By Dr. Uric Dufrene, Sanders Chair in Business and Professor of Finance, Indiana University Southeast

The past week observed a return to market volatility, or in other words, a roller coaster ride.   On one day, Dow Futures pointed to a drop of more than 500 points, but the market showed some stabilization in the afternoon and closed 250+ points down.  The wild ride continued the next day, with the Dow finishing up 400+ points.

Some of the initial volatility occurred earlier in the week when the ISM Services Index came in less than the market consensus.   The index showed continued expansion in the service sector but deceleration from the previous month.   The headline number was less than the market expectation and investors reacted negatively.

Why was the reaction so harsh for a report that still showed expansion in services?   Investors have been expecting strong growth in the service sector of the economy.  Last year, consumers were flush with cash, due to a combination of stimulus checks and limited leisure and hospitality experiences.  Consequently, consumers spent heavily on durable goods.  Households shopped for goods that could be delivered to the front door, made lots of home improvements, or bought things like bikes and kayaks, camping equipment and electronics.

Moving past all that, households now have pent up demand for services. They want to pursue activities with others, like dining, travel, or experiences.  When the ISM Services Index came in less than expected, the market reaction was negative, losing 400+ points early in the trading session, and then finishing down 200+ points on the day.  The less than positive ISM Services Index led investors to believe that the big party everyone had been waiting for might be a little bit less.

A couple days later in the week, we had the big drop in early Dow Futures and the decline of 250+ points for the day.  A lower yield on 10-year government bonds, along with the earlier ISM Services deceleration, produced fear among some investors.   Early in the year, we saw the opposite.  Big drops in the NASDAQ due to a 10-year yield that had surpassed 1.7% caused the reflation trade, with investors rotating to value over growth stocks.

Fast forward to last week, and the market expressed concerns with the declining 10-year yield.  Since early April, rates on 10-year bonds have been on a declining trend.  Last Thursday, the market reacted quite harshly to lower interest rates, not higher!  A declining 10-year yield was telling investors that growth might be less than previously anticipated.  Add the results from the ISM Services Index, and the market was in a grouchy mood.  It finished down 250 plus, but this was a significant improvement from early futures that were pointing to a 500+ decline.

One of the issues on the service side of the economy is available workers.  As discussed in previous columns, worker shortages are making it increasingly difficult for firms to realize the growth potential, given the strong demand.    The ISM Services report alluded to that.    The employment component of the report showed contraction, in the presence of overall expansion in the service economy.   The decline in the ISM Services employment component can be seen with the difficulty in hiring, evident through the record number of job openings.   The latest Bureau of Labor Statistics JOLT (Job Openings and Labor Turnover) report showed that job openings continue to remain at record levels, with leisure and hospitality increasing by 10,000.

Locally, initial claims for unemployment are at the lowest level during the pandemic, and now are almost comparable to levels that existed prior.    Initial claims across the five counties of Southern Indiana reached a pandemic high of 5,300+/- and the latest show a level of 185.  Continuing claims reached a pandemic high of 10,500+/-, and now stand at 1,400+/-.   Pre-pandemic initial and continuing claims were 104 and 565, respectively.

Despite some of the recent hiccups, we can still be optimistic regarding overall growth.  Consumers continue to be flush with savings, and pent-up demand has not been fully satisfied, especially on the services side of the economy.   Low inventory levels in manufacturing, along with supply chain issues and labor bottlenecks, suggest significant production in the pipeline.   The ISM Backlog of Orders Index was at historical high levels but receded slightly last month.   New orders remain high, and inventories low.   Consumers continue to spend and are now willing to take on more debt.  Consumer debt reached a year over year bottom in early 2021 but has been increasing since.   While the 10-year yield is expressing some hesitation in earlier growth prospects, strong growth is still in the pipeline.

