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Recent Pennsylvania Job Trends: Effects of Shale?
 

Recent Pennsylvania Job Trends: Effects of Shale?

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An economic analysis and forecast of job trends in Pennsylvania by Wells Fargo Securities' Economics Group. The analysis shows that Marcellus Shale drilling has led to a dramatic growth in jobs in not ...

An economic analysis and forecast of job trends in Pennsylvania by Wells Fargo Securities' Economics Group. The analysis shows that Marcellus Shale drilling has led to a dramatic growth in jobs in not only counties where drilling is occuring, but also in all of the counties throughout the state--because of shale gas drilling.

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    Recent Pennsylvania Job Trends: Effects of Shale? Recent Pennsylvania Job Trends: Effects of Shale? Document Transcript

    • March 12, 2012Economics GroupSpecial Commentary Jay Bryson, Global Economist jay.bryson@wellsfargo.com ● (704) 383-3518 Tim Quinlan, Economist tim.quinlan@wellsfargo.com ● (704) 374-4407 Joe Seydl, Economic Analyst joseph.seydl@wellsfargo.com ● (704) 715-1488Recent Pennsylvania Job Trends: Effects of Shale?1Executive SummaryEconomic growth in Pennsylvania appears to be positive at present, which is consistent with theexpansion that has taken hold in the overall U.S. economy. In contrast to the last economicexpansion, when payroll growth in the Keystone State lagged the national experience, nonfarmpayrolls in the commonwealth have grown in line with jobs in the overall national economyduring the current expansion. Over the past few years, shale gas production has ramped upsignificantly in Pennsylvania, which could be helping to boost employment in the commonwealth.In this report, we provide an update on the Pennsylvania economy and focus our analysis on therole of shale gas production on employment in the Keystone State. Our analysis finds thatemployment growth in counties without much shale gas presence has been positively associatedwith employment growth in the commonwealth’s primary shale gas counties.Looking forward, we forecast employment growth in Pennsylvania under three differentscenarios. Under our midpoint scenario, which is predicated on what may be the most realistic setof assumptions, statewide employment would increase by about 570,000 jobs by the end of 2020,which is roughly equivalent to the job creation experience in Pennsylvania during the 1990s.Whether the extra boost to employment that is tied, either directly or indirectly, to shale gasexploration and production in Pennsylvania is “worth it” depends on the reader’s assessments ofthe economic, environmental and social issues that are involved.Signs of a Strengthening Expansion in PennsylvaniaRecent economic data at the national level have been encouraging. The most recent real GDP datashowed that the U.S. economy expanded at a healthy 3.0 percent annualized pace in the fourthquarter of 2011, up from a 1.8 percent annualized pace in the third quarter. Admittedly, a largebuildup in inventories helped to boost growth in the fourth quarter, which will likely prove to be aone-time event. That said, consumer spending held up reasonably well toward the end of lastyear, growing at a 2.1 percent pace in the fourth quarter. Moreover, the initial data for 2012 havealso been encouraging, with job growth strengthening and consumer spending continuing toexpand in January.Although we do not have quarterly GDP data for the Pennsylvania economy, there are some initial There are somesigns suggesting that the expansion in the commonwealth has also gained strength in recent initial signsmonths. For one, the Pennsylvania Coincident Index, published by the Federal Reserve Bank of suggesting that thePhiladelphia, moved from a contractionary level in August to expansionary territory toward the expansion in theend of last year (Figure 1). Indeed, at its current level, the index suggests that Pennsylvania’s commonwealth haseconomy is currently expanding at a pace faster than that at any point during the 2003-2007 gained strength inexpansion. recent months.1 We would like to thank Tom Murphy from Penn State University and Matthew Conlan andDavid Tameron from Wells Fargo Securities for helpful discussions about shale gasproduction in Pennsylvania. We also thank Azhar Iqbal for econometric support. This report is available on wellsfargo.com/economics and on Bloomberg WFEC.
