All posts by : One Southern Indiana

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

One of the big stories of the last recession and ongoing recovery has been the labor force. The Bureau of Labor Statistics (BLS) released the monthly report on state employment and unemployment last week, and the report indicated that Indiana’s labor force growth showed additional progress, increasing by another 16,000 in May. Indiana is now up by 25,000 compared to last year, same time. Kentucky saw a small increase in its labor force and is up about 32,000 from last year.

Indiana’s unemployment rate remained flat at 2.2%, significantly under the May national rate of 3.6%. Kentucky saw its lowest unemployment rate in the history of the series, reaching 3.8%, down from the April rate of 3.9%.

Indiana saw a noticeable uptick in payrolls. The report indicated that Indiana added another 9,000 jobs, and total payrolls in Indiana now exceed the level that existed in February 2020 by about 15,000. Kentucky saw its payrolls decline by 5,000, and its payrolls remain about 22,000 under the level that existed in February 2020.

Turning to Southern Indiana, employment is at the highest level for an April reading in the history of the series. Employment in the region normally peaks in July of each year, but if we compare April 2022 employment to previous April levels, it was at the highest level.  The labor force is at the level that existed in February 2020. However, for an April reading, Southern Indiana’s labor force reached an all-time high. This places the region’s unemployment rate at a staggering 1.8%.

For the Louisville Metro region, like Southern Indiana, job postings continue to remain high. Over the last 30 days, job postings exceeded the number that existed around the same time in 2019, pre-Covid. The number of unemployed, relative to the size of the labor force, is at an all-time low.

We should expect to see continued gains in the labor force of both states.  Labor force growth remains a key measure of the ongoing recovery. A portion of inflationary pressures can be attributed to supply chain challenges, and labor force growth will help alleviate some of these.

The past two weeks did see an increase in the number of “bad news” reports. A big headline was in the BLS CPI report.  The CPI reading came in above consensus estimates at an 8.6% annual rate.   The core rate, which strips out food and fuel, was at 6% and slightly above expectations. There was a violently negative reaction in the equity markets. The high CPI reading signaled that the Fed could increase rates by more than ½ a percent.   And indeed, the Fed responded with an increase of 75 basis points the following week. Unlike the negative reaction that occurred to the CPI release, the markets closed higher that day.

We can see the impact of high gas prices and overall inflation on consumer sentiment.  The latest consumer sentiment survey showed another decline.  There are only two other time periods when sentiment was lower: the early 1980s and the Great Recession. Consumer sentiment is low because inflation is at its highest in several decades. Inflation is not the only driver of consumer sentiment, but it is a major factor, particularly with the high levels.  The combination of steep declines in consumer sentiment, along with equity market declines, historically equates to the recessionary territory.

There were a couple of regional reports in manufacturing that came in much weaker than expected.  The Empire Manufacturing report and the Philadelphia Fed Index both came in under expectations and moved lower. These are only two measures of manufacturing activity but could be providing early indicators of an overall slowing of manufacturing activity. While we may see some slowing in manufacturing, simply due to a continued transition to normalization, I’m not expecting a contraction in growth. The last ISM Report on Business indicated that orders remain strong and growing, and customer inventories remain at low levels.

We saw a small increase in unemployment claims, but this is generally a very volatile series.  So, we will need additional data and consistently increasing claims to lend strength to the recession argument.  Another important indicator is consumer spending, a significant component of GDP.   If we continue to see steady declines in consumer spending, along with increases in unemployment claims, the chances of a recession increase.

Higher gasoline prices and elevated inflation will begin to eat into consumer discretionary spending.  While household balance sheets remain strong, compared to pre-pandemic, consumers can only take so much.   Sectors that rely on discretionary spending may begin to be pinched by higher gas prices.   The last retail sales report showed a .3% decline in retail sales, but this was not necessarily unexpected.    The pandemic saw gains in retail sales that were above trend, and a return to a level consistent with earned wages is inevitable.    A transition from goods to services spending should also continue.   The latest report did see a decline in furniture and home furnishings and electronics and appliance stores.   Foodservice and drinking places saw an increase.

