Posts in category: Economic Development

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.

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.