By Dr. Uric Dufrene, Sanders Chair in Business Professor of Finance, Indiana University Southeast
The latest county-level payroll data are out, and it shows impressive job gains for Southern Indiana. For the second quarter of 2022, the five counties of Southern Indiana gained almost 4,000 (3,826) jobs from the previous year. This is the largest gain since the 2nd quarter of 2021. If we remove the outsized gains from the Covid recovery year of 2021, the latest gain would be the largest since the first quarter of 2016. The region also showed the highest level of jobs in the history of the series, with almost 112,000 payrolls across the five counties. The previous high occurred in the 4th quarter of 2019, with a little more than 110,000 jobs. Average weekly wages increased by $71 from the previous year, rising to $928 for the 2nd quarter. This represents the highest average weekly wages for a 2nd quarter time period.
Hospitality led the gains with accommodation and food services adding 1,310 jobs. The second highest change came in administrative and support and waste management, adding 853 payrolls. This is likely due to the hiring of temporary labor services. Manufacturing also showed growth with another 729 jobs added over the year.
Nationally, the most recent unemployment claims showed a decrease from the previous week and came in substantially under the consensus expected. While the technology sector continues to report layoffs, primarily due to excessive hiring in prior years, overall layoffs remain at historic low levels. One of the reasons, but not the only reason, why the economy is now inching toward a soft landing (which could also include a mild recession) is due to the labor market situation. Claims need to be closer to 350,000 before we get close to a declared recession.
While we are not seeing a slowing economy through the eyes of the labor market, other signs continue to point to a slower economy in the year ahead. The ISM manufacturing indicator is now under 50, signaling contraction in manufacturing. The ISM services indicator also dropped below 50, pointing to contraction in the services economy, and this decline came as a big surprise.
One is on the inflation front. The latest CPI (Consumer Price Index) showed a decline from the previous month, and the PPI (Producer Price Index) sank month over month, declining by .5%. The 10-Treasury year yield has retreated from last year’s high of 4.2%, and the latest reading was 3.5%. A declining 10-year yield is not a sign of strong growth ahead, but declining yields will bring mortgage rates down, and this will be a boost to the troubled housing sector. The yield curve remains inverted, which means that shorter-term Treasury yields, such as the 2-year yield are higher than the 10-year. An inverted yield curve developed in advance of the past 6 recessions. The question is whether this time is different.
Adding to the slowing growth argument, retail sales declined by over 1% for December. This decline was larger than expected, and the equity markets took this as an indicator of a slowing economy. Over several columns, however, we made the case that retail sales had to come down. The nation’s economy saw a surge in goods spending, and this was made possible through government stimulus and a large part of the service economy that had been restricted. So, this decline was not altogether unexpected.
We are moving past the “bad news is good news” effect. With the Fed now moving toward smaller increases in interest rates, bad news will be just that: bad news. Weak economic reports will signal slowing growth, and the equity markets will respond accordingly. That said, evolving financial conditions are pointing to more of a “soft landing”, and at worst, we may see a mild recession.