Posts in category: Economic Development

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

New data released confirms that the recovery in Southern Indiana is well on its way and quite strong.   STATS Indiana Quarterly Census on Employment and Wages for the 3^rd quarter of 2021 show that the five Indiana counties of the Louisville Metro region added 2,821 from the 3^rd quarter of 2020.   This marks the second-largest quarterly gain since the end of the Covid recession, but a deceleration from the significant increase of the previous 2^nd quarter.   As of the 3^rd quarter of 2021, the region was down only about 663 jobs from the level that existed during the 3^rd quarter of 2019.

The largest gain occurred in the leisure and hospitality sector with accommodation and food services adding almost 1,000 jobs.   This puts accommodation and food services about 450 payrolls short of the total that existed in the 3^rd quarter of 2019.  Challenges faced in accommodation and food services are more about supply as opposed to demand.   Patrons are there to dine out, but establishments continue to face labor scarcity issues and supply availability.    There are certainly anecdotes and media accounts of restaurants closing due to the lack of staffing, for example.

Transportation and warehousing gained another 832 positions from the previous year.  This industry has experienced the largest growth across Southern Indiana since 2019, adding about 2,900 positions.      The economy saw the largest increase in goods spending over a two-year period in the history of the series, and this was the origin of the supply chain issues that we continue to face today.   The supply chain capacity simply was not large enough to accommodate the level of goods spending that occurred.   In essence, the growth in transportation and warehousing payrolls reflects an expansion in the supply chain capacity.

The Admin. & Support & Waste Mgt. & Rem. Services industry gained 573 payrolls from the previous year. This likely reflects gains to temporary labor services.    As an economy expands, employers will often resort to temporary labor services to help meet demand.   Since 2019, 437 payrolls were added making it the industry with the 2^nd highest level of expansion, second to transportation and warehousing.

Brick and mortar retail is not dead.  Retail trade gained an additional 265 jobs from the previous year, and the industry has a higher job count than existed in 2019.     Significant demand for hires remains.   Job postings data show that retail salespersons rank 3^rd in postings behind registered nurses and truck drivers.

Manufacturing gained another 198 jobs, but total payrolls are still down almost 1,900 from 2019.   Even with a decline of almost 2,000 jobs, total wages are up in manufacturing.  This suggests that overall productivity is higher as manufacturers have been able to meet demand, but with fewer employees.  Average weekly wages are up by $111 since 2019, representing an 11% gain.

The number of establishments saw the second-largest increase (+191) since 2001.  This follows the largest increase (+203) that occurred during the first quarter of 2020.   This points to a favorable long-term outlook for the region and is reflective of the positive economic development trends.

Payroll data at the county level does come with an approximate 6-month lag.  We can get a more recent view with labor force data, however.        Here we see that the region continues to make significant strides in employment recovery. Compared to December 2019, the region is down in employment by almost 2,000.   This is a considerable improvement from the Covid decline of almost 40,000.   The labor force remains down by almost 4,000, and the difficulty that employers face is linked to the availability of this labor.   Gains to the labor force will support payroll growth, and we can expect additional gains to the region’s labor force over 2022.

Data sources:  FactSet, STATS Indiana QCEW

–and labor force shows expansion

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

The BLS released the quarterly report on labor productivity last week and it indicated that labor productivity increased 6.6% in the fourth quarter.   Output increased 9.2%, but hours worked only increased by 2.4%.     Labor productivity did see a bounce during the first year of the pandemic and has been fluctuating back and forth for the past year.   The overall trend, however, has been upward.

Productivity is particularly important now because of the price pressures that producers are seeing.   Productivity will allow producers to keep a lid on unit costs and serve as overall headwinds to inflation.  As an example, the last BLS report indicated that hourly compensation increased by 6.9% in the fourth quarter, but productivity increased by 6.6%.   The net effect was a .3% in unit labor costs.     Productivity will be the key for employers to sustain higher wages.

While we’ve already observed gains to productivity during and after the recession, we have yet to realize additional gains to productivity.   What are some of the clues pointing to gains in productivity that have yet to materialize?

