Posts in category: 1si News

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

Several recent economic releases point to an economy that continues to grow at a brisk rate. The one that really stands out from last week is new claims for unemployment. The latest data on unemployment claims show that national initial claims declined by almost 200,000 in one week. New claims came in at 576,000, clearly the lowest level since the shutdowns of last year. Pre-pandemic claims (early 2020) were in the low 200,000 range, and you must go way back to the late 60s to find initial claims for unemployment lower than 200,000. Keep in mind also that the labor force in the late 1960s was about half the size of the labor force of today.

We can see the labor crunch through some of these numbers. The nation’s labor force hit a trough in April of last year. As some states began to reopen, it climbed in a V-shape fashion until July of last year. Since last July, the size of the nation’s labor force has been stuck around 160 million, plus or minus. As initial unemployment claims continue to decline, and we see robust growth in monthly payroll gains, the labor crunch will only intensify if labor force numbers remain flat.

Last week, industrial production registered the first positive year over year change since August of 2019. How can we be producing more, but with a labor force that has been flat since last July? Employee productivity is the reason. In April of last year, the nation saw the largest increase in productivity since the 1940s! Remember that April was the month that we started seeing massive layoffs. Production did not completely come to a halt in April. Many manufacturers continued to produce and found a way to produce more with fewer employees. We are now about a year past the first economic shutdowns of last year, and some manufacturers are producing more today than a year ago (remember industrial production above). However, the labor force is stuck.

The combination of more production and a stagnant labor force means that employers may begin to see higher wage demands. Employers may be forced to increase wages to attract labor necessary to boost production. Or you could see continued gains to productivity. Employers will need to invest in labor-saving equipment and the nation will see an acceleration toward pre-pandemic trends of more automation. Higher productivity alone implies that wages should also increase. We see this play out in the data. Last year saw the highest jump in average weekly wages since the 1960s, as far back as available in the database!

Let’s see how this is playing out at the local level. Louisville Metro labor force reached a pre-pandemic high of around 685,000 in July 2018 and 2019. Due to seasonality, regional labor force peaks in July of each year. Since August of last year, the labor force for Louisville Metro has been stuck around the 650,000 level. Burning Glass data show that the number of job postings over the past 3 months is about 7,000 higher from August to October of 2020. We know that the unemployment rate is declining as the number of employed continues to increase. This mismatch between labor demand, as evidenced by the increase in job postings, and labor supply, as evidenced by a flat change in labor force, will make it increasingly difficult to find employees.

Moving forward, we will see ongoing challenges surrounding labor force availability. Putting my futuristic hat on for a moment, this will likely accelerate moves to more automation and labor-saving innovations. Productivity will increase even further. Productivity gains also occur with higher skilled employees, and the importance of talent will only intensify as we exit the Covid economy.

Early in the pandemic, manufacturing was one of the hardest hit sectors. A complete shutdown in the economy, work stoppages due to the nature of manufacturing floor layouts, and supply chain challenges all played a role in steep manufacturing job losses. Locked in the home with no place to go and few places to spend, and with extra cash due to government stimulus, the seeds were planted for a quick recovery in manufacturing. Consumers then began spending, and were interested in pursuing home improvements, or buying a new home altogether. Consumers bought bikes, appliances, RVs, sporting goods, and anything that would increase their comfort at home, or naturally distance themselves from others (like an RV). Will the consumer continue to drive solid manufacturing activity, or begin to pull back, perhaps resulting in a manufacturing slowdown? Growth will vary by industry, but the evidence continues to point to an overall strong recovery in manufacturing.

Layoffs and Employment
It was almost a year ago when manufacturing began to see substantial layoffs. Locally, layoffs in manufacturing exceeded all other industries. including retail, healthcare, and food and accommodation. Continued claims in manufacturing for both Floyd and Clark exceeded 1,500 at the height of the downturn. The most recent data show that continued claims hover around 150, a 10-fold decline from the peak.

