Posts in category: Economic Development

–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.

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

–Bottlenecks to build subsequent demand

The past couple of weeks saw an increase in market volatility leading to a pull back in major indices.    Upward movements in the 10-year yield resulted in the NASDAQ trimming record gains.  The close of the week saw a reversal and markets recovered some losses of the previous two weeks.  Monday, October 4^th, was another return to volatility, and as of this writing, heavy losses were across the board.

Despite some of this market volatility, the real economy is poised for continued growth. We see this both with the consumer and manufacturing, a sector particularly important to Indiana and Louisville Metro. The consumer represents about 2/3rds of the nation’s economy, and the national consumer has relevance locally, particularly with the heavy concentration of transportation and warehousing.

First, let’s examine manufacturing.  Last week, the ISM Manufacturing Index increased from an August level of 59.9 to a solid 61.1.   The highest level occurred back in March 2021 when the ISM came in at 64.7.   A reading of 61.1, except for the 64.7 in March, would be the third-highest reading since 1992.  The second highest was 61.2, and that occurred in May 2021.  The September report showed that demand increased, with high levels of new orders, backlog of orders, and low inventories.

Challenges in hiring and filling vacant positions can be seen in the employment index of the report.   The employment component did increase past 50, signally expansion in employment from August.  As we have discussed in this column, labor scarcity continues to challenge all employers, including manufacturers. Despite the hiring difficulties, manufacturers continue to meet demand and ramp up production.  Turning out more output with fewer employees implies that productivity is increasing.    As labor challenges continue to plague manufacturers, they will increasingly turn to automation and investments that will simply rely on fewer workers.

Supply chain problems are evident in prices paid.  For the 16^th month in a row, the price index increased.   Manufacturers report that commodities are up in price, and short in supply.    Three commodities were reported as down in price:   lumber, scrap steel, and wood.    The overall prices index came in at 81.2, but this is down from the pandemic high of 92.1.  So, we are at least seeing some deceleration in price increases.    In the past 30 years, there have been 12 other times where the price index was within 3 percentage points of 80 or higher.

With low levels of customer inventories, and new orders, and backlog of orders increasing, we will see solid growth in manufacturing. We will likely see advances in productivity, but we will also see positive employment growth.

The consumer continues to show strength. Last week’s Bureau of Economic Analysis report on consumer spending showed that the consumer is not going into hibernation.  Goods spending was the highest in five months, and services saw an increase, despite the Delta variant threats.

Supply chain issues are presenting challenges to growth.  Labor bottlenecks make it difficult for some employers to meet demand, and companies face shortages of varying degrees and kind.    At the same time, while consumer spending remains strong, some consumers are deciding to wait on the sidelines, postponing major purchases until conditions normalize.  My view is that the current challenges to the economy are also building subsequent demand.   For example, some automobile owners continue to rack up miles but are delaying purchase decisions until more choices are available and wait times are minimized.  Some consumers just don’t want to deal with current hassles and are intentionally delaying purchase decisions.   The combination of bottlenecks, backorders, new orders, and consumer purchase decisions should deliver strong growth in the near to medium term.

Data sources:  FactSet, BEA Personal Income and Expenditures, ISM Report on Business

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

Despite hiccups the national labor market showed last month, Southern Indiana continues to show steady progress in the overall labor market recovery.  FactSet estimates show the number of unemployed across the five Southern Indiana counties of the Louisville Metro area is equivalent to the level that existed in March of last year, just before the massive layoffs of April.    The region’s labor force is approximately the same as early 2020, and the latest employment figure is higher than the level that existed in February 2020.  This puts the region’s unemployment rate at 3.5% for July.  As a comparison to an earlier period, the region’s unemployment rate was 4.1% five years ago.

The improvement is more evident with a comparison to last July.  In July 2020, almost 13,000 were unemployed across the region. Employment was about 12,000 lower, and the labor force was at the lowest level of the pandemic.

Last week, the Bureau of Labor Statistics released the monthly report on State Employment and Unemployment.  Kentucky registered the highest percentage monthly increase in the country.  Kentucky payrolls increased by almost 21,000 for July. Southern Indiana data are not included in the Kentucky report, but we should see similar gains for Louisville in the next metropolitan report. The BLS metropolitan report does include data from the five Indiana counties of Clark, Floyd, Harrison, Washington, and Scott.

We did get a good example of how interconnected we are as a global economy.  A real estate company in China is at risk of defaulting on loans, and the Dow, S&P, and NASDAQ all tumble.  It is extremely difficult to predict market movements, and I will not try to begin here.  One potential risk to the broader U.S. economy is whether this market pullback could trigger a tightening of consumer spending, thus providing additional brakes to the nation’s economy.  Given the overall shape of household finances, I don’t see that happening.   Household balance sheets are strong.   Personal savings rates remain elevated compared to historical levels, and household net worth is at the highest level ever.

