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

Last year’s outlook expected Louisville Metro payrolls to erase job losses by the end of 2021, and the region is on track to recover a large percentage of job losses by year-end. For next year, Louisville Metro will see payroll growth at around 2% to 3%, likely closer to 3%. Filling elevated job openings, and an increase in the labor force are both keys to this outlook.

Louisville Metro Jobs
As of September 2021 year-to-date, Louisville Metro added approximately 17,500 jobs. If the metro area remains at this same pace of growth for the last quarter of 2021, total jobs added for Louisville Metro should come in at approximately 23,000 jobs, putting the percentage gain at 3.6% for the year. National economic growth is expected to decelerate compared to 2020 levels, and this should lead to a deceleration in Louisville payroll growth from 2021. Consequently, Louisville Metro payroll growth will likely be in the 2% to 3% range for 2022. The last time we saw inventories as low as now, as measured through the inventory to sales ratio, was 2011 and 2012. For Louisville Metro, we saw a large percentage change in manufacturing employment, and overall payroll growth exceeded 3%.

Job Postings
We can see the tightness of the labor market by examining job postings relative to the size of the labor force. In late 2019, just before Covid, Louisville Metro’s labor force was about 675,000. Fast forward to November 2021, the labor force is approximately 650,000. Today, compared to late 2019, there are about 1,300 additional job postings. So, the region has a slightly smaller labor force, but a need to fill more positions. The number of unemployed in 2021 is now about the same as the number of unemployed in late 2019.

Before the pandemic, registered nurses were in significant demand, and that has not changed. Job postings, however, are about the same now, as before the pandemic.

The one glaring difference in job postings relates to occupations that support the supply chain. In 2019, truck drivers were in significant demand. Job postings pre covid were running about 350 +, and freight, stock, and material movers were about the same, 350+. Fast forward to 2021, same time, and truck driver postings are now 550+ and freight, stock and material movers are 550+. The increase in job postings falls primarily on occupations connected to transportation and warehousing.

Manufacturing
Manufacturers should expect a strong year. Nationally, the inventory to sales ratio remains at low levels. Both new orders and unfilled orders continue to run high. The combination of new and unfilled orders and lean inventories will translate to sustained production for manufacturing. Nationally, the inventory to sales ratio for automobiles remains in record low territory. Materials shortages and supply chain challenges that have plagued manufacturers this past year will show some improvement, although not entirely resolved. This will provide a boost to local area manufacturing. Expected increases in labor market participation and a growing labor force will also support manufacturing payroll growth. Louisville area manufacturers added approximately 2,300 jobs, as of September year over year, and should expect to match or exceed this amount next year.

Leisure and hospitality
The much-anticipated growth in leisure and hospitality hit a few roadblocks due to the emergence of the Delta variant. Spending on services should continue to rebound as the sector moves past Delta, and leisure and business travel will see gains. As a result, convention activity in Louisville should also continue to rebound, providing a boost to leisure and hospitality employment. Remote work arrangements will likely be a permanent fixture with some employers, but in-office activity should also show a bounce in 2022. A return to the office will provide support to leisure and hospitality employment, particularly in downtown Louisville. Leisure and hospitality added 6,700 jobs, September year over year. While it might be difficult to match this level of growth next year, we should expect additional gains in leisure and hospitality employment.

Transportation and Warehousing
Transportation and warehousing were one of the strongest growth sectors in employment for Louisville Metro in 2021. September year over year, employers added 3,800 jobs, amid labor shortages. Truck drivers and warehouse workers remain in high demand as manufacturers and retailers work to alleviate supply chain challenges and satisfy consumer demand. Strong hiring will continue into 2022, and we can expect transportation and warehousing to be one of the leading sectors with respect to payroll growth.

Retail Trade
Retail trade added 2,200 jobs in September year over year. This outlook expects a good year for Louisville area retail, but a continued trend away from goods spending to services will continue. With the shift from goods to services spending, the consumer is still positioned for retail activity. Household balance sheets are quite strong, and net worth is at the highest level in history. Savings rates remain elevated, although they have declined, and the consumer debt service ratio remains lower than the pre-pandemic level. Delinquency rates for consumer loans and credit cards plummeted during the recession and continue to fall. Consumers have additional debt capacity, and this will provide some tailwinds to continued consumer spending. Households have yet to tap into home equity. The amount of home equity loans outstanding continues to fall and has declined through the entire pandemic.

