Posts in category: 1si News

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

If you have been a recent buyer or seller for residential real estate, you were either very satisfied as a seller, or faced repeated disappointment as a buyer. Homes are frequently sold as soon as listed, and in some cases with competing multiple offers. Buyers may have to offer above the asking price just to be competitive, and still may find themselves with an unaccepted offer.  Booming prices are the result of a classic supply and demand problem. Demand for housing is high, but the supply is perhaps at the lowest. There are early signs that conditions have begun to normalize but the emphasis is on “begun”. Before we get into the data, let me admit that I do not closely follow real estate. The article below is in the spirit of sharing information that may be of interest to you. Any errors are exclusively my own.

Nationally, the nation is facing a housing shortage due to underbuilding that started around 2000. According to a study published by the National Association of Realtors, the U.S. is facing a shortage of 5.5. million homes. Annual home starts have been running about 275,000 lower than the level that existed from 1968 to 2000, as also reported by the Wall Street Journal (U.S. Housing Market Needs 5.5 Million More Units, Says New Report, Nicole Friedman, June 16, 2021).  The pandemic exacerbated this shortage with the plummeting of housing starts early in the pandemic. Construction shutdowns, rising commodity costs, and supply chain issues have all contributed to challenges in building. Moving past the pandemic, starts have rebounded since last year, and are now at levels higher than existed pre-pandemic.  Even with higher starts, it takes time to build a home, especially with supply chain constraints facing contractors.

Strong demand and limited supply have produced record breaking changes in home prices.  The median home price in the U.S. climbed to $350,000 in May 2021.   This compares to a median home price of $310,700 in February 2020.   The limited supply of homes, and record prices are beginning to have an impact on sales.   The latest data show that existing home sales have been declining since December 2020, and new home sales since January 2021.  Slowing sales will help build up inventories, and level the playing field between sellers and buyers.   Nationally, inventory levels have been increasing since January, but remain about 320,000 homes under May 2020.

Locally, we are observing similar conditions. Inventories are down, but demand is up.  This combination is producing higher prices. Harrison and Scott Counties are observing the highest year over year increases in median home prices, climbing 35.2% and 25.9% respectively, year over year from May 2020 to May 2021.   The highest median home prices are in Clark and Harrison Counties, $229,950 and $229,900, respectively.

Some counties in Indiana are observing price increases significantly higher than the region.   Franklin County, just south of Indianapolis, saw median home prices increase by 127% in May, year over year. Posey County, just west of Evansville, saw home prices increase by 117%.  And in Blackford County, just north of Muncie, median prices increased by a whopping 171%!

Data from the Indiana Association of Realtors show that May inventories have been declining for three consecutive years, and inventories are down 48.2% from same time last year.   Like the national data, home inventories have been gradually increasing since the beginning of the year but are still at extremely low levels.

On the supply side across the five counties of Southern Indiana, the data are fascinating.  Total building permits are just under the level that existed in 2004, the boom in building that helped fuel the last housing crisis. However, unlike that time, multi-family permits are now driving the increase. In fact, it is almost a reversal from the period leading up to the Great Recession. In 2004, there were 1,549 total single- family permits; in 2020, the region generated 1,144 permits. In 2004, the region had a level of only 158 multi-family permits; in 2020, the number of multi-family permits stood at 576.   The number of multi-family permits since 2018 exceeds all multi-family permits from 2004 to 2017!

To help demonstrate the supply issues, we can compare building permits from around 2004 to the most recent period.   Three years prior to the Great Recession, the region generated a sum of 4,465 single family permits. Fast forward to three years around the pandemic recession, the region generated a total of 2,882 single family permits. This limited supply of homes, and excessive demand result in the higher prices we have been observing.

Will conditions ever return to normal?   Yes, but it will take some time. Existing homeowners will list homes when there is confidence that an adequate pool of homes will be available for purchase, and the nation has moved past supply chain issues.  This will support a higher inventory of homes available for sale. Higher prices have had an impact on existing inventories expanding, although at nominal incremental levels.  As interest rates increase, this will also place headwinds to price increases, and soften demand.   At some point, the Fed will begin to taper purchases of mortgage bonds, and this will help lift mortgage rates and remove oxygen out of rising home prices.  On the commodity front, prices are beginning to fall, with lumber prices declining drastically. As supply chain issues normalize, new construction will also increase the supply of homes on the market.

