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Mark Snead - Economic Outlook 2015

Slumping oil prices are dimming an otherwise bright outlook for Oklahoma’s 2015 economy.
Mark Snead - Economic Outlook 2015

Mark Snead - Economic Outlook 2015

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Show Details

Show 1501: Mark Snead - Economic Outlook 2015
Air Date: January 4, 2015

 

Transcript

Rob McClendon: Well, often times it takes a downturn in energy prices to remind us just how much an energy state Oklahoma is. And that had me worried when it came time to show you our annual economic outlook this year. Because when I sat down with economic analyst Mark Snead, it was the middle of November, and oil prices had just begun to fall. And to his credit, Snead’s projections of what that could do to our economy are still spot on.

Rob: So, Mark, before we start talking about 2015, let’s look back at 2014. How did the state do economically?

Mark Snead: 2014 is actually turning out to be a very good year. You know, if -- you almost have to go back to 2013. The oil and gas industry slowed down considerably, and it added some drag to the state economy. We underperformed the U.S. economy slightly. But 2014, the state, you know, returned back to that pretty rapid pace. We’re outperforming the nation. Job growth is strong. Income growth is strong. There’s just a tremendous about of momentum.

Rob: You mentioned the energy industry. Just talk to me about the impact it has on the economy.

Snead: Well, there’s some question about whether Oklahoma’s still an energy state. You know, to what degree do fluctuations in oil and gas prices translate into changes in the overall economy? And when we look at it, Oklahoma is still clearly a tier one energy state. It is affected very directly and very heavily by changes in oil and gas prices. In fact, in our data, it’s almost as sensitive as it was back in the 1979 to 1982 period at the peak of the oil boom. So it matters a great deal. The thing about the industry is that it tends to either expand rapidly or contract rapidly. There’s not really a steady state for the industry. And as oil prices begin to come back a little bit, we’re, you know, at this point we’re, we’re assuming that the industry is having very little influence. If it pulls back further, we’ll have some concern in possibly 2015 or 2016. But a lot of momentum right now in the industry and at the state level.

Rob: Now, as we’re recording this, we’re seeing $80 barrel oil. While that certainly is probably good for consumers that might be driving a car – maybe not so good for oil producing states. What would happen if that becomes the norm versus a dip in prices?

Snead: Yeah, that’s, you know, the trick. Most states benefit from falling oil prices. We know that. The U.S. economy as a whole benefits from falling oil prices. But when you’re in an energy producing state, it’s a delicate balance. You really want, you know, oil and gas prices high enough to keep producers satisfied, to keep expanding the industry, but not too high to affect consumers. And we’re in that sweet spot right now, you know, consumers in Oklahoma at least, we’re paying sub $3 for gasoline. Yet, the oil and gas industry is expanding basically as fast as they can. And if we can stay in that sweet spot, it has a tremendous spillover effect to the overall economy, and consumers are perfectly satisfied.

Rob: As you look forward to 2015, are there other sectors that you’re particularly watching? What is the story for 2015?

Snead: The story is that we’re clicking on all cylinders. That’s the real underlying story. Nearly every major industry sector is doing well, adding jobs at a rapid pace. One thing I would argue is that the key difference in Oklahoma in this cycle is the quality of the job. There’s always been the suggestion that what we’re lacking is high-wage, you know, high-skill, high-quality jobs. That’s exactly what we’ve been adding at a very rapid pace the past decade. It did in fact start with the oil, you know, the resumption of growth in the oil industry about a decade ago. And it’s remarkable, it truly is. It’s effected overall average wages in the state. We’re rapidly approaching par with the nation in terms of per capita income. So a very good story – a lot of momentum, and the quality is there as well.

Rob: So as we see this per capita income just continue to grow, what does that tell us from an education perspective? I mean, how does someone get into that economy, I guess is my question?

Snead: Well, there you have the sort of double-edged sword. Again, we’ve always suggested we should be educating workers and pushing them into the labor force, but all too many times that meant pushing them to Texas, to Dallas or Houston, or pushing them to Denver or pushing them to the two coasts – that we could not absorb them. And I think the dramatic difference over 20 or 25 years is that, you know, these young, young graduates in the state have a very solid opportunity here in Oklahoma. The number of these, these jobs that require, you know, either a traditional college degree or even graduate training now have ample opportunity to find suitable employment here in the state. It’s a powerful mix. It’s coming together from both sides.

Rob: So if we are not just an energy state and benefit from that energy boom, what will our economy look like compared to the national economy?

Snead: Well, this is the concern really for 2015. Oil prices are already pulling back. For example, they pull back to $65 a barrel or less, that’s a really serious red flag for us. It would act as a drag on the overall state economic growth. Where we are currently, we basically assume that the oil and gas industry is having little positive or no affect on overall conditions. It makes us look national-like. It makes us look very national-like. And if that’s the case, you would expect strong conditions because we are now in that point where the U.S. economy is beginning to gel, and we’re beginning to see some momentum at the national level. So given that fact that we may lose our energy boost, it’s at probably the exact right time given a little extra boost from national conditions.

Rob: Do you feel good about our manufacturing numbers here in the state?

Snead: Well, you know, manufacturing in Oklahoma is also closely tied to oil and gas. And I think the short answer to that question is we will probably look very national-like or pretty good as long as the oil and gas industry is going pretty well. A sharp contraction in oil and gas would filter over to the manufacturing sector pretty quickly. And in terms of hiring, we are underperforming the nation in terms of manufacturing hiring – slightly. I wouldn’t read a lot into that, but it is a industry that is in long-run decline hiring-wise, but continues to grow in terms of output. It’s a capital industry. And we largely are going to have to adapt to that, maybe policies that focus on capital and have fewer expectations about hiring from the manufacturing sector would make more sense. Unlikely to ever again be a large source of employment, but a very large source of economic output, you know, the purchases. You know, the brick and mortar is very expensive to operate and maintain. It is, you know, it’s very good to have large manufacturing facilities, the transportation, electricity usage – all of those factors make manufacturing desirable. But it unlikely will be a large source of hiring.

Rob: So in general, as you look at 2015, a positive outlook?

Snead: A very good outlook. Actually the momentum of the state, the momentum at the U.S. level suggests that 2015 could actually be a very big year in Oklahoma. It’s just that one big variable about the path of oil prices. That’s the only real external factor we are considering at this moment.

Rob: I guess that wasn’t my last question. I’ll ask one more. If we do see those oil prices dip below $65, will that be an immediate pain or is that something we could see a contraction that would go over a couple of years?

Snead: Well, you know, the oil and gas industry has very specific behavior. It expands rapidly, and it contracts very rapidly on the hiring side. When they decide to make a move they do it very quickly. I think, you know, we will be watching the unemployment numbers very closely. That is what we consider to be the best single indicator, the number of unemployment claims within the mining sector. The moment we begin to see any surge in that we will become a little bit more concerned. But at this point, 2015 could be a very big year.

Rob: All right. Thank you so much, Mark.

Snead: Thanks.

Rob: Now, we do have more economic projections from the Federal Reserve Bank, as well as OSU’s business school streaming on our website. Just head to okhorizon.com and look for them under our value added section.

 

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economy, education, energy, oil, gas, manufacturing, skills training, agriculture, employment, workforce, Rob McClendon, Rob McClendon, Mark Snead, interview