Posts in category: Economic Development

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.

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

The Bureau of Labor Statistics released the monthly report on Metropolitan Employment and Unemployment last week. The report showed additional progress in one of the major challenges over the past couple of years. The latest BLS metropolitan March estimates show that the region’s labor force is higher than the level that existed in February 2020, and higher than the March 2019 number. Since the trough of June 2020, the region has added about 40,000 workers.

As a comparison to the Great Recession, the region’s labor force showed almost no increase from 2010 to 2015. In March of 2010, just after the Great Recession, the Louisville Metropolitan area labor force was approximately 626,000. By March 2015, the labor force had only increased to 629,000. Starting in 2016, the metro labor force then began an upward trajectory, adding another 38,000 workers until the Covid plunge of February 2020.

The most impressive decade of labor force growth occurred in the 90s. In February 1993, the metropolitan labor force was at 538,000 and then peaked in February 1999 at 592,000, representing a gain of 54,000 workers. In the following decade, the region then only added about 10,000 workers.

On the employment side, Louisville employment now exceeds the level that existed in February 2020, even though it is only by about 2,000. In the past year, Louisville employment has grown by about 20,000. This rate of growth exceeds labor force growth observed from 2017 to 2019. Mid 2016 showed the strongest year over year labor force growth, except for one month in 2010, and the outsized Covid related growth.

On the payroll side of the report, Louisville Metro is down about 5,000 payrolls from the level that existed in March 2020. The BLS report showed a small uptick in payrolls but declined on a seasonally adjusted basis. Over the year, the metro area is up about 12,000 payrolls. On a percentage basis, metro area payroll growth trails Kentucky, Indiana, and the US. Durable goods manufacturing is down about 6,000 payrolls since last year, and overall manufacturing is negative year over year. While overall payroll growth is under state and national rates, there continues to be a demand for hiring. Job postings on the labor market website, Burning Glass, are about 1,000 higher for the metro region compared to last year.

The manufacturing payroll numbers likely explain the overall subdued payroll numbers for the metro region. There are potential explanations for this, including supply chain challenges and the chip shortages that have adversely impacted auto manufacturing. For the readers of this column, I’ve been very optimistic about manufacturing in general. The latest Beige Book (St. Louis Fed section) captures this sentiment precisely.

Manufacturing
Manufacturing activity has strongly increased since our previous report. Firms in both Arkansas and Missouri reported moderate to strong upticks in new orders and production. Demand has continued to remain strong despite significant price increases, exceeding production capacity and creating order backlogs. Some firms are concerned demand may soon soften due to these continued price increases. Labor inputs and wages also remain high due to worker shortages. One contact in trailer manufacturing noted that they “could double their sales if they had the workers.” Firms continue to invest in process automation to reduce their reliance on human labor.

–Beige Book, April 2022

Perhaps the last sentence can also partially explain the overall change in Louisville Metro payrolls. Demand has been strong, but fewer employees in manufacturing may be needed, and we’ve written about this several times in the past.

The latest ISM Report on Manufacturing did show a deceleration in growth. The 55.4 reading is consistent with expansion in manufacturing, but this number was lower than the previous month’s reading of 57.1, and lower than the readings in the 60s we were seeing last year. We need the ISM to get to the lower 40s before we enter a recession.

Data sources: Burning Glass, BLS Report on Metropolitan Employment and Unemployment

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

In the last column, arguments were presented against a recession for the remainder of this year.   The verdict is still out for 2023, however.  What happens with the consumer can tell us a lot about the economic outlook.  Almost 70% of GDP is consumer spending.  So, as the consumer goes, so goes the macro-economy.

One of the points presented in that last column pertained to consumer debt.   Statistics regarding consumer delinquencies, household debt, and levels of outstanding home equity loans point to increased consumer debt capacity.   Debt capacity, or as referred to in corporate finance “unused debt capacity”, will serve a key role in determining the strength of consumer resiliency.    The combination of consumer credit activity, rising real estate values, and gains to net worth all serve to increase household debt capacity, directly or indirectly.   This is one of the fundamental reasons why the consumer will not roll over just yet.