First, we can look at the investment in industrial machinery.   New orders for manufacturing durable goods industrial machinery are at an all-time high, almost double the level that existed coming out of the recession.    As a comparison, new orders for industrial machinery coming out of the Great Recession never caught up with the level that existed just prior to that start.   That is, following the Great Recession, new orders for industrial machinery did not move past pre-Great Recession levels until this past year.   That is a stunning comparison.    This significant acceleration in industrial machinery is not just about meeting demand.    Manufacturers are making significant investments to increase efficiencies with the ultimate objective of increasing productivity.   Gains to productivity following these investments will pave the way for higher sustained wages, along with a stronger focus on the importance of skills.   Simply speaking, it takes a greater skill set to operate a backhoe than it does a shovel.

We are also observing significant investments in software and information processing equipment.  Following the Great Recession, there was a decline in both categories, and it took almost three years to return to the level of investment that existed at the onset.  In the most recent Covid recession, investment in both software and other information processing equipment has been accelerating since last year.   Organizations are making investments in digital technologies that will conserve costs and boost productivity.  At least, that is where the data are pointing.

Boosting productivity due to the installation of new machinery and software does not happen overnight.   The company must do the research, meet with vendors, and make a final decision.  The rollout of the new equipment and software requires training and implementation could even come in phases.   The point is that productivity gains will not show up in one report but over time.

We close with a brief word on the labor force.  The last national employment report was solid on the payrolls front.   The headline number of 467,000 jobs added came in significantly above estimates. The one big takeaway was on developments in the labor force participation rate.   As we have pointed out in previous columns, an available labor force is the key for additional job creation.  Last month, the nation’s labor force increased from 61.9% to 62.2%.   It was the largest increase in the participation rate since June 2020, just as the nation was exiting the recession.  As we see gains to the labor force participation rate, this will also support positive payroll growth.   We can also expect additional gains to the labor participation rate this year.  Approximately 3 million prime-age workers are not in the labor force but indicate that they want a job now.  As we move past the adverse impacts of Omicron on labor supply, and as workers exhaust the benefits of government stimulus, we will see an expanding labor force.

Data sources:  BLS Employment Situation, Census Advance Report Durable Goods, FactSet, FRED, BLS Productivity, and Costs.

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

Indiana has long been a heavy manufacturing state.  Despite overall declines in manufacturing employment, Indiana continues to rank in the top ten nationwide.    Hence, the outlook for national manufacturing is an important economic indicator for both Indiana and locally here in Southern Indiana.   Despite recent declines in the ISM Manufacturing Index (pointing to a deceleration in manufacturing growth), the outlook for Southern Indiana manufacturing remains upbeat.   First, we’ll look at where we’ve been, what we can expect this year, and trends shaping up beyond.

Since the first quarter of 2020, manufacturing employment across the five counties of Southern Indiana remains in a deficit of approximately 1,200.  Overall payrolls are down about the same, approximately 1,150.    On the wage front, we observed a significant increase in hourly average wages during the first year of the pandemic, reaching a historical high in the 4^th quarter of 2020 as employers scrambled to find labor to meet demand.

Manufacturing was hit from both sides:  demand and supply.  On the demand side, we observed perhaps one of the largest, if not the largest, increase in goods expenditures.      Early in the pandemic, capacity utilization rates plummeted due to shutdowns and the overall slowdown of the economy.   At the same time, demand was about to skyrocket.     As demand began to escalate, manufacturers were also faced with labor challenges and materials shortages.   This simply compounded the problems associated with meeting demand.

Significant increases in demand also became a challenge for the nation’s supply chain.   Using a simple example, if the supply chain has the capacity to ship 100 boxes of freight, but orders total 1,000, that means 900 boxes will have to wait for the next truck.     We get a clue of this through the number of truck driver postings.  Before the pandemic, at a time when there was already a shortage of truck drivers, nationwide postings stood at about 127,000.   In the last quarter of 2021, nationwide truck driver postings were more than double at 270,000.  Simply speaking, we simply did not have enough trucks, or supply chain capacity, to move the level of goods through the system.

