Over the Edge

The Gist: (1) O&G capital equipment orders are in decline and labor markets are weakening. (2) What began as early signs of softness in these two areas has since evolved into contraction. (3) U.S. production is beginning to roll over, reinforcing the signal.

Before “Liberation Day” (HERE) and before the latest round of OPEC family feud, I had been pointing out the underlying weakness (HERE) that had been emerging in several leading indicators for U.S. production growth—particularly in durable goods orders and employment trends.

Much like recessions, declines in activity—or in our case, production growth—don’t happen all at once. Instead, a trend of weakness gradually sets in until a “shock” pushes things over the edge. These trends had been brewing for well over a year, and now we’ve finally seen the shocks that tipped it.

Let’s explore.

First up: durable goods orders.

Orders tied to the Mining and Oil & Gas industry fell 12% year-over-year in March. On a last twelve months (LTM) basis, the decline is 3% y/y. This series has historically tracked oil production growth surprisingly well.

I see this chart as a replacement for the old production vs. rig count chart. If current trends continue, I expect year-over-year declines to persist through the remainder of the year.

Adding more weight to the argument, Caterpillar—widely regarded as a bellwether for industrial and energy-related capital spending sectors—just reported some of its weakest Oil & Gas sales since the depths of the pandemic. Their completion-related equipment business was the clear laggard, only partially offset by stronger turbine and midstream activity.

Back in the early days of the shale boom, FMC Technologies' Surface Tech division rode the wave of surging capital equipment orders for a lot of their wellhead & completions equipment. Fast forward to today, and while the business is now more internationally exposed, recent softness in inbound orders suggests continued weakness.

Onto the labor markets.

The first signs of labor market weakness typically emerge in reduced hours worked and softer hiring intentions—well before we see declines in the overall labor force, which remains a lagging indicator.

That familiar sequencing is once again playing out.

Average weekly hours have now fallen to their lowest level since 2016.