Economic Update:  Multiple Reports Out - What does this mean for our region?

07.02.2010

There were several reports out this week that point to slower growth in the second half of the year.  

ISM Manufacturing Index

First, the ISM Manufacturing Index showed slower growth in the manufacturing sector.  The report indicated that manufacturing continues to expand, but now at a slower rate.  The inventory-related measures showed that inventories declined, and that customer inventories are very low.   This is particularly relevant because the expansion in manufacturing has been fueled primarily by inventory restocking.  At some point however, consumer demand will have to step in, and help lead the recovery.  A series of recent reports and financial market volatility suggest that the consumer may still be in hibernating mode.

New Claims for Unemployment

While we continue to undergo a recovery, new claims for unemployment remain stubbornly high.  In a report released yesterday, the Labor Department indicated that new claims increased at a level that was higher than expected.  Prior to the significant layoffs associated with this recession, new claims for unemployment were below 350,000 weekly.    New claims have declined since the massive layoffs associated with 2009, but have not been able to go below the 450,000 floor.  The inability to go below the 450,000 floor will place upward pressure on the national unemployment rate.

Pending Home Sales

The National Association of Realtors released data on pending home sales this week.  A pending home sale includes a signed contract, but the deal has not closed.  Pending home sales plummeted by 30% for May.  The expiration of the government tax credit is having a more significant impact on housing than previously expected.   It appears that most recent activity in the housing sector may have attributed to government incentives.  Despite all time low mortgage rates, housing may go back on life support as government oxygen is removed.

Louisville Metro Employment:  Positive Year over Year Employment Changes

The Bureau of Labor Statistics released the monthly report on Metropolitan Employment and Unemployment this week.  The report showed that the unemployment rate for Louisville Metro remained unchanged at 9.9% for May, slightly higher than the national rate of 9.7%.  The 9.9% rate is lower than the May 2009 rate of 10.2%.  141 metro areas recorded lower unemployment rates than last year, and 222 registered higher unemployment rates.  Despite the overall economic recovery, metro regions continue to face labor market stresses, and this is indicated by the number of metro areas with higher unemployment rates.

The report showed that Louisville Metro saws a slight increase in the size of the labor force from April, as more people continue to return to work.    The number of unemployed declined by 200 from the previous month, and 62,700 metro residents were counted as unemployed.  Compared to May 2009, the number of unemployed is down by 3,000 workers.

Despite the unchanged unemployment rate, the region continues to undergo a labor market recovery.  Seasonally adjusted data available on the BLS website indicates that Louisville Metro has now recorded positive year over year job changes.   My original call was for this to occur in the 2nd half of the year.  While it is too early to determine if this will be a sustained trend, it represents the first year over year gain since the middle of 2008.  I do think that the region will continue to register positive year over year job gains, and gradually regain some of the lost jobs.   To be sure however, this is going to be a long and protracted jobs recovery.   Recent national labor market develops might exacerbate a muted labor market recovery.

Since the beginning of the year, the region has now gained 9,700 jobs, and has recorded three consecutive month-over-month positive changes in non-farm payrolls.  Since the beginning of the recession (December 2007), total non-farm payroll losses now stand at 27,800.

Specialty trade contractors (construction) have added 1,400 jobs (non-seasonally adjusted) for the year, and saw 3 consecutive monthly increases.    We are not going to see any rapid growth in this sector anytime soon.    Recent national releases on housing suggest that housing will continue to face challenges.   The same applies on the commercial real estate side and associated commercial construction.

Manufacturing (non-seasonally adjusted) registered a small positive year over year change (+100).  For the year, employment is down about 1,000 and since the official starting date of the recession, manufacturing employment is down 13,100.  This is almost half of total job losses.

Retail (non-seasonally adjusted) is still in negative year over year territory, and down 100 since the start of 2010.  Total losses since the start of the recession stand at 9,100.  Retail continues to face challenges.  While retail spending is making progress, consumers are still in the process of deleveraging and cleaning up household balance sheets.  

Transportation and utilities (non-seasonally adjusted) are up by 100 since the start of the year, and remains in negative year over year territory.

Professional and business services (non-seasonally adjusted) is registering solid year over year gains, and is up by 5,600 since the start of the year.  PBS has been the largest gainer this year, and this is a positive barometer of future hiring.   We may also be observing employer reluctance to hire on a permanent basis.    Despite the ongoing recovery, there is a tremendous amount of uncertainty in the macro-environment, and the question of sustained demand is still unanswered.  So we may be seeing employers rely on temporary employees as opposed to making a permanent commitment.   

National Employment Report

The national employment report out this morning showed that the nation shed 125,000 jobs for June.  This number is somewhat deceiving however.  Private sector payrolls increased by 83,000, and the decline non-farm payrolls was attributed to a reduction of 225,000 workers by the Census.    While the 83,000 increase shows that private sector employers are increasing payrolls, this number is characteristic of a very sluggish economy.

The headline number indicated that the nation’s unemployment rate fell to 9.5%.   Today’s report is a classic example of why you simply cannot look at the main unemployment rate number to determine the strength of the labor market.   The decline in today’s rate is linked to a reduction in the unemployed through a reduction in the labor force.   The labor force declined by 652,000 and the number of unemployed (household survey) declined by over 350,000.    However, the number of employed dropped by 301,000.  So the decline in the unemployment rate is definitely linked to a reduction in unemployed citizens, but the unemployed are not shifting to employed ranks.  They are simply dropping out of the labor force, as indicated by this morning’s report.

Outlook Update

Recent indicators are pointing to slower growth nationally, and this will impact Louisville's job recovery.   I do think that growth will continue, but only at a slow rate (our original U shape recovery).   Employment and housing will continue to exert challenges on households, and serve as a drag on the overall economy.   What happens in the stock market is also important.  As financial market volatility increases, and as the Dow trends down, this will dampen consumer confidence and impact real or perceived household wealth.  This will further constrain consumer spending.   There will be no so-called double dip, but the economy will continue to experience slow growth.

Data sources:  

Institute for Supply Management, June 2010 Manufacturing ISM Report on Business

Barrons.com

National Association of Realtors

U.S. Department of Labor Unemployment Insurance Weekly Claims Report Update

Bureau of Labor Statistics Metropolitan Report on Employment and Unemployment

Bureau of Labor Statistics The Employment Situation-June 2010

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.