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Energy, Texas and Job Creation

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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All of the job growth from 2007 to today can easily be attributed to the shale oil fracking situation and the oil Renaissance. If you take Texas and North Dakota out of the data series for job employment, what you see is that we haven’t added any jobs in the United States other than those two regions.

The comment above by famed bond investor Jeff Gundlach during a conference call last week set off a firestorm, repeating a trope that has been gaining traction in some quarters. The claim is that all the job creation in this economic recovery is related to the surge in oil and natural-gas fracking. This is demonstrably false.

There have been variations on this theme floating around for a few years. To get the basic claim to work, you need to accept two flawed analyses. The first is that all net job growth in the U.S. since 2007 is the result of the energy and related industries. The second is that, absent Texas, the rest of the country lost jobs.

The reports on which these claims are based are biased and full of analytical errors. Making matters worse, they both come from think tanks that specialize in slanted economic analysis. As the saying goes, torture the data long enough and it will confess to anything.

Let’s begin with a few facts: There are now 118.4 million U.S. workers in private-sector jobs. The economy lost a lot of jobs during the Great Recession, and it wasn’t until 2010 that we began adding to the nonfarm payroll numbers. According to Bureau of Labor Statistics data, more than 10 million jobs have been created since the end of 2010.

What about all of the oil and fracking jobs?

Let’s go to the data, which you can easily get yourself at the BLS or the Federal Reserve Bank of St. Louis. (Check the following two employment series, "Oil and gas extraction" CES1021100001 and "Support activities for oil and gas operationsCES1021311201.)

There are now about 215,000 people working in oil and gas extraction, and 543,200 employed in support activities. At the beginning of 2010, they were 156,500 and 341,300, respectively. In other words, these industries have added about a quarter-million workers since 2010.

So how do we get from there to jobs gains of more than 10 million? Torture the data.

Much of the pain inflicted on the data comes via a research report by the Manhattan Institute, “Small Businesses Unleash Energy Employment Boom,” which says that “nearly 1 million Americans work directly in the oil & gas industry, and a total of 10 million jobs are associated with that industry.”

Let’s assume that this is correct (despite data to the contrary). If you want to make the blanket statement that “millions of jobs are associated with oil and gas industry,” that’s fine. But what about the millions of jobs associated with other industries? What of the technology jobs, Internet and mobile-communications-related employment? Manufacturing-support jobs? Health care, biotech and medical research?

What Manhattan Institute report does is compare apples and oranges: Look at the total job creation versus energy-associated jobs. Sorry, but that’s cheating. You must compare associated and related jobs with other associated and related jobs. Comparing two different data sources -- actual jobs versus associated -- doesn't generate an accurate analysis.

The American Enterprise Institute is the other think tank guilty of torturing the data. We see it in this post with the following headline: "Texas, the ‘great American job machine,’ is solely responsible for the +1.2M net US job increase since 2007."

Compared with states such as Florida and California, which endured heavy real-estate related losses in the housing bust, Texas escaped relatively unscathed (as an aside, remember what happened to Texas in the 1980s energy-price collapse). As the Federal Reserve Bank of Dallas observed, housing prices in Texas fell less than 1 percent from the market peak in 2007 to the trough in 2011.

The reason -- surprisingly for a state that likes to think of itself as a model of free-market economics -- are regulations enshrined in the Texas Constitution and other legislation. Texas is the only state that limits home-equity borrowing, capping total mortgage debt at 80 percent of a home’s fair market value. That helps prevent using one’s own house as a piggyback for engaging in reckless speculation, as we saw in the rest of the country in the mid-2000s.

Those who understand this should be amused that the radical deregulators at AEI are actually making a strong case for increased debt limits and more mortgage regulation. All hail the Texas nanny state!  

Whenever we see a data series going back to 2007 touting Texas as its baseline, we know its authors are up to no good. We don’t have time to do a full fisking at the moment, but this is consistent with an entire line of discredited research AEI has done on the housing-market collapse. Here is a place to start on reviewing the record.

The bottom line is this: Energy has contributed to job creation, but so have many other industries.

The more important issue at the moment is how the decline in energy costs is going to affect the economy: The revenue losses in oil and gas production will be a plus for travel, leisure, airlines, carmakers and retailers. That is the crucial question facing the economy -- not the flawed and biased analyses from think tanks doing the bidding of their financial backers.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Barry L Ritholtz at britholtz3@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net