Posts in category: 1si News

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.

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

Indiana has long been a heavy manufacturing state.  Despite overall declines in manufacturing employment, Indiana continues to rank in the top ten nationwide.    Hence, the outlook for national manufacturing is an important economic indicator for both Indiana and locally here in Southern Indiana.   Despite recent declines in the ISM Manufacturing Index (pointing to a deceleration in manufacturing growth), the outlook for Southern Indiana manufacturing remains upbeat.   First, we’ll look at where we’ve been, what we can expect this year, and trends shaping up beyond.

Since the first quarter of 2020, manufacturing employment across the five counties of Southern Indiana remains in a deficit of approximately 1,200.  Overall payrolls are down about the same, approximately 1,150.    On the wage front, we observed a significant increase in hourly average wages during the first year of the pandemic, reaching a historical high in the 4^th quarter of 2020 as employers scrambled to find labor to meet demand.

Manufacturing was hit from both sides:  demand and supply.  On the demand side, we observed perhaps one of the largest, if not the largest, increase in goods expenditures.      Early in the pandemic, capacity utilization rates plummeted due to shutdowns and the overall slowdown of the economy.   At the same time, demand was about to skyrocket.     As demand began to escalate, manufacturers were also faced with labor challenges and materials shortages.   This simply compounded the problems associated with meeting demand.

Significant increases in demand also became a challenge for the nation’s supply chain.   Using a simple example, if the supply chain has the capacity to ship 100 boxes of freight, but orders total 1,000, that means 900 boxes will have to wait for the next truck.     We get a clue of this through the number of truck driver postings.  Before the pandemic, at a time when there was already a shortage of truck drivers, nationwide postings stood at about 127,000.   In the last quarter of 2021, nationwide truck driver postings were more than double at 270,000.  Simply speaking, we simply did not have enough trucks, or supply chain capacity, to move the level of goods through the system.

But let’s get back to manufacturing.    Why do I continue to remain upbeat on manufacturing, despite some of the headwinds the economy faces?     One indicator is to look at inventories.   Inventories remain very lean. The ISM Customer Inventory component continues to hover at all-time low levels.   There was some improvement from the record low in July 2021, but levels remain significantly under pre-pandemic territory.   The inventory to sales ratio is also pointing to very lean inventories nationwide.    The last reading of 1.09 is significantly under the 1.43 reading prior to the pandemic.   When we combine both inventory and sales into one convenient inventory to sales ratio, it suggests that the “shelves need significant restocking”.    The previous pre-pandemic low of the inventory to sales ratio was observed back in 2012.    Manufacturing employment across Louisville Metro then followed with the largest percentage gain among all economic sectors.

On the new orders front, we are seeing record high levels.   New orders were higher only once, back in 2014, but quickly receded to trend levels.   Except for that 2014 outlier, new orders are at an all-time high.     Unfilled orders are also running at record highs.

Low inventories and orders combine to form a favorable outlook for manufacturing production this year.   Challenges do remain, however.   Perhaps the biggest is on labor availability.    The nation’s labor force remains about 2.5 million workers under the pre-pandemic level, and the labor force participation rate has been stuck in the 61% range since June 2020.  Manufacturing quits are also among the highest (not the highest, but in the top 5), totaling 293,000 as of November 2021.   This compares to a quits level of 189,000 before the pandemic.

The last national employment report indicated 2.5 million workers were not in the labor force;  1.4 million did not search for work last year, and 1.1 million searched for work.    We should expect some of these workers to re-enter the labor force this year.   Given that labor was scarce before the pandemic, and expected to remain, how will manufacturers meet demand moving forward?    We get a hint by observing investments in software and industrial machinery.     Investments in software and information processing equipment are at record highs, and software expenditures have accelerated the past year in a half.   Investments in industrial machinery, a component of non-defense capital goods are also at all-time highs, and with significant acceleration in the rate of spending the past two years.     It takes time to implement a new production process, but we are likely seeing investments that allow manufacturing to meet greater demand, but perhaps with fewer workers.

Data sources:  STATS Indiana Quarterly Census on Employment and Wages, Burning Glass Technologies,  Census Advance Report Durable Goods, FactSet, Bureau of Labor Statistics Employment Situation Report, ISM Report on Business.

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

Wishing everyone a happy, prosperous, and healthy new year!

Just as we resume our bi-weekly columns and start another year, we have good news to share. Unfortunately, this good news is the other side of the coin of challenges.

County payrolls data for the 2021 Q2 have been released, and Southern Indiana experienced a significant pick-up in payrolls. Looking back at the dark days of early 2020, the second quarter saw record declines in payrolls due to the Covid pandemic and the temporary closing of many establishments. Total payrolls had declined by almost 12,000 from the previous year, about double the losses that existed during the Great Recession.

We now see a complete reversal of the 2020 deep payroll losses. 2021:Q2 saw an increase of payrolls of 11,572, or almost 12,000. The second quarter of 2021 was one year into the pandemic, and that payrolls total puts the region only down about 1,800 jobs from the second quarter of 2019. Following the Great Recession, it took almost 7 years for the region to recapture the number of jobs lost. So, while the Covid recession was very deep, it was also a very short recession. This recovery of jobs can be explained by a V-shape that we projected early during the pandemic.

All industries showed positive job gains, except for public administration (likely the reduction in Census payrolls). Leading the way was accommodation and food services (+2,355), followed by manufacturing (+2,042), and health care and social services (+1,415). Retail (+969), administration and support, and waste management services (+777), and transportation and warehousing (+754) also showed significant gains from the previous year.

Calculating a year-over-year change from a lower base can magnify the impact. So, to control for the base year effects, we can examine the change in payrolls, wages, and establishments over a two-year period. The results are quite striking. During the Great Recession, as a comparison, the region saw consistent declines in the number of establishments. At the beginning of the Great Recession, the region was home to 5,584 establishments. At the recession exit, that number was 5,324. We see the opposite for the Covid recession. In fact, not only do we see a gain in the number of establishments, but we also observe the largest change in establishments going back to 2001. This is both for one and two-year changes in establishments.

We see similar changes in average weekly wages. Both one and two- year changes in average weekly wages are the largest since 2001, the start of the data series. The most recent quarter shows that average weekly wages increased by $92 over the two-year period, for a 12% increase.

With more recent labor force data, we observe that the recovery in Southern Indiana is well underway. As of November 2021, the unemployment rate for the five-county region was a staggering 1.8%, the lowest going back to 1991, and perhaps the lowest on record. A 1.8% unemployment rate tells us that we have a very tight labor market. We can see this by comparing the size of the labor force to the number of employed across the five-county region. In late 2021, the size of the labor force exceeded employment by only 2,654. These are estimates and subject to revision but clearly point to a labor scarcity. On the bright side, the last three national employment reports did show some positive movement in the size of the labor force. While the headline payrolls number was less than expected, the household survey showed continued gains in the labor force. As we go through 2022, we will likely see labor force gains accelerate, and this applies to Southern Indiana and Louisville Metro. Labor force gains will be the key to employers filling available positions.

Data sources: FactSet, Bureau of Labor Statistics, STATS Indiana