While retail sales gains have been the strongest on record, current supply chain challenges will also serve as a boost to subsequent goods spending. For example, auto sales have been weak over 2021, relative to historical levels. This is not due to a lack of demand but from a lack of supply. As we move past the supply chain issues impacting auto sales, demand will be sustained due to delayed purchases.

Overall, this outlook is very optimistic about the consumer, more than 2/3rds of the U.S. economy. There are certainly some downside risks to the consumer, and we are seeing that through higher prices.

Southern Indiana
Southern Indiana continues to make steady progress in reducing the steep job losses that occurred during the pandemic recession. As of the first quarter of 2021, payrolls were down approximately 2,600 from the previous year. This is a considerable improvement from the 2020 Q2 deficit that was close to a decline of 12,000 jobs. Average weekly wages saw significant gains across Southern Indiana. The last quarter of 2020 saw the highest increases in average weekly wages going back to 2001. This rise in average weekly wages will persist.

Transportation and warehousing was the leading sector with respect to job gains, adding almost 1,600 jobs over the year.

The biggest decline came in manufacturing with local employers shedding 1,049 jobs over the year. Average weekly wages increased by $55, exceeding the overall average weekly wage gain of $29 a week. The decline in total wages and payrolls imply that jobs lost were primarily lower wage.

To maintain competitiveness and to support higher wages, productivity will be crucial. We can expect a greater reliance and need for productivity-enhancing investments.

The second-largest decline occurred in accommodation and food services, down almost 1,000 jobs compared to Q1 of 2020. The decline in 1,000 jobs is not necessarily a demand problem. This is one of supply, a supply of workers. As we go into 2022, jobs in accommodation and food services will continue to recover as more workers return to the region’s labor force.

For more recent data, and a view of the labor market, we can examine labor force and employment information for Southern Indiana. Unemployment rates in Southern Indiana are at 3%. Employment is slightly higher than the level that existed in February 2020, and the region’s labor force is almost back to the level that existed in February 2020.

Current job postings in Southern Indiana are running at just over 3,000, compared to 2,400 in November 2019, where the region’s labor force was at an all-time high.

Truck drivers, followed by registered nurses and freight movers are the top three occupations with respect to the level of job postings in Southern Indiana.

In November 2019, there were about 50+ openings for truck drivers. Today, that number stands at 240. Registered nurses’ openings were at 78. Today, that number stands at 160.

Freight movers were at 64 openings in 2019. Today, that number stands at 102.

Southern Indiana will continue to see growth through 2022 and should see payroll gains that surpass levels that existed prior to Covid.

We are seeing significant building permit activity in Clark County, relative to the four other counties in Southern Indiana. As of September, building permits in Clark County have already surpassed 2020 totals. In fact, total building permits in 2020 and 2021 year-to-date exceed total permits that existed in the last permit boom of 2006 and 2007.

We can see the dominance of Clark County with building permits by the share of the overall total. Clark County has about 41% of the population, but in 2020, had 76% of all building permits. In 2021, Clark County has 82% of the building permits issued. In 2021, half of the Clark County permits were in multi-family, and in 2020, about 45% were in multifamily. This is very different from the boom of 2007 where only 1/3 of permits were in multifamily. This level of permits will provide another boost to area retail establishments.

Summary
Louisville Metro will see another year of solid payroll gains. An expanding labor force and mitigating supply chain disruptions will support overall payroll growth. Strong household balance sheets will support consumer spending, providing demand for several sectors, including transportation and warehousing. Services spending will accelerate compared to 2021, and this will support leisure and hospitality enterprises. Manufacturing can expect additional growth in 2022 as it continues to work through order backlogs. Automotive will see strong sales relative to 2021, and this will provide another boost to Louisville area manufacturers.

Overall, the outlook for the Louisville Metro economy is quite favorable.

Data Sources: Burning Glass Technologies, STATS Indiana, Bureau of Labor Statistics, State of the Cities Data Systems

–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.