Consumer credit was released last week, and the number came in significantly higher than what was expected.   Consumer credit came in at $41.8 billion, and the consensus estimate was $17.5 billion.   The prior number was $8.9 billion. Numbers are mentioned here only to show the magnitude of the increase.  The report indicated an explosion in consumer credit.  It was one of the largest monthly increases in 30 years.  Does this mean that the consumer is headed straight for the cliff?  We are not at that point just yet.   Household balance sheets remain strong, and the surge in consumer credit suggests that the consumer will provide some resiliency for the rest of the year.

Last week’s unemployment claims number came in at 166,000!   This is an extremely low number when compared to historical levels. This number was the lowest since the 1960s when the labor force was significantly smaller in size.   We can also use unemployment levels as a predictor of recessions.  When unemployment claims approach a level of about 350,000, that is close to the start of a recession.   We can’t use the Covid recession as an anecdote because we had the quickest increase in unemployment claims ever.   However, if we go back to the recessions of 2008, 2001, and 1990, the 350,000 unemployment claims number is pretty accurate.  With 166,000 claims, we are far from that number.

The last U.S. employment report showed that employers added 431,000 jobs in March.  That was a little below the consensus number, but the big takeaway from the report is the activity we are now seeing with the nation’s labor force. March saw another noticeable pick-up in the labor force, adding to February’s gains.   This was a significant piece of the report.  Not only did the labor force increase, but the number of unemployed dropped as well, resulting in an unemployment rate that is now 3.6%.  The big challenge last year was a stagnant labor force.   A positive trend is now developing, and this will support overall payrolls growth in the near term.

The last employment report for metropolitan areas also showed a noticeable uptick in the region’s labor force.  These data are preliminary and subject to subsequent revisions, and the metropolitan report lags the nation’s employment report.  The latest metro data show that the metro labor force is almost back to the pre-Covid level that existed in February 2020.   Examining both the national and metro reports suggests that the stagnant labor force growth of last year may be behind us, or perhaps showing some improvement.

Despite some of the gains we are now seeing with the labor force, local employers continue to face challenges in meeting demand.  Burning Glass job postings over the past 30 days were at approximately 20,000 for Louisville Metro.  Examining the same time of the year in 2019, prior to Covid disruptions, show that postings were at approximately 15,000.   The total unemployed in the metro region is estimated at 23,000, about the same level that existed just prior to the Covid disruptions.  So, openings are close to the number of unemployed.    Put another way, there are still very few workers available to hire.  A now expanding labor force will bring some relief to employers.

We could easily write several articles about recession risks.    Inflation, stock market volatility, and rising interest rates are a few to mention.   As we go through 2022, the risks might strengthen the headwinds confronting growth, and the probability of a recession will increase.    To be continued.

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

Not a day goes by that you won’t hear or read about the possibility of the economy entering a recession.   Indeed, several indicators do continue to point in the direction of a recession.    While the economy does face significant risks, slower growth is likely, but not to the extent that it will trigger an officially dated recession.

One indicator flashing a recession signal is Consumer Sentiment, the statistical indicator which is largely based on consumer perception of household finances.  Consumer sentiment, as measured by the University of Michigan Consumer Sentiment Survey, has been on a downward trend since the post-Covid recession peak in April 2021.   The last reading of 68.2 is the lowest since the Great Recession, and the lowest prior to the Great Recession was in the first recession of the early 80s.     A 68.2 reading is lower than the levels of consumer sentiment that appeared in 9 recessions dating back to the 1950s.   There were only two recessions with consumer sentiment readings lower than the current:  the Great Recession and the early 1980s.   From this indicator alone, one would conclude that a recession is pending.

Another widely cited consumer mood statistic is the Conference Board’s Consumer Confidence Index.  Where the Michigan survey is derived from consumer perceptions about finances, the Consumer Confidence Index is based more on consumer attitudes regarding labor market conditions.    With the Consumer Confidence Index, the outlook regarding the economy is somewhat different than the Michigan Sentiment number.   The latest reading is down from the post-pandemic recession high of June 2021 but is still higher than all levels that existed between 2010 and 2017.    The tight labor market and historically low unemployment rates prior to the pandemic resulted in consumer confidence numbers that were higher than the current reading, but the only other period where the consumer confidence numbers were noticeably higher than the current reading was in the late 1990s.   Unlike the consumer sentiment number, consumer confidence is not signaling a recession.    When we observe data such as record-breaking job quits, one of the conclusions we can draw is that workers are very confident.