    • Recent Pennsylvania Job Trends: Effects of Shale? WELLS FARGO SECURITIES, LLC March 12, 2012 ECONOMICS GROUP Figure 1 Figure 2 Pennsylvania Coincident Index Nonfarm Payrolls: PA vs. US Three-Month Percent Change Index, 100=Aug. 2003, From The Establishment Survey 4.0% 4.0% 108 108 Pennsylvania: Dec @ 1.1% United States: Feb @ 102.2 Pennsylvania: Dec @ 101.7 3.0% 3.0% 106 106 2.0% 2.0% 104 104 1.0% 1.0% 0.0% 0.0% 102 102 -1.0% -1.0% 100 100 -2.0% -2.0% -3.0% -3.0% 98 98 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 2003 2005 2007 2009 2011 Source: Federal Reserve Bank of Philadelphia, U.S. Dept. of Labor and Wells Fargo Securities, LLC Recent gains in nonfarm employment in Pennsylvania are also consistent with a strengtheningSince reaching a economic expansion. Since reaching a bottom in February 2010, more than 130,000 jobs havebottom in February been added in the commonwealth. This 2.4 percent increase in Pennsylvania payrolls is in line2010, more than with the job growth experience at the national level (Figure 2). Interestingly, job growth in the130,000 jobs have commonwealth relative to that at the national level has been much stronger in the current cyclebeen added in the than what had been the case in the 2003-2007 cycle, in which job growth in Pennsylvania laggedcommonwealth. considerably behind job growth for the country as a whole. Figure 3 PA Employment Growth By Sector Percent, Since Feb. 2010 Trough, As of Dec. 2011 35% 45-Degree Line Ed/Health Svcs. Percent of Job Growth Accounted For By Sector 30% 25% Trade/Trans/Ut 20% 15% Leis/Hosp Mfg. Prof/Bus Svcs. 10% Construction Nat. Resources & Mining Other Svcs. 5% Info. Svcs. 0% 0% 5% 10% 15% 20% 25% 30% 35% Size of Sector - Percent of Total Payrolls Source: U.S. Department of Labor and Wells Fargo Securities, LLC 2
    • Recent Pennsylvania Job Trends: Effects of Shale? WELLS FARGO SECURITIES, LLCMarch 12, 2012 ECONOMICS GROUPSo what sectors are creating jobs in the Keystone State? Figure 3 shows that the gains have beengenerally broad based. 2 The sector comprised of education and healthcare employs 20 percent of The naturalthe commonwealth’s workers and has accounted for one-third of all the jobs that have been resources andcreated in Pennsylvania since employment bottomed in February 2010. Trade, transportation and mining sector hasutilities, professional and business services, manufacturing, leisure and hospitality, and accounted for 8construction have also generated jobs over the past two years. Notably, the natural resources and percent of themining sector, which employs less than 1 percent of the commonwealth’s workers, has accounted overall job growthfor 8 percent of the overall job growth in Pennsylvania. In other words, the natural in Pennsylvania.resources and mining sector, which includes the shale gas industry, is currently“punching well above its weight” in terms of employment growth.Figure 4 Williamsport ERIE WARREN MCKEAN POTTER TIOGA BRADFORD SUSQUEH ANN A CRAWFORD WAYNE FOREST WYOMING LACKA- ELK CAMERON SULLIVAN WANN A VENANGO MERCER CLINTON PIKE J EF FERSON LYCOMING CLARION LUZERNE C OLU MBIA LAWRENCE CLEARFIELD MONROE Montour BUTLER CENTRE UNION ARMSTRON G CARBON TO N NOR TH_ MP HA UMBERLAN D H SNYDE R RTPittsburgh BEAVER MIF FLIN SCHUYLKILL LEHIGH NO INDIANA JU NIATA CAMBRIA BLAIR BERKS PERRY DAUPH IN M ALL EGHENY LE BANON ON BUCKS WESTMORELAND HU NT INGDON TG O M CUMBERLAN D ER WASHINGTON LANCASTER Y IA PH F ULTON EL BEDFORD CHESTER IL AD FAYETTE SOMERSET DELA- P H FRANKLIN ADAMS YORK WARE GREENE Primary Shale Counties Other CountiesSource: Wells Fargo Securities, LLCSince drilling in the Marcellus formation began in earnest during the past decade, there has beenmuch speculation, both in the popular media and in academia, about the employment effectsfrom the shale industry in Pennsylvania. Not surprisingly, some studies have found significantemployment effects from the shale industry, while other studies have been less effusive. 3 In theremainder of this report, we focus on what effects the shale gas industry may be having onemployment in local communities as well as in the broader Pennsylvania economy.Is the Shale Industry Having a Significant Effect on Job Growth?To look at the local impact of the shale gas industry, we divide Pennsylvania into 14 counties thataccount for 90 percent of the shale gas wells drilled to date in the Keystone State and the2 Sectors that lie above the 45-degree line have contributed more to employment growth than theirweight in the overall workforce. For expositional simplicity, we have omitted sectors in whichemployment has contracted from Figure 3. Over the past two years employment in the financial servicesindustry, which accounts for 5 percent of Pennsylvania’s nonfarm payrolls, has contracted nearly2 percent, while public sector employment (13 percent of payrolls) has plunged nearly 18 percent.3 Timothy Considine, Robert Watson and Seth Blumsack, “The Economic Impacts of the PennsylvaniaMarcellus Shale Natural Gas Play: An Update” (May 24, 2010) estimate that the industry would create111,000 jobs in 2011. However, Stephen Herzenberg “Drilling Deeper into Job Claims: The ActualContribution of Marcellus Shale to Pennsylvania Job Growth” (June 2011), and Timothy Kelsey, et al“Economic Impacts of Marcellus Shale in Pennsylvania: Employment and Income in 2009” (August 2011)find the employment-generating effects to be significantly smaller. 3