Louisville area manufacturing payrolls have not fully recovered pandemic-induced losses. Manufacturing payrolls were at 82,000 at the start of 2020, and now stand at 80,000. Payrolls had declined to 62,000 in April, which also coincides with the overall bottoming of the economy. Unlike the Great Recession, the recovery has been swifter. It took 6 years to go from 62,000 payrolls to a level of 82,000 following the Great Recession. In the current recession, the region has almost recovered all job losses in a year.

Savings
Considerable challenges remain among some households. The decimation of certain industries due to lockdowns and Covid restrictions have placed uneven burdens on firms and respective employees. Overall, however, the consumer is in great shape. Sky-rocketing savings, and muted delinquency rates (consumer delinquency rates have declined during the pandemic), along with anecdotal evidence of pent-up demand suggest that manufacturing will boom the rest of the year, and into next. The most recent savings rate was at 13.7%, and this is the highest since the 1970s. During the Great Recession, savings rates had reached a high of a little more than 8%. During the Covid-19 recession, savings rates had reached an unheard level of 33%! The consumer is ready to spend even more and has the means to do so. Some of these savings will return to services (dining out, vacations), but the demand for goods is expected to continue.

Institute for Supply Management Index
The ISM Report on Manufacturing showed a deep contraction back in April, but the sector has been expanding since. An ISM reading above 50 points to expansion, and below 50 indicate contraction. The latest reading of 60 points to solid growth. If we examine the ISM coming out of prior recessions, 60 is one of the strongest numbers. One would have to go back to the recession of the early 80s to find an ISM higher than 60 upon exiting a recession.

Inventories
Inventory readings provide an indication of the potential growth pipeline in manufacturing. Excessive inventories relative to demand can spell trouble for manufacturing, but lean levels can portend solid growth. The inventory to sales ratio combines inventory levels and demand, as measured through sales, and is an indicator of upcoming manufacturing activity.

The latest reading on the inventory to sales ratio stands at 1.36 and can be interpreted as the average number of months it takes to sell off inventories. How does this 1.36 compare to previous readings? Back in April 2020, the inventory to sales ratio ballooned up to 1.66, the highest number going back to 1991. The shutdown of the nation’s economy gave consumers few places to spend money, and consequently this led to shelves that were overstocked. As we all know, this did not last long. The inventory to sales ratio then began to plummet over the past year and is now at the lowest level since 2012.

What is the significance to Louisville Metro manufacturing? The year of 2012 marked the highest year over year growth in Louisville area manufacturing since 1991. In essence, this was the “shelf-restocking” phase following the Great Recession, and the region saw very high percentage growth in manufacturing as a result. To be sure, year over year growth in manufacturing payroll growth remains negative, but in a better position than other sectors. Only two sectors are showing positive year over year growth: retail trade (surprisingly) and transportation and utilities. Low inventory levels, relative to sales, and pent-up demand from the consumer will combine to produce strong growth for area manufacturing this year.

Durable Goods Orders
Durable goods are longer lasting and have a life that exceeds 3 years. Think appliances, computers, automobiles, and machinery. As an indicator, durables goods orders provide a signal of future manufacturing activity. Prior to the pandemic, growth in durable goods was sluggish. Uncertainty around trade policy produced reluctance among manufacturers, and this showed up in an overall decline in durable goods orders from the peak of 2018 to February 2020. The pandemic then led to a massive decline in durable goods orders that bottomed out in April 2020. Since then, durable goods have been on the upswing. While levels have yet to return to the peak of 2018, durable goods are significantly higher than levels that existed following the Great Recession, and higher than levels that existed during 2012, the year that was associated with strong manufacturing employment growth for Louisville Metro.

Summary
Manufacturing suffered some of the deepest job losses, but these losses were transitory. As we begin 2021, signs are pointing to a very good year for manufacturing. Manufacturing does not hold the number of jobs it once did, `but is still one of the key sectors for the entire region. The overall positive outlook for manufacturing is one of the reasons Louisville Metro should fully recover total job losses by year end.

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