By Dr. Uric Dufrene, Sanders Chair in Business and Professor of Finance, Indiana University Southeast
The big monthly jobs report was released last Friday, and the headline number was out of the ballpark! About 250,000 jobs were expected but the Bureau of Labor Statistics report showed that more than 500,000 jobs were added in July. Even a number like 250,000 would be considered above average in normal economic times, but 500,000 is through the roof! The blowout report means that we will likely see another rate increase of ¾% at the next Fed meeting.
Unemployed ranks declined by 242,000, and this was reflected in a drop in the nation’s unemployment rate to 3.5%. In a nutshell, the national labor market remains very tight. The labor force showed a decline of 63,000, and the number of workers not in the labor force increased by another 239,000. The labor force participation rate declined. Labor force numbers were a dimmer on an overall positive report. There is a reason why the economy has observed record-breaking levels of investments in machinery and software, and labor force availability is a major driver.
Hiring was the strongest in leisure and hospitality, professional and business services, and health care. Other notable gains of local interest include 30,000 additional jobs in manufacturing and 21,000 jobs in transportation and warehousing.
The BLS also released the latest employment report for metropolitan areas. Louisville Metro is now observing steady increases in the metro area labor force. This had been one of the biggest challenges facing employers, and while challenges do remain, labor force growth is headed in the right direction. The report showed labor force gains from May to June of approximately 6,500 (preliminary estimate, and subject to subsequent revision) for the metro region, which includes Floyd and Clark counties in Southern Indiana. Compared to February 2020, the metro labor force is larger by approximately 13,000 workers.
The number of unemployed in the region declined further. The unemployed ranks dropped by another 1,600 (estimate) to about 24,000. This compares to 37,000 unemployed same time last year. A growing labor force with a decline in the number of unemployed produced a lower unemployment rate of 3.4%, down from the 3.7% in May.
We are seeing the positive impact of labor force growth on the ability of employers to increase payrolls. Job growth in Louisville Metro increased by another 6,000, pushing payrolls up by 24,000 over the year. Excluding the abnormal year-over-year changes observed last year, a gain of 24,000 jobs is the highest in the past 30 years. Total payrolls in Louisville Metro are now at 682,000. In February 2020, metro payrolls were at 680,000.
During the pandemic, the country’s economy saw a massive shift to goods spending. Consumers rushed to improve their homes, buy camping and outdoor sporting equipment, computers and equipment for remote working, sofas, and appliances, etc. This surge in goods spending could not continue, and we will continue to see a shift away from goods to services. There is still pent-up demand on the services side, and the consumer is simply directing their spending there. Gas prices are declining, and this will also support continued growth on the services side, particularly travel. The latest ISM report on services showed additional growth.
On the goods side, there is still pent-up demand in the automobile sector. Inventories relative to sales remain very lean. Households have delayed automotive purchases due to the lack of available models on the lot, and this is reflected in historically low auto sales levels. So, while overall goods spending will see a decline, pent-up demand remains in automotive, and this will be a benefit for Louisville and Southern Indiana. So, when we combine what we are now seeing in services, and the general outlook for automobile manufacturing, the outlook for Louisville Metro remains upbeat.
We will get another round of the Consumer Price Index report this week, and we’ll likely see a moderation in the headline rate. Depending on the magnitude of the decline and the core (CPI minus food and energy) inflation rate, we could see a very strong positive reaction in the equity markets.