By Dr. Uric Dufrene, Sanders Chair in Business and Professor of Finance, Indiana University Southeast
In the last column, arguments were presented against a recession for the remainder of this year. The verdict is still out for 2023, however. What happens with the consumer can tell us a lot about the economic outlook. Almost 70% of GDP is consumer spending. So, as the consumer goes, so goes the macro-economy.
One of the points presented in that last column pertained to consumer debt. Statistics regarding consumer delinquencies, household debt, and levels of outstanding home equity loans point to increased consumer debt capacity. Debt capacity, or as referred to in corporate finance “unused debt capacity”, will serve a key role in determining the strength of consumer resiliency. The combination of consumer credit activity, rising real estate values, and gains to net worth all serve to increase household debt capacity, directly or indirectly. This is one of the fundamental reasons why the consumer will not roll over just yet.
Consumer credit was released last week, and the number came in significantly higher than what was expected. Consumer credit came in at $41.8 billion, and the consensus estimate was $17.5 billion. The prior number was $8.9 billion. Numbers are mentioned here only to show the magnitude of the increase. The report indicated an explosion in consumer credit. It was one of the largest monthly increases in 30 years. Does this mean that the consumer is headed straight for the cliff? We are not at that point just yet. Household balance sheets remain strong, and the surge in consumer credit suggests that the consumer will provide some resiliency for the rest of the year.
Last week’s unemployment claims number came in at 166,000! This is an extremely low number when compared to historical levels. This number was the lowest since the 1960s when the labor force was significantly smaller in size. We can also use unemployment levels as a predictor of recessions. When unemployment claims approach a level of about 350,000, that is close to the start of a recession. We can’t use the Covid recession as an anecdote because we had the quickest increase in unemployment claims ever. However, if we go back to the recessions of 2008, 2001, and 1990, the 350,000 unemployment claims number is pretty accurate. With 166,000 claims, we are far from that number.
The last U.S. employment report showed that employers added 431,000 jobs in March. That was a little below the consensus number, but the big takeaway from the report is the activity we are now seeing with the nation’s labor force. March saw another noticeable pick-up in the labor force, adding to February’s gains. This was a significant piece of the report. Not only did the labor force increase, but the number of unemployed dropped as well, resulting in an unemployment rate that is now 3.6%. The big challenge last year was a stagnant labor force. A positive trend is now developing, and this will support overall payrolls growth in the near term.
The last employment report for metropolitan areas also showed a noticeable uptick in the region’s labor force. These data are preliminary and subject to subsequent revisions, and the metropolitan report lags the nation’s employment report. The latest metro data show that the metro labor force is almost back to the pre-Covid level that existed in February 2020. Examining both the national and metro reports suggests that the stagnant labor force growth of last year may be behind us, or perhaps showing some improvement.
Despite some of the gains we are now seeing with the labor force, local employers continue to face challenges in meeting demand. Burning Glass job postings over the past 30 days were at approximately 20,000 for Louisville Metro. Examining the same time of the year in 2019, prior to Covid disruptions, show that postings were at approximately 15,000. The total unemployed in the metro region is estimated at 23,000, about the same level that existed just prior to the Covid disruptions. So, openings are close to the number of unemployed. Put another way, there are still very few workers available to hire. A now expanding labor force will bring some relief to employers.
We could easily write several articles about recession risks. Inflation, stock market volatility, and rising interest rates are a few to mention. As we go through 2022, the risks might strengthen the headwinds confronting growth, and the probability of a recession will increase. To be continued.