Despite the volatility in the equity markets, the overall macroeconomic recovery should continue.   The last report on national job openings showed the highest number of openings in the history of the series.  Almost 11 million job openings were reported on the JOLTS (Job Openings and Labor Turnover Survey).   Locally, Burning Glass Technologies reports openings across the five-county region at about 2,900 for the 30-day period from August to September.  Last September, openings were approximately 3,300.  The gain that we are seeing to Southern Indiana employment is also reflected in the decline in the number of job openings.

The Delta variant is the likely cause of downward revisions to GDP.  We saw signs last week that the consumer is not ready to go into hibernation. Retail sales increased a healthy .7%, continuing the record-breaking changes since the Covid shutdowns.  Over the past 30 years, there has never been a change in retail sales that we have observed since February 2020. At some point, we should expect the growth in retail to normalize.  To continue this pace would either require another government stimulus, or the consumer would have to significantly incur personal debt.   Perhaps the latter might be more likely than the former.

On the manufacturing front, last week saw a couple of positive regional reports.  Both the Philadelphia Fed Index and Empire State Index showed significant progress in regional manufacturing.  Both reports vastly beat consensus estimates.  And as we’ve mentioned in previous columns, inventories are too low, and this should continue to drive production.   Additionally, backorders and new orders are at high levels.

Risks to the economy remain.  The Delta variant is one risk, and we see how interconnected we are to risks that seem a world apart from the US economy.  Given all that, including risks that have yet to surface, the overall outlook remains upbeat.

Data sources:  FactSet, Hoosier by the Numbers, Burning Glass Technologies, Census Retail Sales, BLS JOLTS, BLS State Employment and Unemployment.

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

Last week’s employment report pointed to a sharp deceleration in national payroll growth in August.   Consensus estimates were expecting a report to show a gain of 750,000, but only 235,000 jobs were added.   In July, over 1 million payrolls were added.  The August result was a significant disappointment.

The leisure and hospitality sector was the highest driver of job growth during the past twelve months.   As a comparison, leisure and hospitality jobs increased by 2.25 million over the past 12 months, about double the second leading sector of professional and business services with 1.1 million jobs.   Over the past six months, average monthly growth was 350,000 jobs.    The subdued overall payroll growth from the August report was partly due to the leisure and hospitality sector.   It remained unchanged.  Under leisure and hospitality, food and drinking places lost 42,000 and arts, entertainment and recreation gained 36,000.

There were some bright spots in the report.  Professional and business services, a barometer for subsequent payroll growth, added 74,000 jobs.   Architectural and engineering services and computer systems design and related services both saw strong growth.   An economy with any underlying growth weakness would not observe such patterns.

Transportation and warehousing added 53,000 jobs and is now above the level of jobs that existed prior to the pandemic layoffs.   Transportation and warehousing is also the leading job creator in Southern Indiana since early last year.

Manufacturing gained 37,000 jobs but remains 378,000 below its pre-pandemic level.   We should expect to see continued growth in manufacturing in the near term, despite current challenges in the supply chain.  Inventory levels are at historical lows, and production will be required to restore inventories, and to meet order back logs.   The ISM Index increased last month, pointing to additional growth in manufacturing.

Despite the overall weak payroll number in the establishment survey, there were some bright spots in the household survey version of the report.   The unemployment rate declined to 5.2%, down from 5.4% in July.   This decline came about with the labor force increasing by a weak 190,000, but employment was up by 509,000.   The number of unemployed dropped by 318,000.  All combined to reduce the unemployment rate by 2/10ths of a point.   The significance here was the strong gain of 509,000 in employment growth.

Another takeaway from the report was the rise in average hourly earnings.   Average hourly earnings increased by 17 cents, rising from $30.56 to $30.73 an hour.   Starting in February of 2020, the increase in average hourly earnings of private employees is the steepest since 2006 (the start of my available dataset used here).   For production and non-supervisory employees, the gain since early 2020 is the largest since the 1960s.  In my view, these wage increases will be paid for through gains in productivity.  Investments in digital technologies and automation will pave the way for additional productivity gains.  The pandemic has accelerated trends that were already underway, and the seismic shift in wages will be complimented by similar gains in productivity.

Another important development from last week was the report on unemployment claims.  The Department of Labor reported that new claims for unemployment declined to 340,000, the lowest level since the start of the pandemic.   Under normal times, such a level of unemployment claims is usually associated with the start of a recession.  Times are not normal, and this further decline in unemployment claims points to further evidence of a labor market recovery.

