Oil Price Slump and Unemployment: Is the Economy Headed toward another Recession?

The global economy is slipping gradually into another recession. The usual indicators are beginning to show up in the usual ways: declining economic activity, slumping purchase manager indices or PMI, expanding credit spreads and rising inventories. But this would be the most extraordinary recession – the first ever recession caused by deteriorating oil prices.

A decline in oil prices implies that oil producers are facing shortage of money, whereas oil consumers have more money in their hands. About 5.1 million barrels per day is being imported by the U.S. The amount is significantly greater than the amount of petroleum and crude oil imported. Priced at $100 per barrel, that had been causing a drain on the U.S economy of $190 billion per year. The drain will now be reduced by more than half due to declining oil prices.

With oil prices hovering at $55.25 per barrel, the year’s lowest; people are wondering if there would be spillovers in the U.S national economy. Even though a great many people are more concerned about their jobs, there are some other concerns as well including but not limited to, future working hours, inflation or deflation, and the demand for new orders in the future. The producers of manufactured goods in Texas are the ones that are affected greatly whenever there is a slump in oil prices. Generally they are the first economic sector to recognize radical changes in the economy. They can gauge if a crisis is underway.

In January, Texas factory activity experienced a major hit, another indicator that dropping oil prices and a strong dollar is [1]wreaking havoc on manufacturing. The Dallas Fed’s production index – which is a strong indicator of the manufacturing conditions of the state – declined from 12.7 to -10.2 a 23 point drop. It suggests that output dropped after growing ascending throughout the 4Q of 2015.

The situation is getting pretty worse according to the Texas Manufacturing Outlook Survey. And the strengthening dollar is making conditions even worse. Texas manufacturers have been affected hard by declining oil prices and fading demand for exports forcing the sector to lay off thousands of workers and shut down plants.

Low oil prices and strengthening dollar prices remain the two biggest challenges faced by the Texas Manufacturing Association recently. Other indices of current manufacturing activity also signaled contraction in January. The indices of new orders and growth rate of new orders became further negative in January. The shipment index and capacity utilization index recorded double digit drop into negative territory.

The indicators in the survey like the new orders index have been signaling imminent weakness in manufacturing for several months now. These weaknesses materialize in a big way, with some indices reaching levels not witnessed since the last recession. Nevertheless, a number of economic indicators point to modest growth and the Dallas Fed Employment prediction for Texas currently is at 1.1% job growth. The growth, however, is slower than what is typically seen in the state.

It was reported by the Texas Workforce Commission that about 4,800 manufacturing jobs were lost in December 2015. Compared to fiscal 2014, manufacturing is down 41,900 jobs. Bear in mind that Texas produces more than 11% of the manufactured goods in the U.S after California.