So why is there such disagreement between sentiment and confidence?    There is one word, and it is inflation.   Consumers do not like inflation, and this is the first time that a large percentage of the buying public has ever experienced rising prices of this magnitude.   And if consumers face higher prices, they certainly expect shelves to be stocked and goods to be delivered in a reasonable amount of time.  The supply chain situation, along with the highest inflation in 40 years, combine to produce the very dismal consumer sentiment numbers.   In fact, there is a negative correlation between sentiment and inflation.  When inflation is up, sentiment is down, and vice versa.

When we examine actual household finances, we get a view of the consumer that is different from inferences we might draw from the Consumer Sentiment Survey.  Overall, consumer finances are stronger now than coming into the pandemic.    Household net worth is at the highest level on record.  With the devastating Great Recession, it took 5 years before households could recover net worth lost.   With the Covid recession, it only took about one quarter to recover losses.   Since March 2020, net worth has been climbing, and the gains since then are the largest since going back to the 1940s, perhaps the largest gains in history.    Think of this net worth as a cushion.

Consumers also used excess savings and stimulus to pay down debt.   Household debt as a percent of income is considerably lower than the high rates that existed at the start of the Great Recession.   At that time, household debt as a percent of personal income was higher than 100%, about 124%.    Today, the number is in the upper 80s, considerably lower than the excessive debt number associated with the Great Recession.   Delinquency rates for credit cards and consumer loans are at historical lows, at least the lowest in the past 30 years.  There has been a small uptick since the middle of 2021, but rates remain under those that existed coming into the Covid recession and far lower than delinquency rates associated with the Great Recession.

Home equity loans are at the lowest level since 2000.  Home equity loans outstanding peaked with the real estate binge of the Great Recession but has been on a downward trajectory since.  With the decline in household debt as a percent of income and lower consumer delinquency rates, the household is positioned to take on more debt, providing potential support to consumer spending.   Think of this unused debt capacity as additional stimulus for growth.  Will consumers tap into this is a question.

Another signal pointing to a recession is the yield curve, which is a plot of Treasury yields at various maturities.  Normally, an upward sloping yield curve points to a growing economy; longer-term bonds have higher yields than shorter-term instruments.   One of the signals to monitor from the yield curve is the difference between the 10-year Treasury and the 2-year.   An expanding spread usually points to growth, and a declining spread points to potential slower growth.   An inversion occurs when the yield on the 2-year exceeds the yield on a 10-year bond.   The curve is about to show inversion, pointing to an upcoming recession.  The issue is the timeliness of the prediction.  An inverted yield curve does not point to when a recession will occur, only that it will occur.  The 10-2 spread narrowed about 3 years prior to the recession of 2001, and about the same for the Great Recession.   The spread narrowed prior to the Covid recession, but that was even before we knew anything about Covid.   Another measure derived from the yield curve is the difference between 3-month T-Bills and the 10-year Treasury. Unlike the 10-2, this gap has been widening, pointing to stronger growth.

Record openings and a labor force that is now showing expansion will support payroll growth for the rest of 2022.    New claims for unemployment are at record low levels.    In addition to a solid labor market, industry data and macro trends continue to point to growth in manufacturing.  Very lean inventory to sales and customer inventories suggest that manufacturers still have a lot of production in the pipeline. Higher prices at the pump and inflation, in general, will impose additional costs on households.  In addition, declining consumer sentiment along with signals that we are getting from the yield curve, point to slower growth.  However, we are not ready to declare that a recession will take hold this year.

The U.S. economy saw record increases in consumer spending over the past two years.   Government stimulus and a shift away from services to goods spending resulted in record gains in retail sales.   This amount of spending cannot be sustained, and we will see a deceleration in this consumption.  This will allow supply chains to “catch up”.   Improvements to the supply chain, along with an expanding labor force, will result in a moderation of the price increases.    The five-year break-even rates, an implied rate of inflation due to bond pricing, have moved up about 7/10ths of a percent since the beginning of the year, but remain under 4%.

