(Bloomberg View) —
Not all job growth is created equal. Even though 2017 didn’t accelerate job growth over all, it accelerated growth in the right kind of jobs.
High-paying goods-producing job growth jumped to 465,000 in 2017, from 64,000 in 2016. This was the second-best year for goods-producing jobs growth of the expansion. Starting from a level of low labor slack, this is impressive.
President Donald Trump’s supporters will chalk up the performance to his stewardship of the economy, but the more sensible place to give credit is the shale oil bust that began in 2014.
Its impact on financial markets and the economy hasn’t gotten enough attention, perhaps because the public became consumed by the 2016 presidential election. But increasingly that bust, which ran from 2014 to 2016, appears to be to this economic cycle what the Asian financial crisis was to the late 1990s economic expansion.
At the height of that crisis, from August to October 1998, Russia devalued the ruble and defaulted on its debt. The Federal Reserve cut the federal funds target rate by 0.75 percentage points. Credit markets went haywire and volatility spiked. The hedge fund Long Term Capital Management famously went bust. Between January 1997 and December 1998, the price of West Texas intermediate crude oil fell from $26 a barrel to $11 a barrel. While the overall U.S. economic growth trajectory was not derailed by that crisis — real GDP growth was over 4 percent in both 1998 and 1999 — it created intense pain to those affected before it ended and the recovery began.
Similarly, while job and economic growth were steady between 2014 and 2016, the energy sector went through an intense boom-bust cycle. Mining and logging employment, which includes energy-related activity, fell by 27 percent from September 2014 to October 2016.
Credit markets, once again, went haywire. In part this was because so much debt was issued to support the energy sector in the 2010s, and as the price of oil dropped, investors feared that these bonds would go bad. The plunge in energy prices led to negative readings for headline inflation, and interest rates fell in response. Bank stocks got hammered because of the combined concerns of the effect of continued low interest rates on profitability, and fears that banks held lots of energy sector loans that would default.
The price of oil and financial markets finally hit bottom in February 2016, leading to the beginnings of a recovery. But for months, the recovery in the energy sector was limited to the price of oil and energy sector debt. Employment began to stabilize but didn’t grow — because businesses wanted to make sure the worst was behind them.
The first month of growth in the mining sector’s work hours? November 2016, the same month as the presidential election.
Since then, the growth in hours worked has been robust, up 15.9 percent over the past year. The only faster growth in the past 30 years has been immediately following the financial crisis. This growth has a multiplier effect for workers in blue-collar communities, because stronger energy activity means higher demand for industrial equipment used in the energy sector, and more service-sector jobs in the communities supporting both energy production and manufacturing.
This cyclical dynamic is why 2017 was such a great year for employment and financial market growth. Having a sound and stable growth foundation in place like we’ve had for the past several years has helped as well. It’s why the Federal Reserve is increasingly confident in the economic picture and is raising interest rates accordingly. But cyclical recoveries only come about in response to cyclical busts, so in some respects the credit for the recovery should go to the bust that preceded it.
And of course, all recoveries end. It’s likely that over the next few months the pace of the energy-industrial expansion will slow, and more rate hikes from the Fed are coming, which should begin to act as a headwind on the economy. How the economy responds to these two forces will be the key question for the second half of the year.