    • Recent Pennsylvania Job Trends: Effects of Shale? WELLS FARGO SECURITIES, LLC March 12, 2012 ECONOMICS GROUP commonwealth’s other 53 counties. We call the former group primary shale (PS) counties and the latter group we refer to as other counties (Figure 4). 4 Between mid-2003 and early 2008, theIt appears that the period that marked the last cyclical employment upturn in Pennsylvania, there was little materialshale gas industry difference between the employment outcomes in these two groups of counties, especially oncemay be having a employment gains really started to gather pace in 2004 (Figure 5). However, in the currentmarked effect on cycle, there has been a clear divergence in the two time series. Nonfarm employment in theemployment in the PS counties rose nearly 5 percent between its trough in August 2009 and June 2011, whilecommonwealth. employment in the other 53 counties rose only 1.6 percent. 5 Indeed, employment in the PS counties has surpassed its previous cyclical peak, unlike the situation in the other Pennsylvania counties or in the nation at large. Therefore, it appears that the shale gas industry may be having a marked effect on employment in the commonwealth’s PS counties. However, these counties are generally remote and account for only 10 percent of the commonwealth’s employment base and 11 percent of its population of 12.7 million people. A quick glance at Figure 5 might lead some observers to conclude that the shale gas industry has not had a marked effect on employment outside of the local communities in which the wells are located. Before jumping to such a conclusion, however, we want to examine the situation more closely. We now turn our focus to Williamsport and Pittsburgh, two cities that are emerging as logistical hubs for the shale gas industry, to see what effect, if any, the proximity of drilling activity is having on employment in those cities. Is Shale Turning Williamsport into a “Boomtown?” Williamsport is the county seat of Lycoming County, which is one of our PS counties. Since the statewide trough in employment in February 2010, payrolls in the Williamsport Metropolitan Statistical Area (MSA) have risen 2.9 percent, which is above the 2.4 percent gain witnessed at theShale gas drilling is broader state level. The increase in jobs in the natural resources, mining and construction sectorlikely contributing has been especially impressive, surging by more than 25 percent since February 2010. 6 Despiteto additional accounting for only 5 percent of the employment base in Williamsport, the natural resources,demand in mining and construction sector has been responsible for nearly 40 percent of the total job gainsWilliamsport’s witnessed in the metropolitan area since February 2010 (Figure 6). 7 The leisure and hospitalityhotels and sector is also having an outsized effect on overall employment in Williamsport. This sector, whichrestaurants. makes up only 8 percent of the MSA’s employment base, has accounted for 35 percent of the job growth in Williamsport since February 2010. Shale gas drilling in Lycoming County and in some of the nearby PS counties is likely contributing to additional demand in the city’s hotels and restaurants, translating into 13 percent job growth in the leisure and hospitality sector over the past two years. Although we do not know exactly how much of the impressive growth witnessed in Williamsport’s natural resources, mining and construction sector is related to natural gas drilling, there is some anecdotal evidence suggesting that shale is playing a big role. According to Jason Fink, vice president of the Williamsport/Lycoming Chamber of Commerce, shale-related activities are driving employment growth in Williamsport and accounting for a sizable portion of wage growth for the Williamsport area, as jobs tied to natural gas mining and exploration tend to pay relatively 4 According to the Pennsylvania Department of Environmental Protection, the following 14 counties, ranked in order of importance, account for 90 percent of the shale gas wells drilled in the commonwealth: Bradford, Tioga, Lycoming, Washington, Greene, Susquehanna, Fayette, Westmoreland, Butler, Clearfield, Wyoming, Potter, Armstrong and Elk. 5 Although we have current monthly nonfarm payroll data for the nation and the entire commonwealth, countywide nonfarm employment data lag by a number of months. Moreover, the countywide data that are available to us are not seasonally adjusted. Therefore, we have seasonally adjusted the countywide nonfarm payroll data used in the analysis of this report. 6 Williamsport is a smaller metropolitan area, and we were unable to obtain data separating construction payrolls from the natural resources and mining sector, as was the case when we considered overall state payrolls by sector in Figure 3. 7 As was the case with Figure 3, we have omitted sectors in which employment has contracted since February 2010 in Figure 5. In the case of Williamsport, the only sector in which jobs have declined since February 2010 is the “other services” sector, where employment is down only 0.2 percent. 4
