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February 25, 2015

Oil Bust Hitting Texas

By Wolf Richter at Wolf Street

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

Courtesy Wolf Richter at WolfStreet.com (EconMatters archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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