While there are challenges to buyers and contractors, higher home prices help fuel consumer spending, the driver of the nation’s economy.   Higher home values are building stronger household balance sheets, and household debt as a percentage of income has declined.   Stronger household net worth, linked to home values and equity markets, along with elevated savings rates, will help sustain the strong recovery through the rest of 2021.

Data sources:  Indiana Association of Realtors, FactSet, STATS Indiana

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

Early in the pandemic, consumer hoarding led to shortages of items like hand sanitizer, toilet paper, and yeast, to name a few.   These early shortages were driven by safety and health concerns, hoarding instincts that kick in during survival mode, or just looking for things to do to “pass the time” (a Cajun expression).    We now have a new set of shortages that are linked to the country moving out of the pandemic.   The big question, both nationally and locally, is the length of such shortages, and the overall impact on the economy.

Today, we will look at the latest in the labor shortage.    Last week’s April JOLTS (Job Openings and Labor Turnover Survey) report indicated that job openings surged to 9.3 million, the highest on record.  This was an increase of about 1 million job openings since March.   The largest number of openings existed in leisure and hospitality, followed by professional and business services, education and health services, and retail trade.  The largest increase in openings occurred in the leisure and hospitality sector.  Restaurants and tourism destinations are reopening nation-wide, and the labor pool is very scarce.

Calculating a simple ratio provides another look at the degree of tightness.  Openings divided by the number of unemployed conveys the number of job openings per unemployed individuals.    A ratio of 1 implies that for every job opening, there is one person unemployed to fill the position.   A number greater than one implies that there are more openings than the number of unemployed, and a number less than one means that there are more unemployed for every job available.   Industries with the highest number of job openings have ratios greater than one, implying that more openings exist than the number of unemployed.

Note:  Unemployed and Openings expressed in thousands.

Another back of the envelope calculation we can make is to remove the number of unemployed that existed prior to the start of the pandemic.    That number stood at 5.7 million.  If we remove 5.7 million from the current number of unemployed, we get a number equal to 4.1 million.  We can think of 4.1 million as the number available from unemployed ranks, or certainly a number less than the 9.8 million.

Prior to the start of the pandemic, there was already a tight labor market and the nation had unemployed ranks that totaled 5.7 million.   Regardless of the economy’s strength, there will always be the number of unemployed (due to frictional, structural, seasonal, cyclical reasons).   If the labor pool from unemployed ranks is scarce, then an option is to hire someone already employed.     This will require competitive wages and benefits, and attractive work environments, or some combination.  The importance of employee retention only intensifies.

The JOLTS report also tracks the number of quits.  Quits signal that workers have more confidence in employment prospects elsewhere.    The Quit rate usually goes up when the economy is booming and goes down when there is less confidence in finding another job.  The Quit rate hit an all-time series high of 4 million in the last report, reiterating the significance of employee retention.

Turning to the Southern Indiana region, we also see evidence of a very tight labor market.  Last February 2020, Burning Glass data indicated job postings of approximately 3,300 (author’s rounding).   The number of unemployed across the five Southern Indiana counties stood at 4,800 (author’s rounding).   Fast forward to the pandemic exit phase, there are now 4,200 (rounding) job postings and approximately 5,000 (rounding) unemployed.      After adjusting for seasonality, the region’s labor force is smaller by about 3,500 workers since February 2020, thus further compounding the shortage.

Employers were already familiar with the labor market challenges prior to the pandemic.   The higher ratio above indicates that it has only gotten tighter.

Data sources:  FactSet, Burning Glass, BLS JOLTS

–Are wage changes permanent, or a temporary adjustment of the Covid economy?

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

We now have a full year of employment and wages data at the county level for all of 2020.   The 4th quarter data for 2020 were recently released, and the results show record-breaking changes for the five Louisville Metro counties across Southern Indiana.

First, the data (Quarterly Census of Employment and Wages, STATS Indiana) show that Southern Indiana continues to recover jobs lost in the early stages of the pandemic.   The latest show that the region is down about 2,800 jobs from the previous year (2019 Q4 to 2020 Q4).    All industries saw declines, except for transportation and warehousing, gaining 1,600 jobs, and public administration, showing a plus 214 jobs from the prior year.

