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?
(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 and 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 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) Collapse of the mining sector (including oil and 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 and 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, 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 and gas extraction only employs 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.