By Dr. Uric Dufrene, Sanders Chair in Business and Professor of Finance, Indiana University Southeast

If you have been a recent buyer or seller for residential real estate, you were either very satisfied as a seller, or faced repeated disappointment as a buyer. Homes are frequently sold as soon as listed, and in some cases with competing multiple offers. Buyers may have to offer above the asking price just to be competitive, and still may find themselves with an unaccepted offer.  Booming prices are the result of a classic supply and demand problem. Demand for housing is high, but the supply is perhaps at the lowest. There are early signs that conditions have begun to normalize but the emphasis is on “begun”. Before we get into the data, let me admit that I do not closely follow real estate. The article below is in the spirit of sharing information that may be of interest to you. Any errors are exclusively my own.

Nationally, the nation is facing a housing shortage due to underbuilding that started around 2000. According to a study published by the National Association of Realtors, the U.S. is facing a shortage of 5.5. million homes. Annual home starts have been running about 275,000 lower than the level that existed from 1968 to 2000, as also reported by the Wall Street Journal (U.S. Housing Market Needs 5.5 Million More Units, Says New Report, Nicole Friedman, June 16, 2021).  The pandemic exacerbated this shortage with the plummeting of housing starts early in the pandemic. Construction shutdowns, rising commodity costs, and supply chain issues have all contributed to challenges in building. Moving past the pandemic, starts have rebounded since last year, and are now at levels higher than existed pre-pandemic.  Even with higher starts, it takes time to build a home, especially with supply chain constraints facing contractors.

Strong demand and limited supply have produced record breaking changes in home prices.  The median home price in the U.S. climbed to $350,000 in May 2021.   This compares to a median home price of $310,700 in February 2020.   The limited supply of homes, and record prices are beginning to have an impact on sales.   The latest data show that existing home sales have been declining since December 2020, and new home sales since January 2021.  Slowing sales will help build up inventories, and level the playing field between sellers and buyers.   Nationally, inventory levels have been increasing since January, but remain about 320,000 homes under May 2020.

Locally, we are observing similar conditions. Inventories are down, but demand is up.  This combination is producing higher prices. Harrison and Scott Counties are observing the highest year over year increases in median home prices, climbing 35.2% and 25.9% respectively, year over year from May 2020 to May 2021.   The highest median home prices are in Clark and Harrison Counties, $229,950 and $229,900, respectively.

Some counties in Indiana are observing price increases significantly higher than the region.   Franklin County, just south of Indianapolis, saw median home prices increase by 127% in May, year over year. Posey County, just west of Evansville, saw home prices increase by 117%.  And in Blackford County, just north of Muncie, median prices increased by a whopping 171%!

Data from the Indiana Association of Realtors show that May inventories have been declining for three consecutive years, and inventories are down 48.2% from same time last year.   Like the national data, home inventories have been gradually increasing since the beginning of the year but are still at extremely low levels.

On the supply side across the five counties of Southern Indiana, the data are fascinating.  Total building permits are just under the level that existed in 2004, the boom in building that helped fuel the last housing crisis. However, unlike that time, multi-family permits are now driving the increase. In fact, it is almost a reversal from the period leading up to the Great Recession. In 2004, there were 1,549 total single- family permits; in 2020, the region generated 1,144 permits. In 2004, the region had a level of only 158 multi-family permits; in 2020, the number of multi-family permits stood at 576.   The number of multi-family permits since 2018 exceeds all multi-family permits from 2004 to 2017!

To help demonstrate the supply issues, we can compare building permits from around 2004 to the most recent period.   Three years prior to the Great Recession, the region generated a sum of 4,465 single family permits. Fast forward to three years around the pandemic recession, the region generated a total of 2,882 single family permits. This limited supply of homes, and excessive demand result in the higher prices we have been observing.

