28 December 2017

Not All Industries Are Created Equal

Despite a strong theoretical basis and conventional wisdom in economics that the extent to which a sector of the economy influences the business cycle is strictly a function of its size in terms of GDP, the empirical evidence shows convincingly that some sectors of the economy are more influential relative to the size in terms of GDP than others, with the oil and gas sector being the most influential. This is because the detailed relationship of one sector of the economy to another matters.

The Oil and Gas Industry
[R]apid increases in the price of oil have preceded almost all U.S. recessions (see Hamilton’s papers) and such increases appear to be much more important than the size of the oil sector would allow.…It turns out that for a large negative shock, the “oil and gas” industry produces the largest negative response in GDP – this despite the fact that the oil and gas industry is not the largest industry in the economy.

What is special about the oil and gas industry? 

One point that I hadn't been aware of was how much of the overall capital expenditures of the U.S. economy are related to the oil and gas industry.

In 2015, which wasn't particularly unusual, 13.3% ($218.9 billion) of all capital expenditures by U.S. firms in that year ($1,638.6 billion) were made by the oil and gas industry. See here and here

Yet, total employment in the oil and gas industry is about 180,000 people compared to a total labor force in the U.S. of about 140,400,000 people using comparable statistics from the same source. So, the oil and gas industry employs only about 0.13% of the total U.S. work force.

Thus, the oil and gas industry is roughly 100 times as capital intensive per employee as the U.S. economy as a whole. 

Also, who makes all this capital? The manufacturing industry, which is neck and neck with the oil and gas industry as the source of the most capital investment in the U.S. economy, although the manufacturing industry employs far more people than the oil and gas industry does so it isn't nearly as capital intensive per employee as the oil and gas industry. (The construction industry also provides a lot of the capital for the oil and gas industry.)

So, a material chunk of the capital investment in the manufacturing industry, on a statistical basis, supports the capital needs of the oil and gas industry.

Coal Compared

The coal industry, in contrast, is not very special.

Capital investment by the coal industry in 2015 was $2.6 billion (about 0.16% of the U.S. total) and the industry employed about 68,000 people (about 0.05% of the total U.S. workforce) (a number that has fallen significantly to about 53,000 people since then), so the coal industry is only about 3.2 times a capital intensive as the U.S. economy as a whole and is not a significant part of either the U.S. market for capital investment or the U.S. workforce.

Coal is used predominately by electrical utilities to generate power and by manufacturing companies to make "coke" an intermediate component of the metal manufacturing process.

Moving coal makes up a substantial share of freight rail and river barge freight traffic, but neither freight rail nor freight barges are a huge part of the U.S. economy.

Wal-Mart Compared

As a further comparison, a single firm, Wal-Mart employed 1.4 million people in the U.S. (and 2.3 million people globally) in 2016. It had $478.614 billion in sales from U.S. operations (about $480 billion globally) in 2016.

Thus, Wal-Mart employs almost eight times as many people in the U.S. as the entire oil and gas industry and about twenty-one times as many people in the U.S. as the entire coal industry.

Retail trade, however, is not very capital intensive. The entire retail trade industry made $85.8 billion of capital investment in 2015, about 5.2% of the total U.S. capital investment, but the retail trade industry, of which Wal-Mart is a part, as a whole, employs 15,845,000 people, about 11.3% of the total U.S. work force. So, retail trade is about 46% as capital intensive per employee as the overall U.S. economy.

Wal-Mart accounts for about one in eleven employees in the retail trade industry. The total capital investments made by Wal-Mart are probably on the order of about $7.56 billion per year (applying its share of industry employment to industry-wide capital investment0.

So, despite being in a not very capital intensive industry, Wal-Mart's annual capital investment is 2.9 times as great as the entire coal industry in the U.S. 

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