Uric Dufrene, Ph.D., Interim Executive Vice Chancellor for Academic Affairs, Sanders Chair in Business, Indiana University Southeast
–All eyes on CPI Wednesday
The latest employment report should put a lid on any further rate increases by the Federal this year. The last BLS monthly report on the nation’s jobs picture showed another steady increase in payrolls, but the unemployment rate increased to 3.8%. An additional 187,000 jobs were added in August, while slower than the numbers produced last year, such a jump in payrolls would be considered quite healthy compared to historical norms. The Fed is striving for a cooling labor market, as evidenced by a higher unemployment rate, but also not putting the economy in a recession. A softening labor market should also bring more progress on the inflation front, helping meet the Fed’s dual mandate of stable prices and employment.
The other piece of music to the Fed’s ears came in the hourly earnings figures in the report. Average hourly earnings increased 4.3% over the year, and this was less than the consensus estimates. Slowing earnings will also serve as a headwind to higher inflation.
There was more good news as it relates to price pressures, and that came with the jump in the labor force. The nation’s labor force increased by 736,000 in August, driving an increase in the labor force participation rate to 62.8%. An expanding labor force increases the labor pool for employers, reducing wage pressures and contributing to softer price pressures.
Finally, the previous month’s payroll increase was revised downward, from an initial 185,000 to 105,000, a number that signals a cooling labor market. Altogether, payrolls for the past two months were revised downward by 110,000, removing some of the steam from a previously hot labor market.
With the most recent data, the economy is inching further along to a softer landing. Job creation continues, without significant spikes in the unemployment rate, and price pressures continue to subside. The latest ISM report on services showed a higher-than-expected result, pointing to strength in the services side of the economy. The most recent report on inflation, the PCE Deflator, and the Fed’s preferred inflation gauge, showed that inflation increased by just 2/10ths of a percent in July. On an annual basis, this puts inflation at 2.4%, close to the Fed’s goal of 2%. The Fed will likely keep rates on hold for their next meeting. An increase is not likely, but don’t expect the Fed to reduce rates for the rest of the year. All eyes will be on the CPI report out this Wednesday. FactSet consensus estimates point to a .6% monthly gain and 3.6% on an annual basis. Anything under these numbers will be met very favorably by equity markets. Anything higher, expect a turbulent day with stocks and bonds.
Turning to Southern Indiana, the five Indiana counties of the Louisville Metro region gained close to 3,500 jobs in the first quarter, matching the quarterly average since the 3rd quarter of 2021. Average weekly wages notched another increase, moving to $998 a week, marking the highest wage level in Southern Indiana for any first quarter. The three leading industries based on job growth were health care and social services (+1,342), construction (+524) and retail trade (+415). Accommodation and food services notched another 380 payrolls; industry payrolls are about 1,200 higher than the level existed during the first quarter of 2020.
As a comparison to other metro areas across Indiana, this places Southern Indiana 2nd among metro areas with respect to payroll growth during the first quarter of 2023, and above the overall average of 1.5%. Payrolls across Southern Indiana grew by 3.1% over the year; west Lafayette had the highest growth in payrolls with 3.8%.
Two metro areas, Kokomo and Elkhart-Goshen, saw a decline in year-over-year payrolls. Elkhart-Goshen saw the largest percent decline, 5.5%, and an overall decline of 7,394. RV shipments are down considerably from last year, and the payroll numbers for Elkhart-Goshen likely reflect this shift in spending.
On the wage front, average weekly wages in Southern Indiana are 23.4% higher than the first quarter of 2020; average weekly wages have gone from $809 in 2020:Q1 to $998 in 2023:Q1. The largest absolute increase occurred in the professional, scientific, and technical services industry, increasing by $311 since 2020:Q1. Other notable increases since 2020 are in transportation and warehousing (+$289), wholesale trade (+$262) and information (+$243).
We’ll likely see no change in Fed rates for the rest of the year, and any recession is now postponed to 2024. Perhaps the economy will miss one altogether. It is too early to definitively make that call, but 2023 continues to set the economy up for a softer landing in 2024.