Will conditions ever return to normal?   Yes, but it will take some time. Existing homeowners will list homes when there is confidence that an adequate pool of homes will be available for purchase, and the nation has moved past supply chain issues.  This will support a higher inventory of homes available for sale. Higher prices have had an impact on existing inventories expanding, although at nominal incremental levels.  As interest rates increase, this will also place headwinds to price increases, and soften demand.   At some point, the Fed will begin to taper purchases of mortgage bonds, and this will help lift mortgage rates and remove oxygen out of rising home prices.  On the commodity front, prices are beginning to fall, with lumber prices declining drastically. As supply chain issues normalize, new construction will also increase the supply of homes on the market.

While there are challenges to buyers and contractors, higher home prices help fuel consumer spending, the driver of the nation’s economy.   Higher home values are building stronger household balance sheets, and household debt as a percentage of income has declined.   Stronger household net worth, linked to home values and equity markets, along with elevated savings rates, will help sustain the strong recovery through the rest of 2021.

Data sources:  Indiana Association of Realtors, FactSet, STATS Indiana

By Dr. Uric Dufrene, Sanders Chair in Business and Professor of Finance, Indiana University Southeast

Early in the pandemic, consumer hoarding led to shortages of items like hand sanitizer, toilet paper, and yeast, to name a few.   These early shortages were driven by safety and health concerns, hoarding instincts that kick in during survival mode, or just looking for things to do to “pass the time” (a Cajun expression).    We now have a new set of shortages that are linked to the country moving out of the pandemic.   The big question, both nationally and locally, is the length of such shortages, and the overall impact on the economy.

Today, we will look at the latest in the labor shortage.    Last week’s April JOLTS (Job Openings and Labor Turnover Survey) report indicated that job openings surged to 9.3 million, the highest on record.  This was an increase of about 1 million job openings since March.   The largest number of openings existed in leisure and hospitality, followed by professional and business services, education and health services, and retail trade.  The largest increase in openings occurred in the leisure and hospitality sector.  Restaurants and tourism destinations are reopening nation-wide, and the labor pool is very scarce.

Calculating a simple ratio provides another look at the degree of tightness.  Openings divided by the number of unemployed conveys the number of job openings per unemployed individuals.    A ratio of 1 implies that for every job opening, there is one person unemployed to fill the position.   A number greater than one implies that there are more openings than the number of unemployed, and a number less than one means that there are more unemployed for every job available.   Industries with the highest number of job openings have ratios greater than one, implying that more openings exist than the number of unemployed.

Note:  Unemployed and Openings expressed in thousands.

Another back of the envelope calculation we can make is to remove the number of unemployed that existed prior to the start of the pandemic.    That number stood at 5.7 million.  If we remove 5.7 million from the current number of unemployed, we get a number equal to 4.1 million.  We can think of 4.1 million as the number available from unemployed ranks, or certainly a number less than the 9.8 million.

Prior to the start of the pandemic, there was already a tight labor market and the nation had unemployed ranks that totaled 5.7 million.   Regardless of the economy’s strength, there will always be the number of unemployed (due to frictional, structural, seasonal, cyclical reasons).   If the labor pool from unemployed ranks is scarce, then an option is to hire someone already employed.     This will require competitive wages and benefits, and attractive work environments, or some combination.  The importance of employee retention only intensifies.

The JOLTS report also tracks the number of quits.  Quits signal that workers have more confidence in employment prospects elsewhere.    The Quit rate usually goes up when the economy is booming and goes down when there is less confidence in finding another job.  The Quit rate hit an all-time series high of 4 million in the last report, reiterating the significance of employee retention.

Turning to the Southern Indiana region, we also see evidence of a very tight labor market.  Last February 2020, Burning Glass data indicated job postings of approximately 3,300 (author’s rounding).   The number of unemployed across the five Southern Indiana counties stood at 4,800 (author’s rounding).   Fast forward to the pandemic exit phase, there are now 4,200 (rounding) job postings and approximately 5,000 (rounding) unemployed.      After adjusting for seasonality, the region’s labor force is smaller by about 3,500 workers since February 2020, thus further compounding the shortage.

