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Manufacturing grows sluggish as oil prices slide, economists say

manufacturingBy TED CARTER

Steep declines in oil and petroleum prices have finally shown a corresponding drop in commercial construction costs tracked by the U.S. Department of Labor’s Producer Price Index.

Contractors can cheer about the drop in costs – at least those who don’t build for the oil exploration and mining sectors. Not so for manufacturers. They’re getting anxious about sluggishness setting in with a sustained oil slump.

A pullback in shale drilling, an emerging economic driver in Southwest Mississippi until crude prices started sliding, is of special concern to manufacturers who serve the petroleum sector, said Michael Levy, a senior fellow of energy at the Council on Foreign Relations, in an interview with National Public Radio.

“Shale drilling uses a lot of manufactured goods – 20 percent of what people spend on a well is steel, 10 percent cement, so less drilling means less manufacturing in those sectors,” Levy said.

And lower prices on steel for commercial builders. “Input” costs slid about 2 percent lower from the previous month, according to Anirban Basu, Associated Builders and Contractors’ chief economist.

Non-residential construction costs fell 2.1 percent on a monthly basis and 4.6 percent on a yearly basis, Basu said.

He noted in a later report that spending in all categories of construction nationwide dipped 2 percent in January, but commercial construction spending still climbed 4.8 percent higher than a year ago.

Falling input prices tend to bolster margins, increase the likelihood that certain construction projects will move forward, and allow the Federal Reserve to maintain “accommodative” interest rates, said the economist for the national “open shop” builders’ group whose Mississippi chapter is headquartered in Pearl.

Contractors paid 1.2 percent less for steel in January and closed 2014 with prices 1.5 percent lower than the previous year, according to Basu.

However, concrete’s prices had not declined by the end of January, Basu said his research showed. “Prices expanded 0.5 percent in January and are up 3.9 percent on year-over-year basis,” he added.

Basu said crude petroleum prices fell 30 percent in January and were down 54.8 percent from the same time last year. “Crude energy materials prices fell 23.6 percent in January and are 38.4 percent lower year over year,” he noted.

Natural gas prices continued to drop, according to Basu, declining 28.9 percent in January and falling 29.3 percent from one year ago.

Buddy Edens, president of Associated Builders and Contractors’ Mississippi chapter, said in a recent interview lower oil prices have “certainly contributed to the decrease” in materials cost, but the state’s contractors haven’t had the work volume to take full advantage of the declining costs. “Demand is somewhat down,” Edens said at the start of 2015, describing the Mississippi economy as “languishing.”

Edens said Mississippi chapter members are nonetheless “fairly optimistic about a turnaround in construction,” especially with private projects such as restaurants and hotels set to get underway.

The monthly “Mississippi’s Business” newsletter published by state economists won’t be out for another week. But data compiled so far show residential building permits “up a good bit” in January, said Corey Miller, economic analyst for the state and author of the newsletter.

“This is three months in a row,” that residential permits have increased, Miller said, putting December’s increase at 2 percent.

On the other hand, signs are that manufacturing is slowing down nationally, with crude oil price declines contributing, he added.

“Because this disproportionately affects Mississippi,” Miller said he expects next week’s newsletter will report weakened manufacturing in the state.

The February newsletter described Mississippi’s economy as “stagnant.”

The Mississippi Leading Index, a gauge of Mississippi’s economic health, fell a full percent in December but remained 6.1 percent higher than in the previous December, the Mississippi’s Business newsletter reported.

February’s newsletter reported that while December employment in manufacturing rose around the state, average weekly hours of production declined by one hour.

As motor fuel prices headed toward $2 a gallon in mid January, U.S. Steel announced layoffs of 545 workers, bringing the steel giant’s January total to more than 1,000 as the industry reeled from the dramatic decline in oil prices, Manufacturing.net reported.

The pullbacks included shutting down pipe and tube manufacturing plants in Texas and Ohio. The plants’ products had been going to the oil industry.

Manufacturing.net also reported that Tenaris, another steel company that relies heavily on the energy sector, announced hundreds of layoffs in January, affecting plants in Texas and Arkansas.

The Federal Reserve’s early March Beige Book, a periodic  report on economic conditions within the dozen Federal Reserve districts,  reported companies engaged in exploration and production and oilfield service providers began to report production slowdowns, including employee layoffs.

BancorpSouth, one of Mississippi’s largest regional banks, began increasing its Texas presence about two years ago, shortly after hiring Houston banker James R. Rollins III as CEO.

Speaking at a February conference in Boston, Rollins said Texans are accustomed to the ups and downs of the oil market “and people who lose a job in one place find one in another.”

He said despite the gloomy headlines in Houston, BancorpSouth’s operation there has yet to see any effects of a slowdown.

If and when the effects do show, BancorpSouth “has other markets that can pick up” the slack, he said.

About Ted Carter

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