Data Center News and Comment

Asymmetric Effects of Oil Price Shocks: Kentucky Comparison

Recent gains in U.S. oil and natural gas production have spurred debates about the strengths and vulnerabilities of the domestic energy market. Technological advances along with high oil and gas prices spurred increased production and exploration of the abundant oil and natural gas resources here within the U.S. The recent oil boom, though positive and beneficial in many respects, does have its own vulnerabilities. Furthermore, these drawbacks do not affect all states and all sectors of the economy equally – the effects of the domestic price shocks to oil production and exploration are asymmetrically distributed. This suggests that some sectors are affected in different ways, to varying magnitudes. For example, in Kentucky this could be beneficial to many industries that have large economic impact – transportation, manufacturing, the automotive industry, etc. – and harmful to others such as mining. It even has serious tax implications that affect consumer spending and roads maintained by the Kentucky Road Fund and the gas tax formula.

According to GasBuddy.com, the average price of gasoline one year ago was $3.43. Currently the price is $2.31. Though the price over the past year has fluctuated, that is an annual decline in Kentucky gasoline prices – which roughly mirrors the same trend in the price of crude oil – of 32.7%. This is a significant drop. If you contrast the recent decline with the general upward trend that has been consistent since 2009, the magnitude of the recent decline appears even more pronounced.

Historical Kentucky Gas Prices

Historical Kentucky Gas Price (Data from U.S. Energy Information Administration)

 

 

Now looking at the recent trend downward, what can we expect to happen if it continues? According to a study prepared for the Kentucky Department for Energy Development and Independence, oil price fluctuations have greater effect on production and output as compared to other sources of energy such as natural gas and coal. In short, this study found that a price decrease in crude oil yields a net positive impact, taking time effects into account, even though there may be short-term losses to total Kentucky Employment and Gross State Product. Though coal is not perfectly substitutable for crude oil and natural gas in regards to energy production, as the price of other energy substitutes for coal decrease, this could affect areas like eastern Kentucky that are heavily reliant on the mining industry. Due to the decreasing price of crude oil and natural gas, the relative price of coal increases which affects its demand. In the short-run, coal is rather sensitive to price changes – a 1% increase in its price  results in a 0.64% drop in aggregate coal consumption. Though Kentucky still is heavily reliant on coal for energy production, the closure of coal-fired power plants in other areas in recent years lowers Kentucky coal exports and created surplus coal stockpiles. The additional factor of lower crude oil and natural gas prices only compounds this effect.

The negative impact on mining however does not span all industries. Consider the shipping industry in Kentucky. Kentucky is a global hub for the shipping and transportation industry. Shipping and transportation companies – such as DHL Express and UPS which both have air hubs at Cincinnati/Northern Kentucky International Airport and Louisville International Airport respectively – stand to gain most from reduced crude oil and energy prices. With gasoline and fuel being a major input for these industries, their operating costs are being curtailed. Falling oil prices could also have the same effect on input prices for another major Kentucky transportation industry – trucking. The decrease in fuel costs allows industries like trucking to operate at lower costs and structure operations around demand issues rather than saving on fuel costs.

Similar effects can also be seen in other industries where energy is a major input. Manufacturers of consumer goods and goods that involve oil derivatives, either to operate or produce, will see significant positive impacts as well. Automobile manufacturing being the most obvious example pertinent to Kentucky. Warren County, being the center of Chevrolet Corvette manufacturing in the US, stands to gain from a prolonged decrease in oil prices. Not only now are the automobiles cheaper to manufacture, but from the consumers’ perspective, they are also cheaper to purchase and operate. Manufacturing in Kentucky makes up nearly 14% of economic activity according the US Census Bureau. With manufacturing, automobile manufacturing being a portion of that, being such a substantial part of the Kentucky economy, gains from decreasing oil prices cannot be understated.

One more subtle effect of decreasing oil prices is the effect that a prolonged decline could have on road maintenance and constructions. The Kentucky Gas tax – which makes up more than 50% of the revenue for the Kentucky Road Fund – is calculated at nine percent per gallon of the wholesale price of gasoline. The recent decrease essentially acts as a tax cut for consumers but at the same time puts pressure on the Kentucky Department of Transportation to make up the difference for road maintenance. Though the effect on consumers is mainly one-sided in regards to basic tax implications, the safety and efficiency of roadway construction could experience some negative side effects. Dropping crude oil and gasoline prices coupled with more fuel efficient cars may push legislators to restructure the gas tax formula.