But let’s get back to manufacturing.    Why do I continue to remain upbeat on manufacturing, despite some of the headwinds the economy faces?     One indicator is to look at inventories.   Inventories remain very lean. The ISM Customer Inventory component continues to hover at all-time low levels.   There was some improvement from the record low in July 2021, but levels remain significantly under pre-pandemic territory.   The inventory to sales ratio is also pointing to very lean inventories nationwide.    The last reading of 1.09 is significantly under the 1.43 reading prior to the pandemic.   When we combine both inventory and sales into one convenient inventory to sales ratio, it suggests that the “shelves need significant restocking”.    The previous pre-pandemic low of the inventory to sales ratio was observed back in 2012.    Manufacturing employment across Louisville Metro then followed with the largest percentage gain among all economic sectors.

On the new orders front, we are seeing record high levels.   New orders were higher only once, back in 2014, but quickly receded to trend levels.   Except for that 2014 outlier, new orders are at an all-time high.     Unfilled orders are also running at record highs.

Low inventories and orders combine to form a favorable outlook for manufacturing production this year.   Challenges do remain, however.   Perhaps the biggest is on labor availability.    The nation’s labor force remains about 2.5 million workers under the pre-pandemic level, and the labor force participation rate has been stuck in the 61% range since June 2020.  Manufacturing quits are also among the highest (not the highest, but in the top 5), totaling 293,000 as of November 2021.   This compares to a quits level of 189,000 before the pandemic.

The last national employment report indicated 2.5 million workers were not in the labor force;  1.4 million did not search for work last year, and 1.1 million searched for work.    We should expect some of these workers to re-enter the labor force this year.   Given that labor was scarce before the pandemic, and expected to remain, how will manufacturers meet demand moving forward?    We get a hint by observing investments in software and industrial machinery.     Investments in software and information processing equipment are at record highs, and software expenditures have accelerated the past year in a half.   Investments in industrial machinery, a component of non-defense capital goods are also at all-time highs, and with significant acceleration in the rate of spending the past two years.     It takes time to implement a new production process, but we are likely seeing investments that allow manufacturing to meet greater demand, but perhaps with fewer workers.

Data sources:  STATS Indiana Quarterly Census on Employment and Wages, Burning Glass Technologies,  Census Advance Report Durable Goods, FactSet, Bureau of Labor Statistics Employment Situation Report, ISM Report on Business.

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

Wishing everyone a happy, prosperous, and healthy new year!

Just as we resume our bi-weekly columns and start another year, we have good news to share. Unfortunately, this good news is the other side of the coin of challenges.

County payrolls data for the 2021 Q2 have been released, and Southern Indiana experienced a significant pick-up in payrolls. Looking back at the dark days of early 2020, the second quarter saw record declines in payrolls due to the Covid pandemic and the temporary closing of many establishments. Total payrolls had declined by almost 12,000 from the previous year, about double the losses that existed during the Great Recession.

We now see a complete reversal of the 2020 deep payroll losses. 2021:Q2 saw an increase of payrolls of 11,572, or almost 12,000. The second quarter of 2021 was one year into the pandemic, and that payrolls total puts the region only down about 1,800 jobs from the second quarter of 2019. Following the Great Recession, it took almost 7 years for the region to recapture the number of jobs lost. So, while the Covid recession was very deep, it was also a very short recession. This recovery of jobs can be explained by a V-shape that we projected early during the pandemic.

All industries showed positive job gains, except for public administration (likely the reduction in Census payrolls). Leading the way was accommodation and food services (+2,355), followed by manufacturing (+2,042), and health care and social services (+1,415). Retail (+969), administration and support, and waste management services (+777), and transportation and warehousing (+754) also showed significant gains from the previous year.

Calculating a year-over-year change from a lower base can magnify the impact. So, to control for the base year effects, we can examine the change in payrolls, wages, and establishments over a two-year period. The results are quite striking. During the Great Recession, as a comparison, the region saw consistent declines in the number of establishments. At the beginning of the Great Recession, the region was home to 5,584 establishments. At the recession exit, that number was 5,324. We see the opposite for the Covid recession. In fact, not only do we see a gain in the number of establishments, but we also observe the largest change in establishments going back to 2001. This is both for one and two-year changes in establishments.

We see similar changes in average weekly wages. Both one and two- year changes in average weekly wages are the largest since 2001, the start of the data series. The most recent quarter shows that average weekly wages increased by $92 over the two-year period, for a 12% increase.

