Posts in category: 1si News

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.

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.