The wealth destruction taking place in the stock market will also not help. Even with the double punch of inflation and stock market declines, we should escape a recession this year.  Job openings are about double the number of unemployed, and labor markets remain very tight.   Next year, however, as the impact of higher interest rates is transmitted throughout the economy (one of the first impacts is the housing sector), the chance of a mild recession has increased.  My optimistic (and hopeful) pathway is that inflation begins to cool later this year, leading to a slower movement in Fed hikes, and strong positive reactions in the equity markets.

Sources:  Bureau of Labor Statistics State Employment and Unemployment, Census Retail Sales, FactSet, Burning Glass, BLS CPI May 2022, ISM Report on Business

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

Recent data show that the region continues to make a solid recovery, now two years after the recession of early 2020.

In the latest Bureau of Labor Statistics metropolitan employment report, Louisville Metro’s unemployment rate dropped to 2.7%, matching the lowest rate that occurred back in 1998.  The year-over-year percent change in jobs was 3.8%, quite high relative to historical changes. Outside the abnormal changes observed last year, this is one of the highest percent changes in the past 30 years. The impressive part about the decline in the unemployment rate was the significant increase in employment. So, the unemployment rate fell for the right reasons, an increase in employment, with a labor force that remained relatively flat. Over the year, Louisville added about 21,000 jobs.  Not counting the Covid-related job changes last year, this has only occurred on four other occasions in the past 30 years. So, 21,000 jobs added in one year is significant. The latest count places the metro area about 5,000 jobs short of the level that existed in February 2020.

For Southern Indiana, we just received the latest payroll data at the county level, and the results are equally impressive.  The five Indiana counties of the Louisville Metro region added a little over 2,000 jobs from the 4^th quarter of 2020 to the 4^th quarter of 2021. This is not a record change, but on a historical basis, well above the quarterly average of 500 plus over the past 20 years. This puts the region just shy of the all-time high job total that existed in the 4^th quarter of 2019 (about 500 jobs under the 2019 4^th quarter total).

The region saw another significant increase in the number of new establishments.  One hundred ninety (190) new establishments, from 2020 4^th quarter to 2021 4^th quarter, is the 3^rd largest change since 2001. For two consecutive quarters, the Southern Indiana region has now observed quite positive changes in the number of new establishments.

For the first time, average weekly wages now exceed $1,000 across the five counties. An average weekly wage of $1,018 is the highest observed on record and is $75 higher than the total in the last quarter of 2020. The $75 increase represents the second-highest change in the past 20 years.  As the economy cools, we will likely see a moderation of these wage gains.  Regional firms will see wage gains stick, however.  Try reversing the wage gain for any employee and observe what might happen to employee retention. Successfully navigating these wage increases will either rely on efficiency gains or higher prices, or some combination of the two.   This will vary from firm to firm and across industries.

Nation-wide, job openings saw a small decline, but remain at very high levels. Job openings are almost double the number of unemployed. For the rest of the year, we should see these openings decline, as the labor force shows incremental expansion. Labor force growth is the key to alleviating some of the supply problems challenging the economy and moderating wage-price gains.

We will now be entering another phase of “good news is bad news”.  We saw this recently with the Institute of Supply Management Report on Business and the most recent national employment report. For the ISM report, the ISM Index came in higher than expected, and the market finished in the red for the day. The most recent national employment report saw a higher-than-expected increase in payrolls, and the equity markets tanked.  In both cases, markets interpret positive economic data as an assurance that the Fed will continue tightening or even raise rates higher than initially expected. “Bad news” will have the opposite effect. For example, the last report on personal consumption expenditures, it was mostly good news, but there was also some indication that inflation may begin a cooling period. For any report that points to subsiding inflation,  equity markets will respond quite favorably.  The market will be closely monitoring the next CPI report out this week.  If the data show that inflation may have peaked, you will likely see a very strong, positive reaction in the equity markets.

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

As the consumer goes, so goes the economy!  So far, the consumer continues to shop, travel, and visit food and drinking places.  In fact, the consumer is buying so much that the surge in imports caused GDP growth to be negative during the first quarter.