    • Recent Pennsylvania Job Trends: Effects of Shale? WELLS FARGO SECURITIES, LLCMarch 12, 2012 ECONOMICS GROUPhigh salaries. 8 According the Bureau of Labor Statistics, U.S. average earnings in the miningsector were $24.80 per hour in 2011, which is 25.6 percent greater than the $19.60 per hourearned by production workers in the overall private sector.Figure 5 Figure 6 Employment Growth in PA Williamsport Employment Growth By Sector Index, 100=July 2003, SA, Quarterly Census of Employ. & Wages Percent, Since Feb. 2010 Trough, As of Dec. 2011106 106 40% Nat. Resources, Primary Shale Counties: Jun @ 105.0 Mining & Construction Percent of Job Growth Accounted For By Sector Other Counties: Jun @ 100.2 Leisure & Hospitality 30%104 104 20%102 102 Manufacturing 10% Edu. & Health100 100 Services Government Trans. & Utilities 45-Degree Line 0% 0% 10% 20% 30% 40% 98 98 2003 2005 2007 2009 2011 Size of Sector - Percent of Total PayrollsSource: U.S. Department of Labor and Wells Fargo Securities, LLCPittsburgh: From Steel to Healthcare to…Shale?The city of Williamsport has a population of roughly 30,000 people and a greater metro area ofjust over 100,000 residents. Therefore, it may be relatively easy for the influx of people, moneyand jobs related to shale gas drilling to have a noticeable effect in a relatively small communitysuch as Williamsport. However, it may be more difficult for the shale gas industry to have asignificant impact in a city such as Pittsburgh. With more than 300,000 people living within itscity limits and roughly 2.4 million in the seven-county metro area, Pittsburgh is the 22nd largesturban area in the country.The number of payroll jobs in the Pittsburgh MSA has risen by 46,000 since February 2010, a4.1 percent increase. Therefore, Pittsburgh, like Williamsport, is doing better than the overall Pittsburgh, likecommonwealth in terms of job growth over the past two years. Unlike Williamsport, however, the Williamsport, ismost important driver of employment growth in the Pittsburgh MSA has been a sector with few doing better thanties to the shale gas industry; namely, the education and healthcare sector. The University of the overallPittsburgh Medical Center is not only the largest employer in the city, but it also employs more commonwealth inworkers than the next three largest employers combined (The University of Pittsburgh itself, terms of job growthGiant Eagle and PNC Financial). Other healthcare companies such as West Penn Allegheny over the past twoHealth System and Excela Health are also key employers in the area. Since the trough in years.employment in February 2010, more than 30 percent of the job creation has happened in theeducation and healthcare sector, which accounts for about 20 percent of total payrolls in the MSA(Figure 7). 9That is not to say that the shale gas industry has been unimportant in the Pittsburgh MSA. TheSteel City is the county seat of Allegheny County, which does not have much shale activity.However, the Pittsburgh MSA includes six other counties, and Armstrong, Butler, Fayette,Washington and Westmoreland counties are among our PS counties. Although less than 1 percentof the MSA’s workforce is employed in the natural resources and mining sector, that tiny sector8 Marcheskie, Dave. (Dec. 6, 2011). “Boomtown, Pa." Williamsport benefiting from Marcellus Shaledrilling. ABC 27 WHTM. http://www.abc27.com/story/16201912/boomtown-pa-williamsport-benefitting-from-marcellus-shale-drilling.9 As in Figure 6 and Figure 3, we have omitted sectors in which employment has contracted sinceFebruary 2010 in Figure 7. In the case of Pittsburgh, two sectors have lost jobs since February 2010: thegovernment sector, which is down 1.0 percent, and the information services sector, which is down6.3 percent. 5
    • Recent Pennsylvania Job Trends: Effects of Shale? WELLS FARGO SECURITIES, LLC March 12, 2012 ECONOMICS GROUP has accounted for more than 5 percent of the employment growth in the Pittsburgh MSA over the past two years. 10 While impressive job growth in Pittsburgh since early 2010 has recently caused employment to surpass its 2008 peak, employment still remains just shy of its all-time high in early 2001 (Figure 8). At its current growth rate, however, employment in the Steel City will set a new record within the next few months. Figure 7 Figure 8 Pittsburgh Employment Growth By Sector Pittsburgh Nonfarm Payrolls Percent, Since Feb. 2010 Trough, As of Dec. 2011 Millions of Workers, Seasonally Adjusted 35% 1.20 1.20 Percent of Job Growth Accounted For By Sector Ed/Health Svcs. 30% 1.17 1.17 25% Trade/Trans/Ut 1.14 1.14 20% Prof/Bus Svcs. 1.11 1.11 15% Construction 10% 1.08 1.08 Leis/Hosp Nat. Resources Financial 5% & Mining Mfg. 1.05 1.05 Other Svcs. 45-Degree Line 0% 0% 5% 10% 15% 20% 25% 30% 35% Total Nonfarm Payrolls: Dec @ 1.16 Million 1.02 1.02 Size of Sector - Percent of Total Payrolls 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: U.S. Department of Labor and Wells Fargo Securities, LLC Has the Rest of Pennsylvania Felt the Effects of Shale? The shale gas industry is clearly helping to stoke employment growth in the commonwealth’s PS counties as well as in the Williamsport MSA. There even appears to be a beneficial employment effect in Pittsburgh, which is a major metropolitan area. However, there seems to be a more macro-level