The largest decline occurred in manufacturing, down 1,553 from the previous year.   This is a considerable improvement from the 2nd quarter of 2020 when manufacturing was down almost 4,000 jobs from the previous year.   Accommodation and food services declined by almost 1,000 jobs from the prior year.   Again, this is a respectable improvement from the 2nd quarter of 2020 when firms in accommodation and food services were down approximately 3,100 from the previous year.   Health care and social services declined by almost 700 jobs from the prior year, compared to the approximate 2,400 lost jobs in the second quarter.

Significant layoffs occurred in March and April of 2020, but the region has been regaining jobs since.  April 2020 will likely be viewed as the bottom in the nation’s economy, and locally, job losses also accelerated.  The second quarter of 2020 saw the region lose approximately 11,500 jobs from the previous year, almost double the job losses that occurred in the Great Recession.    Southern Indiana has made significant progress in recovering the jobs that were lost in the 2nd quarter of 2020.    This latest data suggest that the five counties of Southern Indiana will recover all jobs during 2021.

The “record breaking” part of the Quarterly Census of Employment and Wages data can be seen on the wages side.    Wages across Southern Indiana saw a significant increase from the prior year.   Average weekly wages increased by $92 a week, moving from $846 in the 4th quarter of 2019 to $938 a week in the 4th quarter of 2020.   This represents an 11% wage increase in one year, and the weekly gain of $92 is the largest since 2001, the starting point for the data series.  Average weekly wages increased in all industries, except for transportation and warehousing, which observed a decline of $72.   Weekly wage increases were also observed across all Indiana metro regions, ranging from .1% in Kokomo to 18.5% for Elkhart-Goshen.

In manufacturing, payrolls were down 1,553 from the previous year, but total wages increased, along with the average weekly wage. The average weekly wage in manufacturing increased by $122, bringing the average weekly wage in manufacturing to $1,191, the highest in the data series. The combination of a lower jobs count, and higher wages suggest that area manufacturers saw gains to productivity in 2020, consistent with what was observed nationally. Expect the worker skills availability debate to only intensify.

Over the coming months, inflation will be one of the most talked about economic indicators.  Some inflation is desirable, and the Fed’s preferred inflation rate is about 2% a year.   The last report on CPI (consumer price index) showed year over year price increases of 4.2%, which was much higher than consensus estimates.   The Fed has indicated it is willing to see prices go higher than the optimal level of 2%.    The hope is that price increases over time will average out to the 2% inflationary rate target.

Employment costs will be closely monitored by the Fed.  Higher employment costs could ultimately trigger additional price increases, lower profits, or some combination of the two.  As of 2020 Q4, Southern Indiana establishments observed uniform increases in average weekly wages that were the highest since data were available from 2001.    Will these significant wage gains be sustained, or simply reflect 2020 Covid dynamics of the labor market?  That is an important question as we head into the second half of 2021 and the release of the 2021 Q1 data.

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

Before we address the question, there were a few disappointing indicators out the past couple of weeks. The monthly employment report showed that the nation added 266,000 jobs. While this would be a very strong number in normal times, it was vastly under the consensus of about 1,000,000 new jobs.

Inflation also came in much higher than expected. Consensus estimates were in the 3% range, but the consumer price index came in at 4.2%, over the year. Producer prices also came in at twice the level expected. One of the negative effects of inflation is the impact on wages, adjusted for inflation. As a result, real wages declined by 3.3% in April. While this is only one month, a decline of that magnitude is staggering. We must go all the way back to 1980 to find a decline that was steeper. Higher prices do not bring about positive feelings for consumers. As a result, consumer sentiment saw a big drop.

Retail sales were also under consensus estimates, but given last month’s strong number, the flat change in retail sales did not necessarily show that the consumer was ready to close their wallets. Compared to last year however, the change is the highest on record, due to so-called “base effects”. Therefore, any indicator in April, compared to last April (during the shutdown), may be inflated. However, when we examine the change in retail sales from June 2020, which is the month when retail sales caught up with the pre-pandemic level, we see the largest increase since the early 90s.

