January 02

US Factories at Risk of Oil Related Slowdown

A broad set of manufacturing surveys has raised alarm that the US economy may be experiencing a slowdown related to the sharp decline in oil prices. In the last three weeks nearly every regional and national manufacturing PMI has missed estimates, along with a core durable goods orders that was much lower than expected. Various anecdotal accounts of business activity have also mentioned knock on effects from the drop in oil and related commodities.

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The WSJ reported that Texas based Hercules Offshore Inc laid off 324 employees or 15% of its workforce as it is experiencing a ‘significant decline in demand’ for its offshore drilling rigs in the Gulf of Mexico. Forecasting firm IHS Global Insights projects that oil and gas companies could lose 40,000 jobs by the end of the year, which is about 9% of total oil and gas jobs. The Manhattan Institute has studied the US oil boom and attributes that ten million jobs are related to shale fracking operations. US Payrolls total about 130 million for comparison.

The massive capital expenditure that has taken place in North Dakota and south Texas over the last five years has been one of the few bright spots in an otherwise lackluster economic recovery. Many economists are already expecting that these two states will fall into recession if oil prices remain depressed throughout the first half of 2015. The rig count in North Dakota has declined by 10 rigs to 183 since September, in a trend that is set to continue as the State industrial commission said this month that “Rig count in the Williston Basin is set to fall rapidly during the first quarter of 2015.”

The FT reported that even the major oil firms which typically steered clear of risky fracking projects have already initiated sharp pays cuts of up to 15% for oil contractor employees in the North Sea. US based Chevron’s pay cuts will be effective as of January 1st to “manage cost pressures”.  Oil related jobs have been one of the few areas of sharp growth not only in the size of payrolls but wage growth, easily outpacing pay raises in other industries.

The implications here for the US Dollar and Federal Reserve policy are significant. If a slowdown in activity becomes apparent to the extent that it begins to weigh down broad payrolls and wage growth, the Federal Reserve would be justified in delaying or slowing the pace of rate increases to compensate. The US economic recovery has been heavily supported by the capital expenditures that built the shale revolution, and a loss of this demand is extremely worrying.  Long US Dollar positioning remains crowded and a slowdown in the manufacturing sector may be just what is needed to flush out weak longs and reload from better levels, keep an eye on next week’s payrolls data for more clues.

ISM Manufacturing Comments:

  • “Retail sales this holiday season are shaping up to be much improved over last year.” (Food, Beverage & Tobacco Products)
  • “West Coast port issues have greatly impacted our incoming materials. We are air freighting many parts from Japan and Asia to support production while parts sit at the dock.” (Fabricated Metal Products)
  • “Class 8 trucks and RV business is very strong.” (Transportation Equipment)
  • “Most commodities feeling downward price pressure from crude. Rain in California driving demand for repair products through the roof.” (Petroleum & Coal Products)
  • “Business has not slowed as of yet, but outlook is that business should start slowing, energy market related.” (Computer & Electronic Products)
  • “Collapse of oil prices is supporting negotiations for significantly lower petrochemical related material prices. Sales are slowing down as buyers reduce inventory in anticipation of lower prices.” (Chemical Products)
  • “West Coast ports are creating delays for imported goods.” (Textile Mills)
  • “Energy prices falling are a blessing and a curse for us. We will experience downside as projects are canceled by energy companies, but suspect manufacturing in the US will improve driving upside in that space.” (Apparel, Leather & Allied Products)
  • “The West Coast ports slow-down is really affecting deliveries of our Asian purchases.” (Machinery)
  • “Currently in slow season until new year.” (Primary Metals)
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