With more recent labor force data, we observe that the recovery in Southern Indiana is well underway. As of November 2021, the unemployment rate for the five-county region was a staggering 1.8%, the lowest going back to 1991, and perhaps the lowest on record. A 1.8% unemployment rate tells us that we have a very tight labor market. We can see this by comparing the size of the labor force to the number of employed across the five-county region. In late 2021, the size of the labor force exceeded employment by only 2,654. These are estimates and subject to revision but clearly point to a labor scarcity. On the bright side, the last three national employment reports did show some positive movement in the size of the labor force. While the headline payrolls number was less than expected, the household survey showed continued gains in the labor force. As we go through 2022, we will likely see labor force gains accelerate, and this applies to Southern Indiana and Louisville Metro. Labor force gains will be the key to employers filling available positions.

Data sources: FactSet, Bureau of Labor Statistics, STATS Indiana

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

Last year’s outlook expected Louisville Metro payrolls to erase job losses by the end of 2021, and the region is on track to recover a large percentage of job losses by year-end. For next year, Louisville Metro will see payroll growth at around 2% to 3%, likely closer to 3%. Filling elevated job openings, and an increase in the labor force are both keys to this outlook.

Louisville Metro Jobs
As of September 2021 year-to-date, Louisville Metro added approximately 17,500 jobs. If the metro area remains at this same pace of growth for the last quarter of 2021, total jobs added for Louisville Metro should come in at approximately 23,000 jobs, putting the percentage gain at 3.6% for the year. National economic growth is expected to decelerate compared to 2020 levels, and this should lead to a deceleration in Louisville payroll growth from 2021. Consequently, Louisville Metro payroll growth will likely be in the 2% to 3% range for 2022. The last time we saw inventories as low as now, as measured through the inventory to sales ratio, was 2011 and 2012. For Louisville Metro, we saw a large percentage change in manufacturing employment, and overall payroll growth exceeded 3%.

Job Postings
We can see the tightness of the labor market by examining job postings relative to the size of the labor force. In late 2019, just before Covid, Louisville Metro’s labor force was about 675,000. Fast forward to November 2021, the labor force is approximately 650,000. Today, compared to late 2019, there are about 1,300 additional job postings. So, the region has a slightly smaller labor force, but a need to fill more positions. The number of unemployed in 2021 is now about the same as the number of unemployed in late 2019.

Before the pandemic, registered nurses were in significant demand, and that has not changed. Job postings, however, are about the same now, as before the pandemic.

The one glaring difference in job postings relates to occupations that support the supply chain. In 2019, truck drivers were in significant demand. Job postings pre covid were running about 350 +, and freight, stock, and material movers were about the same, 350+. Fast forward to 2021, same time, and truck driver postings are now 550+ and freight, stock and material movers are 550+. The increase in job postings falls primarily on occupations connected to transportation and warehousing.

Manufacturing
Manufacturers should expect a strong year. Nationally, the inventory to sales ratio remains at low levels. Both new orders and unfilled orders continue to run high. The combination of new and unfilled orders and lean inventories will translate to sustained production for manufacturing. Nationally, the inventory to sales ratio for automobiles remains in record low territory. Materials shortages and supply chain challenges that have plagued manufacturers this past year will show some improvement, although not entirely resolved. This will provide a boost to local area manufacturing. Expected increases in labor market participation and a growing labor force will also support manufacturing payroll growth. Louisville area manufacturers added approximately 2,300 jobs, as of September year over year, and should expect to match or exceed this amount next year.

Leisure and hospitality
The much-anticipated growth in leisure and hospitality hit a few roadblocks due to the emergence of the Delta variant. Spending on services should continue to rebound as the sector moves past Delta, and leisure and business travel will see gains. As a result, convention activity in Louisville should also continue to rebound, providing a boost to leisure and hospitality employment. Remote work arrangements will likely be a permanent fixture with some employers, but in-office activity should also show a bounce in 2022. A return to the office will provide support to leisure and hospitality employment, particularly in downtown Louisville. Leisure and hospitality added 6,700 jobs, September year over year. While it might be difficult to match this level of growth next year, we should expect additional gains in leisure and hospitality employment.