question on people’s minds. In our conversations with business leaders and economic development groups across Pennsylvania, what we get asked about most often is the extent to which the shale gas industry is having an impact on payrolls in the rest of Pennsylvania. The follow-up question usually involves a forward-looking assessment of that dynamic as well.We performed a We performed a comprehensive statistical analysis of employment growth in the PS counties andcomprehensive in the other counties to determine what effect, if any, the shale gas industry has had on overallstatistical analysis Pennsylvania employment. Some of this analysis is fairly straightforward, but a proper study ofof employment the linkages between employment growth rates in these two areas of the commonwealth relies ongrowth in the a somewhat advanced econometric methodology. At the risk of oversimplifying, we offer a plaincommonwealth English explanation of that analysis in the lines that follow, and we refer interested readers with arelated to shale penchant for econometrics and statistics to the technical details that are contained in thedrilling. appendix. Essentially, we are attempting to answer two questions: first, “Has the shale gas industry affected overall payroll growth in Pennsylvania?” and second, “What impact will the shale gas industry have on future job growth in the commonwealth?” To answer the first question, we evaluated job growth in Pennsylvania between January 1990, when our data starts, and June 2011, when it ends, to measure the extent to which the PS counties influenced job growth in the other counties. As discussed in more detail in the statistical appendix, we found that employment growth in the PS counties does indeed have a statistically significant effect on employment growth in the other counties. Next, we tackled the second question: “What impact will the shale gas industry have on future job growth in Pennsylvania?” As a starting point, we needed to make some assumptions regarding 10 The construction sector needs to be added to the natural resources and mining sector to make the comparison to Williamsport straightforward. Together, the construction sector and the natural resources and mining sector make up 5 percent of the workforce in the Pittsburgh MSA, but these two sectors have accounted for 17 percent of the job growth over the past two years. 6
    • Recent Pennsylvania Job Trends: Effects of Shale? WELLS FARGO SECURITIES, LLCMarch 12, 2012 ECONOMICS GROUPemployment growth in the PS counties as well as in the overall national economy over the nexteight years. 11 Then we utilized the results of our historical analysis to project employment growthin Pennsylvania’s 53 other counties. Recognizing that the growth rate of employment in thePS counties may not be indicative of future trends, we considered three scenarios for our forecast:an optimistic scenario, a pessimistic scenario and a midpoint scenario.In our optimistic scenario, we assumed that employment in the PS counties will grow over thenext eight years at the rapid 2.9 percent per annum rate experienced between August 2009, whenemployment in the PS counties troughed after the last downturn, and June 2011 (see Figure 5).In addition, we assume that growth in U.S. nonfarm payrolls, which we found to be positively We consideredassociated with growth in employment in the commonwealth’s 53 other counties, reverts to the three scenarios for1.6 percent annual pace witnessed during the 2003-2008 expansion. Our statistical analysis our job growthfound that since 2006, when shale gas production in Pennsylvania began to ramp up in earnest, a forecast.one percentage point increase in employment growth in the PS counties is associated with a0.27 percentage point increase in employment growth in the other counties, holding othervariables constant. Using these assumptions, we were able to generate forecasts of employment inthe PS counties and in the other counties. We then added these two forecasts together to arrive ata forecast for total employment in Pennsylvania through the end of 2020.Figure 9 Figure 10 Pennsylvania Employment Projections Natural Gas Millions of Jobs, Seasonally Adjusted Henry Hub Spot, Dollars per MMBTU6.3 6.3 $16 $16 Optimistic Scenario: 2020 @ 6.24 Million6.2 Midpoint Scenario: 2020 @ 5.98 Million 6.2 $14 $14 Pessimistic Scenario: 2020 @ 5.74 Million6.1 6.1 Total Nonfarm: 2011 @ 5.41 Million $12 $126.0 6.05.9 5.9 $10 $105.8 5.8 $8 $85.7 5.75.6 5.6 $6 $65.5 5.5 $4 $45.4 5.4 $2 $25.3 5.3 Natural Gas: Mar @ $2.495.2 5.2 $0 $0 2003 2005 2008 2010 2013 2015 2018 2020 2005 2006 2007 2008 2009 2010 2011 2012Source: U.S. Department of Labor, IHS Global Insight and Wells Fargo Securities, LLCUnder this optimistic scenario, we project that nonfarm payrolls in the Keystone State would Under angrow by 825,000 by the end of 2020 (Figure 9). This 15 percent increase from the current level optimistic scenario,represents a 1.5 percent per annum rise, nearly twice as fast as the 0.8 percent average annual we project thatgrowth rate that was achieved in Pennsylvania between 2003 and 2008. Employment in the nonfarm payrollsPS counties would shoot up by more than 165,000 by the end of 2020, a remarkable 32 percent in the Keystoneincrease for counties that historically have been among the commonwealth’s less prosperous State would growareas (Figure 11). 