Economic Update | Despite the Risks

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.

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