Economic Update:  Is there good news in the Beige Book report?

03.05.2010

The Federal Reserve released the Beige Book this week, and indicated that the economy improved in 9 of the 12 Federal Reserve districts. The St. Louis District, which includes Louisville Metro, reported that
"conditions were mixed, but showed further signs of improvement."

The report indicated that manufacturing increased since the last report. Locally, manufacturing losses have decelerated significantly since the trough of mid 2009. We should expect this trend to continue as manufacturers increase production to replace significantly depleted inventory stocks. National indicators have been very strong pointing to a recovery in manufacturing. We discussed this manufacturing recovery about mid 2009 in a previous One Weekly column. (click here to read previous article)

Last month, 11,000 manufacturing jobs were added for example. Recessionary gains in productivity will challenge manufacturing employment growth in the near term however. Employers have been able to do more with fewer employees, and this is going to impact the number of people who are ultimately called back.

These gains in productivity are evident by viewing the two graphs below. Figure 1 shows the relationship between GDP growth and changes in quarterly employment. As you might recall, during the last half of 2009, the nation recorded two consecutive quarterly increases in GDP. Figure 2 also shows the increase in the capacity utilization rate. This increase in plant usage corresponds with the coincidental increase in GDP. Basically, the nation produced a higher level of goods and services, and had to use more factory space to accomplish this. However, at the same time, the nation continued to shed jobs. So while productivity gains are desirable in the long run, productivity will challenge overall employment growth in the near term.

Productivity gains will increase profitability and support plant expansion and capital investment however. You can only squeeze so much out of an employee. So at some point, these productivity and profitability gains will also contribute to stronger employment gains.

Figure 1

Figure 2

The Book indicated that retail sales were mixed throughout the District. 52% of retailers reported declines, and 32% saw increases in January and February, compared to last year. Despite the decline in retail sales reported by a majority of respondents, the "outlook was positive" with "54% expecting an increase in sales".

The consumer is going to determine the pace of the recovery. As consumers gain more confidence, spending will follow. But before consumers gain confidence, we will need to see a significant decline in the unemployment rate, and higher values in the stock market and home prices. The retail results simply point to additional evidence of a more frugal consumer compared to pre-recession levels. The report indicated that lower priced items were big sellers and higher priced items moved slowly.
Frugality is going to persist beyond the official ending date of the recession.

Today’s National Employment Report

The nation’s unemployment rate remained unchanged for February, and employers shed another 36,000 jobs. These numbers came in under the consensus forecast. As of this writing, Dow futures are up. So we’ll likely see positive gains in the market today.

Positives in the report include manufacturing gaining 1,000 jobs and temporary services gaining 48,000 jobs. Employers will rely on temporary services initially, included in the professional and business services sector. As uncertainty declines, permanent hiring will follow the temporary labor. So the plus 48,000 is a good signal of hiring down the road.

Locally, we have to look at the professional and business services sector. As hiring in this sector increases, we should see positive year over year job growth for Louisville Metro. During the past two months, the change in the Louisville Metro PBS segment was a plus and neutral change, year over year. If we register positive year over year changes in PBS over the next several months, you will see positive changes in year over year total employment. I expect this to take place in the late 3rd or 4th quarter of 2010.

National construction employment continued its downward trend. Despite stimulus spending, we have not seen the gains in construction that may have been anticipated. Construction employment was down by 64,000. Some of these losses could be weather-related.

On the plus side, education and health services continued to add jobs. 32,000 jobs were added last month. We also continue to observe positive changes locally. For Louisville metro, education and health services registered positive year over year gains in every month for 2009.

The average work week declined from 33.3 to 33.1 hours. Under normal circumstances, I would view this as a negative development. We need to see the average work week increase before we begin to see sizeable gains in employment. For this month however, we need to consider the snow storms as a possible explanation. Someone may not lose a job due to a snow storm, but a shorter work week is quite possible.

This month’s national household survey (the part of the report that includes the labor force and unemployment rate) has to be viewed favorably. The size of the labor force increased, indicating that people are beginning to return to the workforce. The number employed actually increased by 308,000, and the number of unemployed only increased by 34,000. All in all, the flat change in the unemployment rate, and the significant increase in the nation’s labor force are very favorable developments.

Suggestions

If you have any suggestions on future columns or research about specific industries or other economic data, please send me an email at udufrene@ius.edu.

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Uric Dufrene.

Uric Dufrene, Ph.D. holds the Sanders Chair in Business in theSchool of Business at Indiana University Southeast. He conducts research on local and regional economic trends, and teaches corporate finance at the undergraduate and graduate levels. He previously served as dean of the School of Business.