Though Kentucky is not affected the same way as many states that have larger deposits of crude oil and natural gas such as Texas and North and South Dakota, the effects of decreasing energy prices on those areas only further illustrate the asymmetric effects previously mentioned. If we look at the overall output of the oil and energy industries as a function of price and quantity, as the price of energy decreases, assuming quantity produced remains equal, revenue decreases in the same way that price is decreasing. So the drop in price of oil and energy is not a positive signal for those areas that rely on oil and energy as economic strengths. Many media outlets such as CBSNPR, and CNN all recognize the possibility of employment cuts and losses in economic growth in these sectors due to prolonged decreased prices, but looking at current employment figures these losses have yet to be realized at the national level.

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US Oil and Gas Extraction (Data from U.S. Bureau of Labor Statistics)

Overall, the recent decline in oil and energy prices is a mixed bag with multiple asymmetries. Kentucky is a prime example of those unequal effects. Though the cumulative impact of a decrease in crude oil and gas prices appear to be overall positive across time, the size and magnitude of those effects are unequally distributed across countries, states, and business sectors.

Mean vs. Median Income: Which One to Use and What it Means for South Central Kentucky

When it comes to economic indicators as litmus tests on the state of the economy, the measurement of mean or median income is often discussed. What has happened to the “typical” person’s income over time? What does the “typical” income tell us about the state of income distribution? Are people better off today than they were yesterday? A lot of questions can be discussed about this topic, but it is important to be able to understand some of the basic statistical differences between the measurement of mean and median income so that a more accurate representation can be drawn from what is actually being discussed.

The technical distinction between these two measurements may seem inconsequential, but it really can matter. The short answer of which measurement is more important is rather vague: it depends. In order to answer that question more effectively you would need to know how your data is distributed.

Using Kentucky income as an example, the mean income is calculated by dividing the total combined income of all Kentuckians by the number of incomes that you combined. This measurement would be fine for an economic indicator if the income data you were using was evenly distributed where 50% of Kentuckians made income higher than the mean and 50% made less. However, that is not the case with Kentucky income data. 

If you look at the data published by The United State Census Bureau (illustrated in the chart below), you can see that significantly more people make lower incomes which means that the data is not evenly distributed. Instead it is skewed to the left – meaning that a larger proportion of people have incomes lower than the mean. Using the mean, or the average, in this case could be misleading because a few wealthy millionaires in an otherwise poor county could substantially raise the mean income making it look like people have higher incomes on average than they actually do. Bureau of Labor Statistics data on annual wages of Kentucky illustrates this.The mean wage is $39,520, but the median wage is $31,220 – a difference of $8,300.

income distributionky

In this case, the median, the middle-most value, would be a more accurate representation of the typical Kentuckian income because less than 50% of people are making more than mean income. Knowing that, we can look at a breakdown of median incomes of each county in in Kentucky and highlighting those of the Southcentral Kentucky area. 

countystateusmedianincomekymapheat

Chris Yates, Graduate Assistant
WKU Center for Applied Economics

Declining Food Stamp Enrollments in Kentucky

According to recent data released by the Department of Agriculture there is a national decline in the use of Supplemental Nutrition Assistance Program (SNAP) Benefits. This trend is being seen in Kentucky as well. According to the data, the number of households participating in food stamps funded by the federal government in Kentucky declined by 6.7% from June 2013. 

This view paints a generally positive picture for Kentucky’s economy signaling that recent job market improvements are indeed affecting our region. The U.S.D.A. reported last year that  Kentucky’s 2nd  congressional district – which includes Bowling Green, Owensboro, and Elizabethtown – accounted for roughly 41,000 of Kentucky’s 422,704 current households receiving benefits from SNAP. The table below from the U.S.D.A. compares the characteristics of households receiving SNAP funds with those who are not.

