If it seems like you’re living through an economic downturn even eight years after the Great Recession of 2007-09, it may be because some of you are, especially if you live in one of the energy-dependent states of the Federal Reserve’s Tenth District.
The housing and financial crisis that contributed to the Great Recession was followed by the slowest economic recovery since World War II. Add a steep downturn in the price of crude oil to that slow pace and you have a formula for state-level recessions, especially in states such as Kansas, New Mexico, Oklahoma and Wyoming.
Research by Kansas City Fed Senior Economist Jason Brown shows some states were in recession in 2015 and 2016 even as the national economy was growing. The timing of when states enter recession may differ from the entire nation, and these states may enter recession earlier than others and stay there longer. This is especially true of states with higher concentrations in specific industries.
Brown said that for states with a large share of employment and output in oil and natural gas, a period of sustained low crude prices can result in reduced exploration and cuts in drilling, the effects of which typically spill over to other sectors and dampen overall economic activity. For example, after crude oil plunged 70 percent in less than two years, energy-dependent states including Kansas, Oklahoma, New Mexico and Wyoming soon entered recessions. At the same time, the rest of the Tenth District was experiencing steady, moderate growth.
The bottom drops out
In early 2014, the oil industry was riding high on three-and-a-half years of oil prices trading between $90 and $120 a barrel. In Oklahoma City, Kimray Inc. was embarking on what would be a record year for revenue and profit. The oil field equipment manufacturing company was expanding, adding employees, finding new parts and materials suppliers, and increasing output.
“We were growing and expanding as quickly as we could,” said Bob Cole, president and chief operating officer. “We were close to 1,000 people by the end of the year.”
The bottom, however, was just months away from dropping out of the barrel.
From January 2014 to early August 2014, the price of West Texas Intermediate crude (WTI), the benchmark for oil prices in the United States, traded between $91.36 a barrel and $107.95. By year-end 2014, WTI had fallen to $53.45. Oil’s journey to the bottom continued throughout 2015 and ended Feb. 11, 2016, at $26.19 a barrel, the lowest price in more than a decade.
“When the price declined below $60 a
barrel, I think we thought it was going to be a problem,” Cole said. “At that time, people thought the price needed to be $70 to break even.”
Cole, who joined Kimray in 2008, saw a similar scenario play out shortly after he joined the company. Prices plunged for months before hitting bottom just above $30 in December 2009, about half a year after the official end of the Great Recession.
The main difference between the oil declines in 2009 and 2014-15, Cole said, was the duration and pace of recovery. In 2009, oil prices experienced a quick decline and a quick recovery. When prices started to decline in 2014, Cole said Kimray started preparing for a similar decline and recovery.
“That wasn’t the case in 2014 and 2015,” he said. “Prices dropped and stayed down and we struggled financially.”
And while the company quickly employed what Cole described as “conservative” measures, the downturn in the oil and gas industry quickly turned activity from a gush to a dribble. Soon it became apparent that more creative and eventually more stringent methods would need to be initiated.
Although competitors turned to voluntary or forced layoffs, Kimray first tried to address the downturn through attrition and took the opportunity to fill down time with added training for employees. Kimray even paid employees to work at nonprofit organizations such as Habitat for Humanity and a nearby pregnancy crisis center.
“We didn’t want to lose the talent and experience we had, and we tried to hold on to it for as long as possible,” Cole said.
More severe measures included a wage freeze and a cut in 401(k) contributions. Kimray offered employees a voluntary buyout in fall 2015 and instituted layoffs in 2016. Kimray was down from 1,000 employees at the end of 2014 to about 350 by June 2016. Plans for a new headquarters building were put on hold.
One constant throughout the difficulties, Cole said, was the insistence of the family-run company—the grandfather of current CEO Thomas Hill III founded the company in 1948 and his father is board chairman—on using an open-book policy with employees, even its financials.
“Everybody understood where we were,” he said. “They could see we were losing money over an extended period of time. Because we were so open with them, when we made that decision to lay off people, it was received surprisingly well. Of course, that’s never an easy thing to hear.”
By spring 2016, when oil prices had started to recover, Kimray had about 350 employees. The company started hiring again by fall and reached out to those who had left. Some already had found work elsewhere, such as assembly line trainer Randon Testa, who was among the 80 or so former employees who chose to return. Other recent new hires have pushed the workforce to about 640.
Those who returned found wages had been unfrozen and that some adjustments in pay had been made. The 401(k) had been brought back and Kimray was working to diversify from its oil and gas industry roots. The company also is re-examining its plans for a new headquarters, albeit on a smaller scale than envisioned originally.