To sum up, we will see slower growth this year, but not ready to declare that we will see a recession.  If one wants to observe a measure of consumer resilience, just try going to your favorite restaurant on a weekend evening.   Without a reservation, be prepared for a long wait.

Data source:  FactSet

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

The Bureau of Labor Statistics issued the monthly employment report this week, and there were a few highlights worthy of discussion.

First, the headline payrolls number came in much higher than expected.   Consensus estimates had payroll gains at 400,000 plus, and the actual number came in much higher at 678,000. Leisure and hospitality led the way with 179,000 jobs.  Of that number food and drinking places added 124,000.   Employment in leisure and hospitality is still down 1.5 million since February 2020.    We will likely see continued growth in the leisure and hospitality number this year, but headwinds are developing, and these will be discussed in the conclusion.

Professional and business services were next with 95,000 jobs.  This included 36,000 temporary labor services positions.  A strong number in professional and business services is normally a positive signal about the overall business environment and growth in general.

Employment in healthcare increased by 64,000 and remains 306,000 lower than February 2020 employment.   Registered nurses continue to be in significant demand and the occupation with the highest number of openings in Louisville Metro, and nation-wide.   In the past 90 days, there were over 500,000 job postings for registered nurses positions across the country, about 200,000 higher than software developers, the second-highest number of postings.  As a comparison, we know that truck drivers continue to be in significant demand as well, but total postings nationwide were only 242,000.

Other notable gains include transportation and warehousing and retail.  Transportation and warehousing added 48,000 jobs and is 584,000 higher than February 2020.  For Southern Indiana, we see a similar occurrence.  Transportation and warehousing observed the greatest change in jobs across the five counties and is almost 3,000 jobs higher than existed in late 2019.    Retail added another 37,000 jobs is also at a level that exceeds retail jobs in early 2020.   The same applies for Southern Indiana.  Retail jobs based on the latest available data exceed levels of late 2019, and early 2020.

Another industry with importance to Southern Indiana is manufacturing.  The national jobs report showed that manufacturing added 36,000 jobs and remains lower by 178,000 compared to February 2020.    For Southern Indiana, manufacturing is showing the greatest decline among all industries when compared to early 2020.  Even though payrolls are lower, total wages are up.   One inference we might draw from this is that productivity in manufacturing is higher.  Manufacturers, due to labor scarcity, are finding ways to meet demand, and the growth does not necessarily equate to stronger payroll gains.

An important highlight in last Friday’s report was gains to the labor force.  An ongoing challenge for employers has been the availability of labor.    Record job openings and quits point to the challenges that employers face in adding payrolls.  Last Friday’s report showed that the nation’s labor force increased by 304,000, and the labor participation rate ticked upward to 62.3%.    While these numbers don’t get as much attention as the headline unemployment rate or the total payrolls added number, both were quite significant.   As this labor force number continues to increase, along with labor force participation, this will support overall payroll growth.

The other number that was quite significant was average hourly earnings.   It only increased by one cent, over the month.  While there is another geo-political issue that will present additional inflationary pressures,  last month’s average hourly wage muted increase provided some relief against a wage price spiral.

And now the bad news.   Consumer sentiment has been on the decline for the past several months and is now at the lowest level since 2011.   Inflation is the primary culprit for that. Jobs are quite plentiful, and the consumer is in much better shape now than prior to the pandemic.  But the consumer also likes shelves that are stocked and prices that are contained.     However, even with sinking consumer sentiment, consumers continue to spend.  Retail sales remain strong, and the last consumer spending report indicated another solid gain.   We will begin to see greater pressures on some of this spending, however.  As gas prices exceed $4.00 a gallon, consumer sentiment will sour even more.  Stock market volatility and loss in equity values will provide additional support for declining sentiment.     Growth was expected to slow because it was impossible to maintain the level of growth that occurred when the economy was coming out of the pandemic.   Recent developments, however, point to slower growth on top of what was already expected.