 2nd
(Click to Enlarge)

In order to be eligible households must meet federal minimum income requirements of 130% of the federal poverty level – a monthly gross income of $2,552 (or $30,624 annually) for a family of four. The graph below illustrates the growth trends of median household income and non-farm employment in Kentucky. The graph illustrates the relationship between employment and median household income. Even though data for median household income only dates to 2012, we can assume from the general relationship between these two variables that median household income has continued to grow since 2012 as employment has increased. SNAP eligibility requirements have been loosened in recent years as a part of the Food Stamp Provision in the 2008 Farm Bill and the fact that enrollments continue to decline suggests that increasing income and employment in Kentucky is making those who were once eligible now ineligible or participants are no longer in need of assistance.

income
(Click to enlarge.)

Chris Yates, Graduate Assistant
WKU Center for Applied Economics

 

 

Where Is the Employment Slack in Warren County and Kentucky Labor Markets?

A study* released by the St. Louis Federal Reserve on May 19 indicated that the slack in the labor market since the “Great Recession” can mostly be found in three industries. Those industries include construction, manufacturing and information. In Kentucky, employment in two of the three industries also indicate slack (manufacturing and construction), along with trade, transportation and utilities. In Warren County, the slack appears to be in manufacturing, construction, and financial activities, along with trade, transportation, and utilities. The trade, transportation, and utilities sector is a supersector in service industries that includes wholesale trade, retail trade, transportation (of passengers and cargo) and wharehousing (of goods), and utilities (provision of electric power, natural gas, steam supply, water supply, and sewage removal). The charts below represent employment in these and other selected industries for Kentucky and Warren County. Warren County data is not seasonally adjusted, so seasonal trends employment, such as Christmas holidays in retail and summer construction and travel can easily be seen.

*Where is the Slack in the Labor Market? by Carlos Garriga in Economic Synopses, 2014, No. 13

Catherine Carey, Interim Director
WKU Center for Applied Economics

What Changes in KY’s Economic Activity and Leading Indexes Suggest

Since state GDP estimates are annual and only published with a significant delay, what variables can we look to for information about what is happening with the state’s economy NOW? One option is to look at the FRB of Philadelphia state activity indexes.

The FRB of Philadelphia coincident (economic activity) index consists of variables that tend to move with the economy. For example, if the economy is currently growing, the coincident index is also likely to be growing. Variables included in the coincident index are: the state’s long term trend, state-level nonfarm payroll employment, state-level average hours worked in manufacturing, state-level unemployment rate, and state-level wage and salary disbursements deflated by the consumer price index (U.S. city average). The most recent coincident index data release at the time of this writing was on May 20, 2014 for April, 2014. The data for Kentucky show:

April 2014 Coincident Activity Index for Kentucky: 143.49
1-Month Change   +0.24   0.17%
3-Month Change   +0.47   0.33%
12-Month Change +1.79   1.25%

Economic activity in Kentucky, as measured by the FRB of Philadelphia coincident index, grew at only 1.25% over the past year.

The FRB of Philadelphia leading index consists of variables that tend to turn down before an economic downturn or up before an economic upturn. It is one variable economists can use to forecast the future of economic activity in the state. Variables in the leading index are: the state’s coincident index, state-level housing permits (1-4 units), state-level initial unemployment insurance claims, national delivery times from the Institute for Supply Management (ISM) manufacturing survey, and the interest rate spread between the 10-year Treasury bond and the 3-month Treasury bill. The leading index is designed to provide a nine-month forecast of the state’s economic activity index. One downturn in the index does not necessarily imply recession is coming, but three successive declines might signal a recession in the next nine months.* The most recent leading index data release was on May 29, 2014 for April 2014.

April 2014 Leading Index for Kentucky: 

Previous Percentage Changes in the leading index for Kentucky:
January 2014:   0.01
February 2014:   -0.07
March 2014:   1.82
April 2014:  2.41

Economic activity in Kentucky, as measured by the FRB of Philadelphia leading index, is projected to have a positive growth rate of around 2.41% over the next 6 months. 

This should be interpreted with caution and in conjunction with other variables. To learn more about the FRB of Philadelphia’s coincident and leading activity indexes, see Crone, Theodore M. “A New Look at Economic Indexes for the States in the Third District,” PDF Business Review, Federal Reserve Bank of Philadelphia (November/December 2000). 

To keep track of these and other Kentucky economic indicators, see our Kentucky Indicators page.

*Crone (2000), Pg. 12.

Catherine Carey, Interim Director
WKU Center for Applied Economics