12 by 825,000 by the end of 2020.The commonwealth’s other 53 counties would also experience strong job growth. Employment inthese counties would increase by more than 650,000 positions by the end of 2020 due to twocomponents. First, the general U.S. macroeconomic expansion, which we proxy by the 1.6 percentper annum increase in U.S. nonfarm payrolls, would lead to an increase in jobs in the othercounties in excess of 250,000 positions. The second component reflects very strong growth in thePS counties, which induces an extraordinary 400,000 jobs in the other counties over the next11 Due to the lag associated with nonfarm employment data at the county level, our forecast foremployment growth in Pennsylvania spans from July 2011 to December 2020, whereas our forecast forU.S. nonfarm employment spans from January 2012 to December 2020.12 The number of jobs in these 14 counties would swell to nearly 700,000 at the end of 2020 from about530,000 in June 2011. 7
    • Recent Pennsylvania Job Trends: Effects of Shale? WELLS FARGO SECURITIES, LLC March 12, 2012 ECONOMICS GROUP eight years. As the example of Williamsport shows, strong growth in PS counties could generate demand for leisure and hospitality jobs in other counties that are located near the PS counties. In addition, employment in other supporting industries likely would be induced in other counties by continued strong growth in the PS counties. However, the trajectory of recent history may not be sustainable for our entire forecast period, because natural gas prices have receded to their lowest levels in a decade (Figure 10).Some shale gas Consequently, some producers have announced plans to freeze production. For example,producers have Chesapeake Energy recently announced plans to reduce production and to halve the number ofrecently dry gas drilling rigs this year. 13 The unusually warm winter this year has clearly played a role inannounced plans to reducing the price for natural gas, as individuals have needed less gas to heat their householdsfreeze production. and businesses. That said, the downward trend in natural gas prices that is shown in Figure 10 has been in place for much longer than what unseasonably warm winter weather would explain. The risk is that if gas prices remain depressed due to factors beyond just warmer weather, our optimistic scenario could prove to be, well, way too optimistic. Therefore, we considered a pessimistic scenario in which employment in the PS counties reverts to the 0.8 per annum growth trend experienced during the 2003-2008 expansion, before shale gas production significantly ramped higher. In addition, we assume that U.S. economic growth remains sluggish. Consequently, U.S. nonfarm payrolls continue to grow at the 1.2 percent per annum growth rate that has prevailed over the past two years rather than revert to their faster 2003-2008 pace. Whereas a remarkable 825,000 jobs were created in Pennsylvania under our optimistic scenario,Our pessimistic the pessimistic scenario leads to an increase of only 325,000 statewide positions by the end ofscenario leads to 2020 (Figure 9). The employment gain in the PS counties shrinks to less than 45,000 positions,an increase of only almost one-fourth of the jobs created under the more optimistic scenario (Figure 12). The level325,000 statewide of employment in the other counties increases by only 285,000 jobs. Not only does the sluggishpositions by the nature of U.S. economic growth lead to slower job creation in the Keystone State, but the inducedend of 2020. rise in employment in the other counties from economic growth in the PS counties also falls to a bit more than 100,000 jobs from the 400,000 positions that were created under the more optimistic scenario. Figure 11 Figure 12 Job Growth in Optimistic Scenario Job Growth in Pessimistic Scenario Thousands of Jobs Created (Cumulative), Seasonally Adjusted Thousands of Jobs Created (Cumulative), Seasonally Adjusted 1,000 1,000 1,000 1,000 Trend Growth in Other Counties: 2020 @ 258.5K Trend Growth in Other Counties: 2020 @ 177.9K Induced Statewide Change from PS Counties: 2020 @ 398.6K Induced Statewide Change from PS Counties: 2020 @ 106.6K Primary Shale Counties: 2020 @ 167.8K Primary Shale Counties: 2020 @ 42.3K 800 800 800 800 600 600 600 600 400 400 400 400 200 200 200 200 0 0 0 0 2012 2014 2016 2018 2020 2012 2014 2016 2018 2020 Source: U.S. Department of Labor and Wells Fargo Securities, LLC As with most things in life, the “truth” probably lies somewhere between these two scenarios. Expecting that the recent breakneck pace of job creation in the PS counties will continue for the next eight years does not seem very credible, especially in light of the sharp decline in natural gas prices. On the other hand, it seems likely that U.S. employment growth will eventually strengthen 13 See “CHK: Positive – More Shifting Away from Dry Gas”, Wells Fargo Securities, January 23, 2012. 8