The retail sales numbers are simply mind blowing. No doubt that the several rounds of stimulus is having an impact on consumer spending. As we have documented previously, changes in household incomes and subsequent savings rates are through the roof. March showed the largest monthly increase in personal income since the late 1950s. Not only was it the largest increase, but the change was an earth-shattering amount. March showed personal income increasing by 21%; the previous all time high was a paltry 4.6%! We see similar numbers with the savings rate. The March savings rate was 27.6%, and the previous high was 17.3%, way back in 1975.

This takes us to e-commerce retail sales. One might ask, have online sales increased relative to total sales, especially given the pandemic? Any casual observer might speculate that online sales, relative to total sales have increased. The St. Louis Fed FRED’s database tells us the opposite. Online sales, as a percent to total sales, increased early in the pandemic. From Q1 2020 to Q2 2020, online sales increased from 11.8% of total sales to 16.1%. We saw this increase because many retail outlets were closed. Consumers had no choice but to buy online. Since then, the number has been declining, and the last data point available shows that online sales as a percent of total sales came in at 14% (Q4 2020).

One of the often-cited reasons for the current labor shortage is linked to pandemic-related fears. This appears to be inconsistent with what we might expect to see with online sales. As a percent of total sales, online sales have been declining since 2020 Q2.

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

The U.S. economy is driven by the consumer, with 70% of GDP linked to consumer spending. That includes everything consumers spend on durable goods (i.e. RVs, cars, computers, furniture, etc.), non-durable goods (i.e. clothing, food and beverage for off-premise consumption, gasoline, etc.), and services (i.e. healthcare, utilities, food services, financial, recreation, transportation, etc.).

A recent report on retail sales shows that the consumer is spending like it has never in the past. March retail sales were up 9.8% from the previous month. Compared to the previous year, it was the largest increase going back to the early 90s. Although we must be careful how we interpret some of these year over year numbers now because of the deep declines experienced this time last year. That aside, the retail sales number was phenomenal.

If we examine retail sales from February 2020 (just before the bottom fell out), to now, the nation has never experienced the jump in retail sales of that magnitude (at least going back to 1992). Think about that. This takes into consideration the big fall in retail sales last year, and now the climb out of the hole. Please let me repeat for emphasis. The nation has never experienced the change in retail sales observed from February 2020 to March 2021. Since 1992, a similar jump in retail sales has never been observed! For comparison purposes, it took about 3 years to recover lost retail sales during the Great Recession. In the pandemic recession, it took 3 only months!

If we take total personal consumption spending, and divide it by goods and services, consumers typically spend around two-thirds on services and one-third on goods, plus or minus. Those numbers have seen an adjustment in the pandemic. Right now, consumers are spending about 62% on services and 38% on goods. On the goods front, the big winner has been durable goods. Think RVs, cars, furniture, home improvement. Spending on durable goods is usually about 10% of total personal spending. That number has increased to about 16% of total personal spending. Relative to historical patterns, consumers have been spending more on goods than services.

The pandemic percentages between goods and services will not persist. Patterns will normalize, and the economy will revert to 2/3rds spending on services and 1/3rd spending on goods. And not all the cash has been spent on goods. Households are flush with savings. The last report on personal income and spending showed that the savings rate increased to 27.6%. This is the second highest on record; the savings rate increased to 33% last year.

Locally, retail sales employment is down about 2,000 from last year (March 2020 to March 2021). Metro employment in the retail sector had bottomed out in 2010, and was climbing all the way until 2017, peaking at about 65,000. Since 2017, retail employment in the region had been on a gradual decline and landed at 63,000, just before the pandemic hit. Current numbers have metro retail employment at 61,000 (subject to revisions later).

Nationally, there are about 1 million job openings in both wholesale and retail trade, but about 1.3 million in both sectors remain unemployed. Like other employers, retailers are facing challenges in filling positions, and this is likely having an impact on the overall lower number for Louisville metro retail employment. We can get a hint of this by observing the number of Burning Glass job postings related to retail trade and comparing that to the approximate 2,000 retail jobs deficit. In the past 90 days, job postings in retail trade across the metro area exceed 4,000!

A consumer can only use so many computers, sofas, and automobiles. As states continue to reopen, and crowds begin to gather, the economy will see spending on services like it has never previously. The goods component of spending was the early beneficiary of the pandemic, and services will be next. Expect massive spending to flow to services that include experiences, and those that build memories. The challenge to providers will be linked to labor shortages. You may have to wait in line for that restaurant table or your favorite theme park ride.