Transportation and Warehousing
Transportation and warehousing were one of the strongest growth sectors in employment for Louisville Metro in 2021. September year over year, employers added 3,800 jobs, amid labor shortages. Truck drivers and warehouse workers remain in high demand as manufacturers and retailers work to alleviate supply chain challenges and satisfy consumer demand. Strong hiring will continue into 2022, and we can expect transportation and warehousing to be one of the leading sectors with respect to payroll growth.

Retail Trade
Retail trade added 2,200 jobs in September year over year. This outlook expects a good year for Louisville area retail, but a continued trend away from goods spending to services will continue. With the shift from goods to services spending, the consumer is still positioned for retail activity. Household balance sheets are quite strong, and net worth is at the highest level in history. Savings rates remain elevated, although they have declined, and the consumer debt service ratio remains lower than the pre-pandemic level. Delinquency rates for consumer loans and credit cards plummeted during the recession and continue to fall. Consumers have additional debt capacity, and this will provide some tailwinds to continued consumer spending. Households have yet to tap into home equity. The amount of home equity loans outstanding continues to fall and has declined through the entire pandemic.

While retail sales gains have been the strongest on record, current supply chain challenges will also serve as a boost to subsequent goods spending. For example, auto sales have been weak over 2021, relative to historical levels. This is not due to a lack of demand but from a lack of supply. As we move past the supply chain issues impacting auto sales, demand will be sustained due to delayed purchases.

Overall, this outlook is very optimistic about the consumer, more than 2/3rds of the U.S. economy. There are certainly some downside risks to the consumer, and we are seeing that through higher prices.

Southern Indiana
Southern Indiana continues to make steady progress in reducing the steep job losses that occurred during the pandemic recession. As of the first quarter of 2021, payrolls were down approximately 2,600 from the previous year. This is a considerable improvement from the 2020 Q2 deficit that was close to a decline of 12,000 jobs. Average weekly wages saw significant gains across Southern Indiana. The last quarter of 2020 saw the highest increases in average weekly wages going back to 2001. This rise in average weekly wages will persist.

Transportation and warehousing was the leading sector with respect to job gains, adding almost 1,600 jobs over the year.

The biggest decline came in manufacturing with local employers shedding 1,049 jobs over the year. Average weekly wages increased by $55, exceeding the overall average weekly wage gain of $29 a week. The decline in total wages and payrolls imply that jobs lost were primarily lower wage.

To maintain competitiveness and to support higher wages, productivity will be crucial. We can expect a greater reliance and need for productivity-enhancing investments.

The second-largest decline occurred in accommodation and food services, down almost 1,000 jobs compared to Q1 of 2020. The decline in 1,000 jobs is not necessarily a demand problem. This is one of supply, a supply of workers. As we go into 2022, jobs in accommodation and food services will continue to recover as more workers return to the region’s labor force.

For more recent data, and a view of the labor market, we can examine labor force and employment information for Southern Indiana. Unemployment rates in Southern Indiana are at 3%. Employment is slightly higher than the level that existed in February 2020, and the region’s labor force is almost back to the level that existed in February 2020.

Current job postings in Southern Indiana are running at just over 3,000, compared to 2,400 in November 2019, where the region’s labor force was at an all-time high.

Truck drivers, followed by registered nurses and freight movers are the top three occupations with respect to the level of job postings in Southern Indiana.

In November 2019, there were about 50+ openings for truck drivers. Today, that number stands at 240. Registered nurses’ openings were at 78. Today, that number stands at 160.

Freight movers were at 64 openings in 2019. Today, that number stands at 102.

Southern Indiana will continue to see growth through 2022 and should see payroll gains that surpass levels that existed prior to Covid.

We are seeing significant building permit activity in Clark County, relative to the four other counties in Southern Indiana. As of September, building permits in Clark County have already surpassed 2020 totals. In fact, total building permits in 2020 and 2021 year-to-date exceed total permits that existed in the last permit boom of 2006 and 2007.

We can see the dominance of Clark County with building permits by the share of the overall total. Clark County has about 41% of the population, but in 2020, had 76% of all building permits. In 2021, Clark County has 82% of the building permits issued. In 2021, half of the Clark County permits were in multi-family, and in 2020, about 45% were in multifamily. This is very different from the boom of 2007 where only 1/3 of permits were in multifamily. This level of permits will provide another boost to area retail establishments.

