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Fracking drives manufacturing

Summary:
[Before starting, let me recommend a new Sebastian Edwards paper discussing the effectiveness of MMT-style policies in Latin America. I have a new post at Econlog.] Last year, I did a post over at Econlog speculating that cycles in the price of oil led to cycles in fracking activity, which led to cycles in manufacturing employment growth. Seven months later, the fracking/manufacturing part of the hypothesis is looking increasingly plausible. For various reasons, fracking activity has slowed in recent months. In this case, however, the slowdown is not due to weak oil prices, and experts predict a pickup later in the year: Schlumberger CEO Paul Kibsgaard told analysts and investors last week that his company is seeing a slowing-down of activity in the U.S. shale plays over

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[Before starting, let me recommend a new Sebastian Edwards paper discussing the effectiveness of MMT-style policies in Latin America. I have a new post at Econlog

Last year, I did a post over at Econlog speculating that cycles in the price of oil led to cycles in fracking activity, which led to cycles in manufacturing employment growth.

Seven months later, the fracking/manufacturing part of the hypothesis is looking increasingly plausible. For various reasons, fracking activity has slowed in recent months. In this case, however, the slowdown is not due to weak oil prices, and experts predict a pickup later in the year:

Schlumberger CEO Paul Kibsgaard told analysts and investors last week that his company is seeing a slowing-down of activity in the U.S. shale plays over the first four months of 2019. “North America land activity is set for lower investments with a likely downward adjustment to the current production growth outlook,” Kibsgaard said, “the higher cost of capital, lower borrowing capacity and investors looking for increased returns suggest that future E&P investments will likely be at levels dictated by free cash flow. We, therefore, see land E&P investment in North America down 10% in 2019. ”

Overall, employment growth in 2019 continues to be strong, running at 205,000/month, only slightly below 2018 boom levels.  But manufacturing job growth is slowing more rapidly, with growth especially anemic over the past three months.  Year-over-year data shows the rate of manufacturing job growth slowing from a peak of 2.3% in July 2018 to 1.6%, and I expect a further decline.

Fracking drives manufacturing

Notice that there was also a manufacturing jobs boom during the 2014 fracking boom. 

Labor force participation in April was 62.8%, exactly the same as 5 years ago.  But that’s actually good news, as the retirement of boomers was expected to lead to further declines.  On the other hand, I doubt we’ll get back to the levels of the late 1990s; there are too many demographic headwinds:

Fracking drives manufacturing

The 3.6% unemployment rate is consistent with what we are seeing in other similar developed economies. Relatively “neoliberal” economies are seeing unemployment fall to rates not seen since the 1960s. What makes the US stand out is that productivity numbers have also been pretty good (unlike places like the UK.)

Job growth in the US is also helped by a recent surge in immigration. Overall, a very good jobs report. It shows that manufacturing is not the key to strong employment gains, but fracking is the key to strong manufacturing jobs gains.

PS. Speaking of the UK, I predict their next election will feature Trump vs. Sanders, err, I mean Boris Johnson vs. Jeremy Corbyn. If the Liberal Democrats can’t do well against those two clowns, it’s time to close up shop. If the Brits had any sense, they’d make Rory Stewart their PM. But only after Brexit is resolved—that’s one of those problems that would destroy any leader.


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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