    • Recent Pennsylvania Job Trends: Effects of Shale? WELLS FARGO SECURITIES, LLCMarch 12, 2012 ECONOMICS GROUPfrom its slow pace of the past two years. Perhaps our pessimistic scenario is too gloomy.Therefore, we considered a midpoint scenario in which employment in the PS counties grows at apace that is the average of its 2003-2008 and its 2009-2011 growth rates (i.e., we assumed thatemployment in these 14 counties will grow 1.9 percent per annum). We also assumed that U.S.nonfarm payrolls would grow at an annual average rate of 1.3 percent, the midpoint between our Under ourpessimistic and optimistic scenarios, over the next eight years. midpoint scenarioUnder this scenario, which may be the most realistic of our three forecasts, total employment in total employmentPennsylvania would rise by roughly 570,000 jobs by the end of 2020. Approximately 100,000 of in Pennsylvaniathese positions would be created in the PS counties, and about 250,000 jobs (out of a total of would rise by470,000) would be induced in the other 53 counties by strong growth in the PS counties. On a roughly 570,000statewide basis, employment would rise by 1.1 percent per annum, which would be just shy of the jobs by the end of1.2 percent annual average growth rate that was achieved during the long expansion of the 1990s. 2020.ConclusionsEconomic growth in Pennsylvania appears to be positive at present, which is consistent with theexpansion that has taken hold in the overall U.S. economy. Furthermore, growth in nonfarmpayrolls in the Keystone State has kept pace over the past two years with employment growth inthe overall national economy. There is plenty of anecdotal evidence to suggest that the shale gasindustry is helping to boost employment in Pennsylvania, and “hard” data confirm that jobgrowth in the commonwealth’s 14 primary shale (PS) counties has indeed been strong over thepast two years. Moreover, our statistical analysis shows that, everything else equal, growth inemployment in the commonwealth’s 53 other counties has been associated directly with jobgrowth in the PS counties. Significant drilling activity and gas production in the PS counties hasprobably increased demand for services such as leisure and hospitality, and engineering andsurveying in adjacent counties.Under our optimistic scenario, in which employment in PS counties continues to grow at itsrobust pace of the past two years and U.S. nonfarm payroll growth reverts to its 2003-2008 trend,we estimate that overall employment in Pennsylvania will soar by about 825,000 jobs betweennow and the end of 2020, a remarkable 15 percent increase from its current level. Under morepessimistic assumptions, however, employment in Pennsylvania would increase by only325,000 jobs over the next eight years, a disappointing 0.6 percent per annum increase. Ourmidpoint scenario leads to an increase in statewide employment of roughly 570,000 jobs over thenext eight years, which would be roughly equivalent to the total job creation enjoyed during the1990s.As highlighted in the main body of this report, we are often asked, “What impact will the shale gasindustry have on future job growth in the commonwealth?” Our midpoint scenario projects thatthere would be 250,000 more statewide jobs at the end of 2020 than there would be under ourpessimistic scenario, which assumes slow economic growth in the PS counties as well as in theoverall national economy. Of this 250,000 increase, about 60,000 more jobs would be createddirectly in the PS counties and roughly 140,000 more would be induced in the other counties bythe stronger growth in the PS counties. In other words, the stronger growth rate we assumed forthe PS counties under the midpoint scenario relative to the pessimistic scenario would lead to200,000 more jobs across the commonwealth, which represents a 3 percent boost toemployment, at the end of 2020.We are sometimes asked if shale gas exploration, drilling and production in Pennsylvania is“worth it.” In other words, do the benefits of shale gas outweigh the costs? The 3 percent extraboost to employment that we referenced above, even if accrued over an eight-year period, isclearly a benefit. That said, shale gas exploration, drilling and production could potentially entailsignificant environmental costs. In addition, there may be some social negative externalities (e.g.,there have been anecdotes of families becoming priced out of the rental market in shale regions).As economists, we believe that we have the expertise to address economic issues, and we hopethat the analysis in this report will help to enlighten the debate about the desirability of shale gasexploration, drilling and production in Pennsylvania. Because we do not have expertise in 9
    • Recent Pennsylvania Job Trends: Effects of Shale? WELLS FARGO SECURITIES, LLCMarch 12, 2012 ECONOMICS GROUP environmental and other social sciences, however, we need to leave an analysis of these issues to others. Thus, taking economic, environmental and social issues into consideration, we leave it up to our readers to decide whether the benefits of shale gas outweigh the costs.10