For Testa, the feeling of being part of a bigger family was at least part of his reason for rejoining Kimray.
Testa, who oversees training of employees who assemble high-pressure valves, first joined Kimray in 2009 after working in the Oklahoma oil fields. When he left in spring 2016, he had plans of being a stay-at-home dad.
“My wife decided she really wanted to return to work so I stayed at home,” he said. That plan worked for about a month before they switched roles. He had worked about three months for an Oklahoma City heavy equipment rental company before Kimray called.
The company still had the same strong family values—“no cursing, no smoking”—and some of the same conservative touches that had been employed early in the downturn.
“They got down to bare necessities and cut back on a lot of luxuries, such as the cappuccino machine,” he said, adding that his co-workers volunteered to bring their own coffee cups to work in an effort to cut even a small expense.
A story like that is no surprise to Cole.
“It may sound like a cliché,” he said, “but we treat everyone here like family.”
The company’s “culture” is why Jordan Moore, an electrical technician, joined Kimray. Moore, who had worked almost two years at the company before he was laid off in March 2016, said losing his job was not a surprise.
“I’m in Oklahoma and it’s no secret when oil is going down,” he said. “I was an apprentice and I felt like I was the ‘fat’ in the department at the time, so it wasn’t a shock.”
After months of odd jobs and looking for full-time work, Moore quickly said yes when his former supervisor called and asked if he wanted his old job back.
Moore said he was glad to see that the company’s “culture and environment had not changed” and that it still had a unique feeling of family first—so much so that his wife, brother and mother-in-law have taken jobs there since he returned.
“A lot of companies won’t hire family members, but there are plenty of families here,” he said. “I think that’s cool.”
Identifying the signs of a recession
Typically, there are visible signs of state-level downturns, especially in states where one sector dominates the economy. Brown says, however, identifying when states enter recession and for how long is no easy task.
“Unlike for national recessions, there is no organization like the National Bureau of Economic Research’s Business Cycle Dating Committee that identifies recessions on a state level,” Brown said.
Broad measures of state-level activity are not available with the same frequency as national data. Gross state product, for example, is published quarterly and six months after the fact. An alternative source of state-level data, he said, is the Federal Reserve Bank of Philadelphia’s state coincident index, a monthly measure of economic activity in each state.
The Philly Fed index showed declining economic activity—though it does not identify recessions—from September 2015 to September 2016 in Kansas, Oklahoma, New Mexico and Wyoming. To identify recessions, Brown used two approaches.
“The Markov analysis indicated Oklahoma and Wyoming entered recessions in early to mid-2015, while Kansas and New Mexico entered recessions in late summer 2016,” Brown said.
As of September 2016, Oklahoma, New Mexico and Kansas were still in recession, he said, adding there is not enough information to tell whether they currently are in recession. Wyoming, on the other hand, appeared to exit its recession in late summer 2016.
Ed Cross, president of the Kansas Independent Oil and Gas Association in Topeka, says his members would agree with Brown’s assessment of the state being in recession as of September 2016 and likely even in early 2017.
In recent reports to civic groups across Kansas and legislators in Topeka and Washington, D.C., Cross has painted a picture of the oil and gas industry in the state that is still mostly gloomy but with a hint of recovery. For example:
- Kansas oil and gas companies cut capital expenditures by up to 80 percent in 2016, spending $300 million compared to a more typical expenditure of $1.3 billion in 2014.
- Deferred completion of wells and temporary shutdowns of high-cost wells resulted in a drop in royalty payments of $400 million in 2016.
- Layoffs reached up to 30 percent in the production sector and up to 60 percent
in the service sector, totaling 3,100 direct oil and gas industry jobs and another 3,000 in industries that support oil and
- Layoffs resulted in a loss of $341 million in family income in Kansas.
- Drilling permits dropped 50 percent in 2016 and actual rig counts were down
Despite recent events, Cross says many of his association’s 4,100 members plan to drill wells for the first time in two to three years and 2017 permits through April were on pace to top 2016’s total.
Any expression of optimism in Kansas, which Brown says is a microcosm of the region, may be a good sign for the rest of Tenth District.
“Kansas is reflective of the economy of the entire Tenth District,” he said. “It has some oil and gas, some agriculture, some manufacturing. It had kind of a perfect storm of weak ag, declining oil and struggling manufacturing and then you throw in the contraction of state and local government budgets.”
Although there may be more optimism among participants in Kansas’ oil and gas sector, Cross doesn’t think oil is going back to $100 a barrel anytime soon.
“They continue to remain cautious,” he said.
Read “Identifying State-level Recessions” by Jason Brown
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