Summary
Louisville Metro will see another year of solid payroll gains. An expanding labor force and mitigating supply chain disruptions will support overall payroll growth. Strong household balance sheets will support consumer spending, providing demand for several sectors, including transportation and warehousing. Services spending will accelerate compared to 2021, and this will support leisure and hospitality enterprises. Manufacturing can expect additional growth in 2022 as it continues to work through order backlogs. Automotive will see strong sales relative to 2021, and this will provide another boost to Louisville area manufacturers.

Overall, the outlook for the Louisville Metro economy is quite favorable.

Data Sources: Burning Glass Technologies, STATS Indiana, Bureau of Labor Statistics, State of the Cities Data Systems

–Current supply chain challenges may boost subsequent demand

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

The recession last year produced a goods buying binge. Consumers converted record income and savings to goods purchases.  Lockdowns and social distancing led to a surge in all kinds of goods, ranging from recreational equipment to home improvement, or just about anything that led to comfort and added utility for the consumer.  Goods spending has come down from the peak in April 2021 but is still at record levels. Going back to at least 1998, the past year and a half saw the largest increase in goods spending. As a comparison, during the Great Recession, it took about 3 ½ years to match the level of goods spending that existed just prior to that slowdown. In the Covid recession, goods spending reached the pre-recession level in about three months.

In the past year and a half, spending on goods is approximately 16% higher than the level that existed at the start of the recession.   We see similar increases in retail sales spending. During the Great Recession, almost 9 years passed by before the level of goods spending matched the level that existed in late 2007, the start of that recession.

The surge in goods spending, and the impact on supply chains, is analogous to a pipe bursting due to too much pressure. The supply chain, due to a never seen before the surge in goods spending, simply cannot cope. In essence, the supply chain pipe has ruptured! Think of a 6-inch pipe that represents container ships coming from across the globe.  Then think what happens when that 6-inch pipe is reduced to 1-inch, which represents a port of entry.  That describes one source of current supply chain challenges.

Meanwhile, on the services front, spending has yet to match the level that existed at the start of 2020.    Spending on services is accelerating; this past year has seen the largest jump in spending since at least 1998.  The most recent ISM services index saw the measure jump to 66.7, a record high.    The previous all-time high in the services index was 62 in 1997.   The two indices for business activity and new orders both came in at almost 70, record highs.  The upshot from all this is we can expect additional growth in services spending.  The retrenchment of the Delta variant and an overall reduction in Covid cases, along with pent-up demand in services spending will combine to produce significant growth in spending on the services side of the economy.

On the services side of the economy, however, there is the labor bottleneck, and this could have an adverse impact on the growth in payrolls.   In the last national employment report, there was a small increase in the size of the labor force, but the labor participation rate remained flat at 61.6%.    This is a considerable change from the 63.3% that existed prior to the recession.   Labor participation hit a bottom of 60.2% during the Covid shutdowns and climbed back to 61.5% by the end of 2020.  Since that time, the rate has hovered around the current level, even with the suspension of the federal supplement to unemployment compensation.   The biggest decline in labor force participation has been in the 55+ demographic.  A big question is whether this reduction in labor force participation is more structural, implying more permanency or that of a “new normal”.  In my view, the lower level of labor force participation will not be permanent, but we can expect improvements to be more protracted.   This will have implications for hiring, and overall labor scarcity.

While goods spending has climbed to record heights, auto sales remain depressed.   Auto sales are now at the lowest levels since the 1960s, except for April 2020. The inventory to sales ratio for automobiles is at the lowest since at least 1992.  The depressed sales in automobiles are not due to a lack of demand, but one of supply.   Inventories are simply too lean, as evident by the inventory to sales ratio.  As inventories remain scarce, demand is simply delayed.  Some consumers are postponing auto purchases today, logging additional miles, and will enter the market when inventories are replenished. This should serve as a boost to Louisville area manufacturing, and the broader economy.

Sources:  FactSet, BLS Employment Situation, BEA Personal Consumption and Expenditures, Census Manufacturing and Trade Inventories, Census Advance Retail Sales.

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

This month’s national employment report was another big miss at payrolls.  Consensus estimates were expecting close to 500,000 jobs, but the headline number came in at 194,000.  This is now the second consecutive month of significant misses in the national jobs report.