    • Statistical AppendixOne of the objectives of our statistical analysis is to ascertain what effect employment in the 14 PS counties has had onemployment in the other 53 counties in Pennsylvania. Ex ante, it seems reasonable to assume that employment inPennsylvania should be related to employment in the overall national economy. Therefore, we performed cointegrationtests on U.S. nonfarm payrolls, employment in the PS counties and employment in the other counties for our data sample,which spans January 1990 to June 2011. A Johansen test indicated the existence of one cointegrating vector among thesethree variables for the entire sample. However, the residuals of an error correction model (ECM) showed significantvolatility in late 1999, which could indicate the presence of one or more series breaks in the time series data. Therefore, welimited our sample to January 2000 through June 2011 and divided this sample into two periods (January 2000 untilDecember 2005, and January 2006 until June 2011), as annual time series data indicate that shale gas production beganto ramp up in Pennsylvania around 2005-2006.For the January 2000 to December 2005 period, a Johansen test was not able to reject the null hypothesis of nocointegration among the three variables at the 95 percent confidence level. However, the variables appear to becointegrated in the January 2006 to June 2011 time period. For this time period we estimated the following ECM:Table A1: Regression Results for ∆log (employment in other counties), January 2006 to June 2011 Variable Coefficient t-statisticconstant -0.0001 -1.06∆log (PS employment)t 0.271 4.94∆log (US employment)t 0.467 5.03(error)t-1 -0.04 -1.83 R2 = 0.81 DW = 2.08where (error) is the residuals (i.e., the error correction term) from a regression of the log level of other county employmenton the log levels of PS county employment and U.S. nonfarm payrolls.To generate our optimistic scenario for employment growth in Pennsylvania from July 2011 until December 2020, weassumed that employment in the PS counties will continue to grow at the same strong rate (2.9 percent per annum) thatwas witnessed from August 2009 to June 2011. In addition, we assumed that U.S. nonfarm payrolls will grow for the nexteight years at the 1.6 percent annual rate that was achieved during the 2003-2008 expansion. By using these assumptionsand the above regression results, we were able to produce a forecast of employment in the commonwealth’s other53 counties that we added to our trend estimate of employment in the PS counties to generate a forecast for total payrollsin Pennsylvania. This forecast is shown as the optimistic scenario in Figure 9.We also needed to make a pessimistic scenario. To do this, we assumed that job growth in PS counties will revert to its2003-2008 trend, which coincided with the last cyclical employment upturn in Pennsylvania, but which also largelypreceded the significant increase in shale gas production in the commonwealth. During this period, employment growth inthe PS counties equaled only 0.8 percent per annum. We also assumed that U.S. nonfarm payrolls will continue to grow atthe 1.2 percent pace that has prevailed since national employment bottomed in February 2010. We then used theseassumed employment growth rates along with the coefficient estimates in Table A1 to produce our pessimistic scenario for2012-2020 that is shown in Figure 9. As described on page 9, our midpoint scenario assumes that U.S. nonfarmemployment over the next 8 years grows 1.3 percent per annum and that employment in the PS counties grows at anaverage annual growth rate of 1.9 percent.
    • Wells Fargo Securities, LLC Economics GroupDiane Schumaker-Krieg Global Head of Research (704) 715-8437 diane.schumaker@wellsfargo.com & Economics (212) 214-5070John E. Silvia, Ph.D. Chief Economist (704) 374-7034 john.silvia@wellsfargo.comMark Vitner Senior Economist (704) 383-5635 mark.vitner@wellsfargo.comJay Bryson, Ph.D. Global Economist (704) 383-3518 jay.bryson@wellsfargo.comScott Anderson, Ph.D. Senior Economist (612) 667-9281 scott.a.anderson@wellsfargo.comEugenio Aleman, Ph.D. Senior Economist (704) 715-0314 eugenio.j.aleman@wellsfargo.comSam Bullard Senior Economist (704) 383-7372 sam.bullard@wellsfargo.comAnika Khan Economist (704) 715-0575 anika.khan@wellsfargo.comAzhar Iqbal Econometrician (704) 383-6805 azhar.iqbal@wellsfargo.comEd Kashmarek Economist (612) 667-0479 ed.kashmarek@wellsfargo.comTim Quinlan Economist (704) 374-4407 tim.quinlan@wellsfargo.comMichael A. Brown Economist (704) 715-0569 michael.a.brown@wellsfargo.comJoe Seydl Economic Analyst (704) 715-1488 joseph.seydl@wellsfargo.comSarah Watt Economic Analyst (704) 374-7142 sarah.watt@wellsfargo.comKaylyn Swankoski Economic Analyst (704) 715-0526 kaylyn.swankoski@wellsfargo.comWells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealerregistered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and theSecurities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and throughsubsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC,Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan)Co. Limited. The information and opinions herein are for general information use only. Wells Fargo Securities, LLCdoes not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for anyloss that may result from the reliance by any person upon any such information or opinions. Such information andopinions are subject to change without notice, are for general information only and are not intended as an offer orsolicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells FargoSecurities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of WellsFargo & Company © 2012 Wells Fargo Securities, LLC. SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE