It's the 1980s Again, Thanks to the Oil Glut
History doesn't repeat, but it does rhyme. Or so the saying goes.
Sometimes history indeed repeats. Our latest example: how the distribution of growth across the U.S. is strikingly similar to what took place in the mid-1980s, which is the last time the country grappled with fallout from a supply-driven plunge in oil prices.
The Philadelphia Fed uses four variables (non-farm payrolls, average hours worked in manufacturing, real wages, and unemployment rate) to produce a monthly coincident activity index for each state. Neil Dutta, head of U.S. economics at Renaissance Macro Research, compared the annual change in each state's coincident activity index in December 2015 with those in December 1986 to get a sense of how analogous the distribution of growth has been.
His results show that, by and large, the winners in 2015 were also the winners in 1986:
"Basically, the idea is that a positive supply shock in the energy sector hurts oil-producing states and helps oil-consuming ones," explained Dutta. "It is surprising, frankly, how well this works."
Amid raging debate as to whether the U.S. is already in, or headed for, a recession, it's important to emphasize that most states are enjoying an uptick in activity. The large cluster of states in the first quadrant shows that the vast majority are seeing improved activity relative to the previous year, similar to the situation at the end of 1986.
The small number of states in the second and fourth quadrants of the graph signal that, on roughly 90 percent of occasions, the reaction to low oil prices has been the same as it was in the mid-1980s: States that were doing better as oil fell at that time are also doing well now. While the reaction itself seems intuitively apropos, the degree of similarity spanning 30 years is uncanny.
The inclusion of manufacturing as an input to these indexes also suggests that the pain in this sector is more localized than has been commonly acknowledged—or at the very least, isn't significant enough of a drag to sink the headline growth number in many states.