Breaking the report down, there were some bright spots on the payrolls side.  Leisure and hospitality gained 74,000 jobs, despite the adverse impact of the Delta variant.   Gains were also observed in professional and business services (+60,000), retail trade (+56,000), transportation and warehousing (+47,000), information (+32,000), social assistance (+30,000) and manufacturing (+26,000).

Local and state government education lost a combined 161,000 in jobs.  This number is somewhat difficult to interpret, given that September is a start date for many school systems around the country.  Seasonal adjustment issues following significant volatility during the pandemic could be one of the reasons why this was such a low number.

Had the local and state government education been positive, a more favorable payrolls number, closer to the consensus estimate, would have been the result.  However, the weakness in the report was on the household side of the survey, even though the unemployment rate declined by .4% points to 4.8%.   The nation’s labor force saw a decline of 183,000 in September, and the labor participation rate declined by .1%, to 61.6%.  Those not in the labor force increased by 338,000, raising the total to 100.4 million.   The current labor force participation rate is equivalent to the level that existed all the way back to the mid-1970s and is about 2 percentage points lower than the end of 2019.  It has been stuck at the current level since last July, about the same time the nation’s GDP hit a bottom (June 2020 to be precise).  While labor force participation has been stuck since last July, the nation’s GDP has seen the steepest rise since at least the mid-1970s.

The last JOLTS (job openings, hires, and separations) report saw that job openings declined by 659,000 to 10.4 million.     Quits, however, increased to an all-time high of 4.3 million.    Last February 2020, the economy had a level of quits of about 3.4 million.

As a comparison, the level of quits during the Great Recession hit a bottom with 1.5 million just as the country was about to exit the recession.   It then took 9 years for the level of quits to reach the pre-recession level that existed in 2007.   With the Covid recession, the level of quits hit a bottom of 2.1 million in April 2020 but saw a rapid rise the following month.  It only took a year for the level of quits to reach the pre-pandemic level of early 2020.  After February 2021 of this year, quits have been steadily climbing, and are approaching total quits added this year to 1 million, a change not observed in the history of the series.

The quick rise in the number of quits during the recession of last year, and the continued increases since are quite significant.    To be sure, quits do not convey a lack of confidence in the economy.  Normally, quits signal that employees are confident that they can easily find another job.   With the record number of openings and a declining labor force, this confidence is justified.

In my view, the number of quits and a stagnant national labor force tell us more about structural changes underway.  A look at the data presents a few clues.

Both nominal and real (adjusted for inflation) GDP exceed levels that existed at the start of the pandemic recession.  This has occurred in the presence of significant supply chain issues; perhaps like we have never experienced.   Additionally, the consumer is proving to be quite resilient, and we have seen the largest jump in retail sales in the history of the series.    On the corporate side, profits continue to climb.  Since March 2020, corporate profits have increased by 26%, making it one of the steepest increases in profits coming out of a recession.

With respect to business investment, non-defense capital goods, excluding aircraft, are seeing the fastest increase in the past 30 years.   Following the 2001 recession, it took six years to match the level of investment that existed prior to that recession.   In the Great Recession, it took four years for this investment measure to exceed the level that existed prior to the start of that downturn.   In the pandemic recession, it took less than six months for the level of investment to surpass the pre-recession level.  Since that time, we have observed the steepest increases in non-defense capital goods, excluding aircraft, in the past 30 years.

The “great resignation”, record-breaking job openings, and a stagnant labor force participation rate all relate to this significant increase in capital investment.  As we’ve discussed in this space previously, the labor scarcity situation, as evidenced by the number of openings, quits and a stagnant labor force participation rate is forcing business and industry to seek out innovations to meet the increase in demand.  This can be seen through the level of investment we are seeing in non-defense capital goods investment.

The past two employment reports were big disappointments, but the economy continues to grow.  More data points are necessary, but we may be seeing more productive capacity, with fewer workers.  Corporate profits are increasing, consumers are spending, and this is reflected in increasing GDP.  All this is happening with a record number of job openings, and a declining labor force.   The “great resignation” is producing the “great innovation”.

Data sources:   BLS Employment Situation, FactSet, BLS JOLTS, Census Durable Goods Manufacturers’ Shipments, Inventories, and Orders.