There is no doubt that the Delta variant is now having an impact on payroll growth, particularly in some services like leisure and hospitality.   The chance of widespread shutdowns of last year is slim.  While the variant might dent growth in some sectors, we are not going to observe a significant slowdown in the economy.  However, you will likely see a downward revision in some of the GDP estimates for the last quarter.   One key for growth the rest of the year depends on what happens with the labor force.  Last month’s employment report did see an increase, but we really need labor force growth that exceeds 190,000 a month.  If the Delta variant holds back this growth in labor force, an adjustment to slower growth will be justified.

Data sources:  FactSet, Bureau of Labor Statistics Employment Situation—August 2021

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

The past pandemic recession saw a dramatic drop in consumer sentiment (as measured by the University of Michigan Survey of Consumers) from February to April of 2020. There was a steeper decline in the Great Recession, but that drop was more protracted than the swift two-month cliff last year, taking almost two years for consumer sentiment to go from peak to trough.  Last year’s two-month plummet was the fastest since the 1950s. Following last year’s nosedive, consumer sentiment then started to rebound.  From April 2020 to April 2021, consumer sentiment seesawed back and forth, but the overall trend was upward.  Since April of this year, consumer sentiment has been on the decline, and the last report saw a recognizable drop from the previous month. According to the report, there were only six other surveys in the last half century that recorded drops that were more significant than last month’s decline.

Another measure of the consumer is the Conference Board’s Consumer Confidence Index.  Unlike the University of Michigan Consumer Sentiment survey of only 500 households, the Conference Board surveys 5,000 households. With the Consumer Confidence Index, we are now getting signals somewhat counter to the Michigan Consumer Sentiment Survey. Since January of this year, Consumer Confidence has been on an upward trend and the Index is almost back to the level that existed at the start of last year’s recession.

The question is which do we believe? Does the consumer mood reflect the signals we are getting from the Michigan survey, or are consumers feeling more optimistic, as reflected in the Conference Board numbers?  In my view, we have several factors contributing to dampening consumer sentiment in the Michigan survey.  First, higher gasoline prices do not put consumers in an ebullient mood.  Add the higher prices and availability of some grocery items, and that does not make it better. Second, the Delta variant is not helping. Just when the country was preparing for the end of the pandemic, the Delta variant comes roaring back, putting some plans on hold, and bringing back memories of last year.  Third, is linked to consumer behavior and spending related to government stimulus. Do consumers behave differently when spending dollars gained that are separate from earnings through their own labor?   My outlook at the beginning of the pandemic last year was that we would see a V shape recovery, but at some point, growth would return to moderating levels, or “gradual growth.”  The shift we are seeing in consumer sentiment is linked to that.  As households get through the government stimulus phase, and resume spending based on W-2 earnings, more cautious spending patterns will take shape.  Consumer optimism will also separate from any boosts that may have been attributed to government stimulus. The last report on retail sales saw a drop, and this was not unexpected.

The important question is whether we are going to see a slowdown in hiring and the overall economy because of shifting consumer sentiment? We will continue to see strong payroll numbers, both nationally and locally, and there are several reasons why. One is the status of inventories which are at very low levels. The ISM (Institute of Supply Management) Index on Customer Inventories is at the lowest level in the history of the series.  The macro inventory to sales ratio has shown some incremental gains from the trough but remains low. The current inventory to sales level is comparable to 2012, a big year for Louisville area manufacturing. Another reason for continued growth in payrolls this year is linked to numbers that we should expect to see in labor force growth.  For different reasons, labor force growth has been stuck, although we are seeing some signs of progress in Louisville Metro. As labor force growth increases the rest of the year and into next, this will also support overall payroll growth. Gains in productivity due to innovations and technology investments will moderate payroll growth in some sectors, but the overall trend will be positive.  Last week saw another decline in new claims for unemployment, now at the lowest level in the pandemic phase of the economy.

Despite some of the conflicting signals on consumer attitudes, the household is still in good shape. Household net worth levels are the highest ever.  The increase over the past year and a half is the largest we’ve ever observed, at least going back to the 1940s.  Savings rates have come down but are still elevated compared to the past 20 years.   Make no mistake, there are certainly risks to the current recovery. The latest Delta variant could place a dent on spending, and government stimulus will likely not come to the rescue. The variant could also serve as a headwind to labor force growth, thus reducing payroll gains.  Consumer spending will moderate, but that should not come as a surprise. A moderation will not derail the recovery, and we should not mistake the anticipated slower growth, with an economy in deep trouble. It is just getting closer to normal.

Data sources:  FactSet, University of Michigan Survey of Consumers August 2021, Census Advance Monthly Sales for Retail and Food Services, July 2021.