Summary: The mining and manufacturing sectors of the US economy have rolled over. Perma-bear websites publish lurid descriptions of the horrific effect this will have on the US economy. What’s the truth? {2nd of 2 posts today.}
(1) The manufacturing collapse
Perma-bears often describe the manufacturing sector as in a downturn, sometimes as in a collapse, sometimes as in a recession. Here are the numbers describing the sector, indexed to the December 2007 peak before the recession. An explanation follows.
What does this tell us? Looking at these lines describing the manufacturing sector as of December, from top to bottom.
- Inventories are high and stable.
- Sales are down 8% from July 2014, and falling.
- Its industrial production index is down 2% from July 2014, and stable.
- Employment has grown slowly since March 2010 (+900 thousand); been flat as sales fell.
- Not shown: average hours worked & overtime hours are flat since 2013.
It’s the new industrial revolution at work: tech and capex boost output without more workers. The level of activity in manufacturing (sales and IP) is back to the 2007 peak, but inventories are 15% above the 2007 peak — but employment is unchanged (increased productivity allowed output to increase without more workers).
What will happen if sales continue to fall? Production will drop even faster as companies reduce inventories. Employers will eventually cut hours worked and fire workers. We do not known when and how, but it manufacturing employment is too small to have a significant effect on the overall US economy. Even its output is only 12% of US GDP.
Bottom line: hold the hysteria.
(2)Â Collapse of the mining sector (including oil & gas)
Output in red. Employment in green.
The US mining sector — which includes extraction of coal, oil, and natural gas — has hit hard times. Prices and volume are down. It’s a smaller sector than manufacturing (only 2% of GDP).
The mining story is the same as manufacturing’s — the new industrial revolution allows tech and capex to boost output without more workers since 2012. The decline has run in the opposite way as manufacturing, however: so far employment has fallen more than output (-16% vs. -11%). This is uncharted terrain; we can only guess what this will look like in a year or two.
The geographic concentration of mining means that a few states will suffer disproportionately: mining is one-third of Wyoming’s GDP, one-quarter of Alaska’s, one-sixth of West Virginia’s, one-eighth of Oklahoma’s, and one-tenth of Texas’ GDP (source: EIA).
So far the decline in mining output and employment has been in the non-petroleum industries. The below graph of oil & gas mining shows that since 2012 fracking boosted output with few new workers.
Now everything unravels. The price of natural gas (Henry Hub spot) peaked in February 2014; crude oil (WTI) peaked in June 2014, employment peaked in October 2014, it Industrial Production Index peaked in April 2015. A collapse will result eventually if prices do not rise — but we can only guess at its shape.
But the oil & gas extraction only employees 183 thousand people. The bankruptcies will affect investors. Some communities will suffer. But the national macroeconomic effects will be small.
Bottom line: no hysteria warranted.
Conclusion
The declines in manufacturing and mining have produced a clickbait extravaganza at some popular perma-bear websites. However exciting, most of that exaggerates the national impacts.
Business investment and consumer spending are the powerful and volatile drivers of the US economy. When they turn down — and they have not yet done so — the overall economy will drop with them. There are indications that might happen in 2016. Keep your eyes on the center rings of the circus. Should the picture darken, do not delay taking steps to protect yourself.
For More Information
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- The Simple Version Of The Apple Story, And How To Trade it (Spoiler: sell now), 6 Jan 2015.
- Effects Of The Coming Market Crash On The Economy – And Perhaps On You.
- Playing The Bubble Game: Investing In The 21st Century.
- Banks Are The Key To This Stock Market Decline – And The Recession That Might Follow.
And these about the US economy…
- How To Spot A 2016 Recession While On The Horizon, And Prepare For It.
- The Government Has A Clip Full Of Bullets To Fight The Next Recession.
- Rapidly Rising Household Debt Predicts Recessions. See America’s Future.
- Hold The Hysteria. The US Economy Is OK, So Far.
- About Those Scary High Auto Inventories: The Fed Disagrees.
- Valuable Surprises In The January Jobs Report.
- What’s Going On With The Economy: Making Sense Of The Clashing Numbers.
“The geographic concentration of mining means that a few states will suffer disproportionately: mining is one-third of Wyoming’s GDP, one-quarter of Alaska’s, one-sixth of North Virginia’s, one-eighth of Oklahoma’s, and one-tenth of Texas’ GDP”
I think you meant North Dakota in the above.
“The mining story is the same as manufacturing’s — the new industrial revolution allows tech and capex to boost output without more workers since 2012. The decline has run in the opposite way as manufacturing, however: so far employment has fallen more than output (-16% vs. -11%). This is uncharted terrain; we can only guess what this will look like in a year or two.”
