance. What irony…
That 40%+ of the world’s polulation aren’t going to just go away quietly either. Until it imploded with the foreshock of 2008, western consumption was voracious. Even as cheap credit shenanigans anesthetized lossed western middle class income outsourced to the east, consumption mania drove China, for example, to create a manufacturing capacity capable of supporting the rest of the solar system. Even though western consumption decline was already baked into the cake decades ago (after all, what else could be the endpoint of outsourcing western consumer incomes?), China continued to gear up as none of that advancing collapse could be foreseen.
What choice did they have?
How are you going to slow an engine that big, having inspired so much hope of a better life for rice paddy farmers, who’d only known dirt-poor poverty for generations? China is still wrestling with this question, and its time to square that deal is quickly running out. My guess is, when the shit really starts hitting the fan all over (because, again, it has to), they’ll likely point the finger at the west, as the cause of the collapse that now sends them back to impoverished oblivion. What a crater that metoric rise, now crashed, is going to leave…
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Nowhere is the divide more obvious than in Virginia. Washington DC is the only boomtown left, while the south end of the state is shuttered and decaying.
American Century? Is that title limited to consumption compared to others, or does it include the middle class decline, wage stagnation, class divides, lack of upward mobility, and the knife edge of social divisions, race riots (Fergussons await everywhere), and an increasingly police state? Just asking?
Ah poor Janet…
Ended the longest lasting QE III upon taking over the helm from Helicopter Benny and signaled raising rates this spring based on souped-up unemployment metric which ignores millions of those who gave up looking and/or barely getting by part time with no benefits not to mention BLS adding newly minted jobs out of the air.
Alas, the “real” economy is faltering, jobs added are from lower paying service jobs with barebone benefits (if any), USD is strong while the other CBs are busy devaluing their currencies, etc…
I sense another round of QE whose impact is getting muted with each round rather than rate increase which may further strengthen the USD.