Recently, I’ve seen more references in discussions of the local economic environment to the unemployment rate in the region. An example of such a reference is in this article in this morning’s Midland Reporter Telegram. Each time, it seems, there is a reference somewhere to the resilience of this economy as illustrated by the stability of the employment numbers.
In the words of Justice Scalia, this is “pure applesauce”. The resilience of the unemployment figures in the area has nothing to do with the health of the local economy and everything to do with the state of play in the current oilfield employment regime.
As I mentioned in an earlier post, over the years the oilfield services sector (the only one that matters in West Texas) remade itself from the ashes of the of the 80’s oil bust on the backs of independent contractors. These contractors, in turn, whether rightly or wrongly, never put down roots in this area… likely because they realized their tenure here rested on tomorrow’s service contract. Once the oilfield services sector started getting hammered by low oil prices, these service companies (instead of laying off workers) simply started contracting with fewer people. Those people then… left.
This is clearly evident to anyone who drives past, or better yet talks to the management of, any of the legion of so-called “man camps” in the are. If you find one that is running at greater than 50% capacity, I can almost guarantee you that the proprietor will count themselves as one of the lucky ones. Considering bankruptcy, which more than one of our clients has started to consider, is the more likely reply.
The actual weakness in the economy is increasingly evident in a more accurate assessment tool: sales tax receipts. In Midland, for example, the sales tax for the month of August contracted at an annual clip of 4.7%… In Odessa it was worse – declining at a rate of 6.73% year over year. This has been noted by regional economist (see the article above) as indicative of the start of a downturn.
One need only engage in a simple exercise of macroeconomics to understand that this view is a little behind the actual affects on the ground. If our entire country saw a reduction of 4.7-6.73% in annualized consumption, that would be the harbinger of doom. Look at Russia today, where there is talk of an extended depression (Russia is a nice proxy for our region because, like Russia, we depend inordinately on the price of oil for the region’s economy). Russia’s economy is estimated to be shrinking itself at an annualized rate of… wait for it … 4-5%. International economists remark on this as if it harkens dark days in the future of the ruble.
In short, the next time someone tells you that the economy in West Texas is doing okay because our unemployment levels haven’t spiked yet, don’t believe a word of it. The storm isn’t coming; it’s already here.