I’m not so sure that the boost in mining output from 2012 without more workers is from the industrial revolution. In the oil boom it could just be the sorting of wheat from chaff employees. Also the fact that employment is down but not production is likely just reflective of the lag in output. Last years decrease in wells drilled will show up in this year’s output.
roamer,
Re: West Virgina, not North Virginia.
Thanks for catching that. The limits of spell-checkers.
“I’m not so sure that the boost in mining output from 2012 without more workers is from the industrial revolution.”
It is. Fracking is high productivity drilling from a combination of new tech and methods, maturing after two decades of evolution. Just like as seen in the late 19th and early 20th centuries.
“Also the fact that employment is down but not production is likely just reflective of the lag in output”
Yes, but that’s not my point — which was that we don’t know how the E&P recession will evolve. Will employment continue to drop faster than output? I’ve asked people in the field and gotten no clear answer. “We can only guess at what this will look like in a year or two”.
I’d also be interested to see how much periphery projects are tied to the mining industries. My own experience in the north Dakota shale boom suggests its not insignificant. The overshoot and crash in infrastructure (housing, hotels, franchises ect) looks large.
“It is. Fracking is high productivity drilling from a combination of new tech and methods, maturing after two decades of evolution. Just like as seen in the late 19th and early 20th centuries.”
I understand fracking tech well enough and agree that it has matured into a tech revolution. My point was that the gains from 2012 to present in per worker output can not be attributed to the tech. In the oil shales its mainly just the result of reigning in some pretty out of control boom time spending in response to the price drop. Little changed changed on the tech side of the process over those years.
Having just gotten laid off from working on a north Dakota oil rig I can say at the very least there is no sign of employment declines stopping, but I certainly expect production to follow. Though tech has made those wells fast to drill and complete and thus economical it hasn’t changed the wells production curve. Once all the fat of the operation has been cut away, and it has for a while now, you can expect a good correlation between job declines and lagging production declines.
roamer,
“My point was that the gains from 2012 to present in per worker output can not be attributed to the tech. In the oil shales its mainly just the result of reigning in some pretty the result of reigning in some pretty out of control boom time spending in response to the price drop. ”
You are grossly misreading the graph, but whatever (it is of total, not just oil shale — the increasing role of fracking is responsible for the divergence). I’ve learned that there is no point in bothering with evidence, since not one a thousand commenters care.
“you can expect a good correlation between job declines and lagging production declines.”
Duh. That was not my point, which was about the relative speed of decline for jobs and output.
“You are grossly misreading the graph, but whatever (it is of total, not just oil shale — the increasing role of fracking is responsible for the divergence). I’ve learned that there is no point in bothering with evidence, since not one a thousand commenters care.”
Reexamined graph and I agree, large reading error on my end. I sincerely hope though the statistic you cite of 1 reader in 1000 caring is inaccurate.
Roamer,
I am impressed (again) with your comment acknowledging an error. That’s almost unimaginably rare in comments.
As for the 1:1000 rate: there are 45,000 comments here. That 45 were affected by comments post is a a wild guess, but sounds accurate to me in an order-of-magnitude way.
That I admit error would be more impressive if I knew much lol. I don’t and nor do I often find myself often amongst people in real life who think much of the subjects discussed on this blog. I’m largely out of my league reading this blog but I appreciate the perspective and approach and do hope to learn.
It puzzles me though that the quality of content and moderation here do not attract more serious qualified comments.
Roamer,
“It puzzles me though that the quality of content and moderation here do not attract more serious qualified comments.”
Probably I’m just not good at the commenting game. I try to give lavish praise to quality comments, no matter if pro or con the post.
My guess is that few sensible people bother commenting, and only do so when they feel strongly about it. I’ve collected comments about comments by proprietors of major websites — most despair at their comment sections, and either brutally moderate them or have shut them down. Both are more rational than my policy.
Websites that I’ve long followed have suffered a crash in quality of their comment sections. So far as I can tell, the trolls are winning. They colonize a comment section and drive away sensible people. I’ve beaten them off several times by shutting down comments briefly, but at the cost of not having many (imo an acceptable trade-off).
FM; “Both are more rational than my policy.”
In the short run, yes, but I disagree in the long run. You have set yourself the ambitious goal of rekindling the American spirit. For this to occur, you need for the American public to start responding in an intelligent way, to start fighting the trolls, and to stop mindlessly consuming exciting but completely inaccurate clickbait.
The comments section of your website is an excellent barometer of the success of your efforts. My own efforts at commenting on your website have vastly increased my observation and presentation skills so I can promise you that your efforts are not completely in vain.
I do not read popular websites so I cannot assess level of craziness in the rest of the blogging world but it seems to me that people like you are slowly winning (and when I say slowly, I am measuring in geological time). But I have noticed that these sorts of things tend to take very long times to develop and then suddenly become the next natural thing to occur. Hang in their and hopefully you will see your just reward.
Pluto,
Let’s hope you are correct. So far as I can see — which is not much — the crazies are winning.