The pandemic caused a deep decline in retail sales and consumer spending.  This drop did not last long, however.  In just a few months after the economic shutdowns of early 2020, U.S. retail sales climbed to record levels.   Government stimulus provided support for additional spending, and households cleaned up their balance sheets by paying down debt and increasing the size of their checking accounts.

News for the consumer has been quite dismal.  Gasoline prices are at historically high levels, now exceeding $4 a gallon.  The equity markets have been quite volatile, erasing most of the gains from over the year.  The S&P is teetering with bear market territory, about 20% down from the peak, and the NASDAQ is down around 30%. Forty-year high inflation and erosion of investment accounts show up in surveys of the consumer, such as the University of Michigan Survey of Consumer Sentiment.  The latest survey showed a slight uptick in sentiment but remains at a level that last existed in the Great Recession.  Sentiment levels are now lower than the deep pessimism that existed during the Covid shutdowns.

Consumers are telling surveys that their mood is quite sour, but their behavior is not consistent with survey results.   As an example, the Census Bureau released the monthly retail sales report, and sales exceeded consensus estimates.    A few takeaways show that food and drinking places were up by 2% and non-store retailers (i.e. Amazon and others) by 2.1%.  Despite the lack of inventory, auto vehicle and parts dealers increased by 2.2%.    Interestingly, gasoline stations were down by 2.7% from the previous month, representing the largest decline across all categories.  Retail sales figures are not adjusted for inflation.  So, even with historically high gas prices, sales were down by a significant level.  This suggests that consumer behavior is changing around high gas prices, and households are finding ways to reduce and conserve.

The latest retail sales report tells us that despite all the doom and gloom, households continue to be quite resilient.   This could change very quickly, thereby increasing the probability of a recession. One of the reasons why I don’t think we will see a recession this year is due to the consumer, both at the spending level and with the availability of jobs. Basically, we need to see more layoffs and a decline in consumer spending before we get to the point of increasing the probability of a recession.   Unemployment claims are at historically low levels.  The latest level of 218,000 is about the same prior to the pandemic and significantly under the 350,000 level that usually coincides with the start of a recession. Unlike the start of the Covid recession and the last Great Recession, we now have record job openings.  In fact, the number of openings is about double the number of unemployed. Record openings and few layoffs are not consistent with the beginning of a recession.

With respect to consumer spending, we need to see spiraling declines in consumer spending, and that is simply not happening. While savings rates have come down, checkable deposits held by households remain at record levels.  In other words, households still have lots of cash to spend.  There is also unused debt capacity. That is, consumers can also borrow more.  We are seeing some increases in consumer debt, but household debt ratios are still under the level that existed in February 2020, and well under Great Recession levels. Homeowners have seen burgeoning home equity levels but have yet to fully tap into it as a cash source.   Home equity loans outstanding are at low levels, despite the record increases in home prices.

What about inflation?  One part of the last CPI report that did not get much attention was the month-over-month price change.  The last monthly increase tied for the smallest in the past 12 months.   The monthly increase of .3% was significantly lower than the 1.2% monthly increase in March and tied with the .3% increase in August of last year. Last month may subsequently be viewed as peak inflation, and the CPI should begin to moderate as a result. Inflation expectations, as measured by the difference between 5-year Treasury Inflation-Protected Securities and 5-year Treasury securities, peaked in April, and have been on a steady decline since.    Five-year inflation expectations are now under 3%.    If I can “crystal ball” for a moment, as inflation numbers come in less than expected, equity markets should see a strong bounce.

To be sure, we will likely see a slowdown in the economy.  We cannot continue growing at the rates observed last year.  Even though consumers continue to spend, we will likely see a deceleration in goods spending, and an increase in services.   A key metric that I will be following over the coming months is labor force growth.  We were seeing nationwide gains earlier in the year, but last month saw no growth.  State-wide, Indiana saw a noticeable increase last month, and Louisville Metro has been seeing some gains.  For the national economy, labor force growth is critical.  An expanding labor force will help boost supply and mitigate supply chain challenges. This will also provide stronger headwinds to inflation, along with the strengthening dollar.