By Dr. Uric Dufrene, Sanders Chair in Business and Professor of Finance, Indiana University Southeast
There has been a big debate about whether the US economy is currently in a recession, or if one is just around the corner. Last week’s monthly employment report put the “currently in a recession” argument to rest, at least for now. The Labor Department reported that the nation’s economy added 372,000 jobs in June, far exceeding the consensus estimate of 275,000. The unemployment rate remained flat at 3.6%. As this column has mentioned previously, it will be very difficult to declare a recession with an unemployment rate under 4% and an economy that continues to produce above-average payroll gains. A good month in a normal economy is the addition of about 150,000 jobs, and recent activity is far exceeding that level. The economy could see back-to-back quarters of negative GDP growth (the traditional definition of a recession), given that consumer spending must decline from sky-high levels observed over the past two years.
Additionally, the BLS JOLTS report showed that the number of job openings remains strong. Over 11 million job openings exist right now, and this is almost double the 6 million unemployed. Weekly unemployment claims have increased by almost 50,000 since bottoming out in April of this year. While claims have been inching upward, readings are at levels not consistent with the declaration of a recession.
Manufacturing payrolls increased by 29,000 last month, higher than the consensus estimate of 23,000. The ISM Index continues to show expansion in the manufacturing sector, but at a slower rate. The latest Index came in at 53 (a number higher than 50 shows expansion), but this was lower than expected. While the ISM Report on Business did offer some evidence that the economy is slowing, durable goods orders, an important indicator of manufacturing, showed continued growth and remained strong. Factory orders and durable goods excluding transportation came in more than double what was expected. Non-defense capital goods excluding aircraft are at the highest levels observed.
Over the next several weeks, we are going to observe a tug of war between different camps. There will be the “inflation less than expected” camp. Any data that point to a deceleration in prices will likely be met by strong positive responses in the equity markets. Related to this group is the “slower growth expected” camp. Economic data showing slowing growth will be met with either positive or negative reactions. A positive reaction will occur due to the Fed getting a green light to slow interest rate increases. But a negative reaction will occur if this slower growth begins to erode profits. We saw this with last Friday’s employment report. Payrolls came in very strong, and the unemployment rate remained flat at 3.6%. The Dow and S&P 500 both finished lower on the day. This was an example of “good news is bad news” effect. Good economic news brought a “bad news” response in the equity markets. The positive jobs report was additional data for the Fed to continue aggressive rate hikes. So, we will likely see another 75 basis points increase at the next Fed meeting.
We get the BLS CPI report on Wednesday. Of all the economic releases, CPI is now probably the most important, ranking higher than the monthly employment report. For the past two reports, “past peak” inflation was the phrase used in anticipation of each report. However, market watchers were disappointed with headline inflation showing strong gains. The consensus is for another hot number, with inflation increasing at a rate higher than last month. The month-over-month change in the core (CPI minus food and energy) rate of inflation will be closely examined for signs of slowing price growth. The headline number is important but look at the month-over-month core CPI. If that shows some moderation from the previous month, look for a positive equity response.
Louisville Metro payrolls are up about 21,000 from last year. In absolute numbers, this is among the best over the past 30 years. For May employment and labor force levels, Louisville is now higher than the totals that existed in May 2019, prior to the Covid pandemic.
An examination of Louisville Metro job postings reveals significant developments since pre-Covid times. First, we see that job postings continue to remain strong. Job postings for the past quarter are about 20,000 higher than the level that existed for the same quarter of 2019 (Lightcast job postings data). From April 2022 to June 2022, there were approximately 63,000 job postings across the Louisville Metro region, compared to roughly 43,000 in 2019. While the Louisville Metro labor force has increased, it is not large enough to absorb the strong level of job postings. On advertised salaries (fewer data are available on advertised salaries than job postings), we see significant increases in salaries from 2019. Clark and Floyd advertised salaries increased by 21.6% and 23.9% respectively. This represents a $6,848 increase in Clark and a $7,424 increase in Floyd. It is important to note that these data are not from official government statistics but are retrieved from actual job postings with advertised salaries. BLS data also point to wage gains across the region.
Data sources: FactSet, BLS CPI, BLS Metropolitan Employment, Lightcast, BLS Employment, BLS JOLTS, ISM Report on Business, Census Factory Orders, Census Advance Report on Durable Goods.