Employers were already familiar with the labor market challenges prior to the pandemic.   The higher ratio above indicates that it has only gotten tighter.

Data sources:  FactSet, Burning Glass, BLS JOLTS

–Are wage changes permanent, or a temporary adjustment of the Covid economy?

By Dr. Uric Dufrene, Sanders Chair in Business and Professor of Finance, Indiana University Southeast

We now have a full year of employment and wages data at the county level for all of 2020.   The 4th quarter data for 2020 were recently released, and the results show record-breaking changes for the five Louisville Metro counties across Southern Indiana.

First, the data (Quarterly Census of Employment and Wages, STATS Indiana) show that Southern Indiana continues to recover jobs lost in the early stages of the pandemic.   The latest show that the region is down about 2,800 jobs from the previous year (2019 Q4 to 2020 Q4).    All industries saw declines, except for transportation and warehousing, gaining 1,600 jobs, and public administration, showing a plus 214 jobs from the prior year.

The largest decline occurred in manufacturing, down 1,553 from the previous year.   This is a considerable improvement from the 2nd quarter of 2020 when manufacturing was down almost 4,000 jobs from the previous year.   Accommodation and food services declined by almost 1,000 jobs from the prior year.   Again, this is a respectable improvement from the 2nd quarter of 2020 when firms in accommodation and food services were down approximately 3,100 from the previous year.   Health care and social services declined by almost 700 jobs from the prior year, compared to the approximate 2,400 lost jobs in the second quarter.

Significant layoffs occurred in March and April of 2020, but the region has been regaining jobs since.  April 2020 will likely be viewed as the bottom in the nation’s economy, and locally, job losses also accelerated.  The second quarter of 2020 saw the region lose approximately 11,500 jobs from the previous year, almost double the job losses that occurred in the Great Recession.    Southern Indiana has made significant progress in recovering the jobs that were lost in the 2nd quarter of 2020.    This latest data suggest that the five counties of Southern Indiana will recover all jobs during 2021.

The “record breaking” part of the Quarterly Census of Employment and Wages data can be seen on the wages side.    Wages across Southern Indiana saw a significant increase from the prior year.   Average weekly wages increased by $92 a week, moving from $846 in the 4th quarter of 2019 to $938 a week in the 4th quarter of 2020.   This represents an 11% wage increase in one year, and the weekly gain of $92 is the largest since 2001, the starting point for the data series.  Average weekly wages increased in all industries, except for transportation and warehousing, which observed a decline of $72.   Weekly wage increases were also observed across all Indiana metro regions, ranging from .1% in Kokomo to 18.5% for Elkhart-Goshen.

In manufacturing, payrolls were down 1,553 from the previous year, but total wages increased, along with the average weekly wage. The average weekly wage in manufacturing increased by $122, bringing the average weekly wage in manufacturing to $1,191, the highest in the data series. The combination of a lower jobs count, and higher wages suggest that area manufacturers saw gains to productivity in 2020, consistent with what was observed nationally. Expect the worker skills availability debate to only intensify.

Over the coming months, inflation will be one of the most talked about economic indicators.  Some inflation is desirable, and the Fed’s preferred inflation rate is about 2% a year.   The last report on CPI (consumer price index) showed year over year price increases of 4.2%, which was much higher than consensus estimates.   The Fed has indicated it is willing to see prices go higher than the optimal level of 2%.    The hope is that price increases over time will average out to the 2% inflationary rate target.

Employment costs will be closely monitored by the Fed.  Higher employment costs could ultimately trigger additional price increases, lower profits, or some combination of the two.  As of 2020 Q4, Southern Indiana establishments observed uniform increases in average weekly wages that were the highest since data were available from 2001.    Will these significant wage gains be sustained, or simply reflect 2020 Covid dynamics of the labor market?  That is an important question as we head into the second half of 2021 and the release of the 2021 Q1 data.