Economic Update: Outlook 2010
11.13.2009
Labor Markets and Non-Farm Payrolls
Since the current recession began in December of 2007, Louisville Metro has suffered a 4.9 percent decline in total non-farm payrolls, equivalent to 30,400 jobs . This change is less than the 5.2 percent decline for the United States, but exceeds the combined total job losses for Louisville Metro during the past two recessions.
The 10 percent metro unemployment rate for September exceeded the September national rate of 9.8 percent, but local claims for unemployment reached a peak in the first half of 2008 and are now trending downward .
Due to national problems in housing, the automotive sector, and consumer credit, the region saw significant losses in manufacturing and transportation.
Local job losses, combined with cautionary consumer habits and depressed weekly wages, impacted the retail sector, and as a result, the retail sector also saw significant job losses.
On the plus side, local employment losses reached an apparent bottoming of over the year losses during May, and losses have been decelerating since then.
Manufacturing
Manufacturing will see a pick up due to inventory restocking, but it is doubtful whether this growth will be sustained at any high rate. Losses in manufacturing have also been slowing down, and now stand at 8,600 since the start of the recession. For the current year, September data show a year over year loss of only 3,900, a noticeable deceleration from an earlier trough of 10,000.
Significant reductions in inventory stocks are causing manufacturers to ramp up production, retain workers, and call some back. For example, from January to September of 2008, manufacturing employment declined by 5,000. Over that same period this year, manufacturing employment is up by 100.
Beyond the inventory restocking phase, and a gradual pick up in domestic demand, the success of local manufacturing will then be tied to exports.
Southern Indiana
Looking at the latest data for the metro counties of Southern Indiana, we see that the 4 counties in the metro area saw a decline in non-farm payrolls from Q1 2008 to Q1 2009. Of the 3,600 total jobs lost, 2,100 were in manufacturing with the balance of losses in construction, transportation, and retail. Healthcare added 600 jobs over the same period.
When compared to Louisville, a few Southern Indiana counties, specifically Floyd and Clark, continue to enjoy unemployment rates less than metro, state, and national averages.
Housing and Real Estate
Building permits for Louisville Metro are at a level that is 57 percent of the permit activity in 2008, a year that also saw a significant decline in permits from the previous year .
During the most recent quarter however, building permits have turned upward, running at an annual rate that would exceed 2008 total permits.
The metro area has not been immune to price declines. Both the FHFA Home Price Index and data from the National Association of Realtors point to price declines from the previous year. Based on the release of 2nd and 3rd quarter data, it does appear that metro prices reached a bottom during the 1st quarter of this year.
On the downside, we are actually seeing an increase in mortgage delinquencies and consumer credit in some of the counties throughout the region.
Consumer-related Sectors
As of 2009:Q1, average weekly wages were down for Southern Indiana , and the same likely applies to all of Louisville Metro . For example the decline in average weekly wage for production workers in Louisville metro is down about 10% from the previous month and 10% from the previous year.
Depressed personal earnings, relatively high unemployment rates, and a more frugal consumer will present challenges to certain retail and leisure and hospitality establishments. As an example of the challenges faced by consumer discretionary establishments, Horseshoe Southern Indiana attendance is 25 percent lower than in 2004, equivalent to a reduction of 200,000 customers .
Despite such challenges, some establishments will actually thrive and increase market share due to a business strategy that successfully adjusts to changing consumer habits.
Outlook for 2010
The metro region will continue to experience elevated rates of unemployment likely exceeding 8 percent through 2010. I don’t expect local rates to exceed the current rate of 10%, and some counties such as Floyd and Clark will see rates less than 8%.
The region will continue to see a deceleration of year over year employment losses, but will not recover total jobs lost during the recession.
How long will it take to get the jobs back?
During the mild recession of 2001, it took 4 years and 11 months to return to the level of jobs that existed at the March start date of the 2001 recession. When you look at the number of jobs from peak to peak, June 2000 (623K) to April of 2007 (624K), it took almost 7 years to recapture lost jobs.
The 2001 recession was very different from the current recession, however.
First, Louisville had an unemployment rate of about 5% during 2001. Today, the metro rate is at 10%.
During 2001, we saw a very small change in national consumer debt. During the current recession, we are seeing a “fall off the cliff” change in national consumer debt, as consumers save more and spend less.
During 2001, we actually saw an increase in national auto sales, from 17.5 million to over 22 million. This recession, we have seen auto sales go from over 16 million to under 10 million.
During 2001, we saw a small decline in national housing starts, from just over 1.6 million to fewer than 1.5 million. This recession, we saw housing starts go from 2.3 million to under 500,000 starts for the year. Locally, housing starts actually climbed in Louisville during 2001. This year, Louisville starts are down about 2,000 compared to the start of the recession.
In 2001, Louisville saw the FHFA Home Price Index, an index that measures home price changes, only drop from 5.26 to 4.99, but it was still positive. This recession, we now have recorded the first negative number in the index since 1984.
A decline in wealth, due to declining home values and stock markets, sent a wake-up call to the consumer, and the consumer is now saving more and spending less. And due to the severity of this shock, this change in consumer and household behavior will not be temporary.
Throw in elevated rates of unemployment, and the result is a slow or U-shape recovery. A U-shape national recovery will have local implications due to the impact on major industries such as manufacturing and transportation.
Therefore, due to this slow recovery, it will likely take as long as or even longer than 2001 to recover lost jobs.
At this point, the biggest threat to the local recovery is the unemployment rate, both local and national. Sustained unemployment may contribute to additional problems in real estate, both residential and commercial, and consumer discretionary establishments in general. Additionally, higher unemployment rates will discourage spending from those who are employed. This “maybe I’m next” effect will also contribute to this U-shape recovery.
In summary, 2010 will be a year of slow growth, lower rates of unemployment than 2009 (but above 8%), and the emergence of the new consumer. Locally and nationally, a recovery is in the works. It will only take time.
Source: www.bls.gov. 30,400 is the difference between jobs in September 2009 and December 2007, using seasonally adjusted data.
Statement based on unemployment claims for Indiana Region 10 consisting of Crawford Clark, Floyd, Harrison, Washington, and Scott counties. Source: www.hoosierdata.in.gov.
Building permits source: http://socds.huduser.org/index.html
Source: QCEW data at www.stats.indiana.edu
Average weekly earnings of Louisville Metro production workers declined by 10% in September, both on a month over month and year over year basis. Source: www.bls.gov.
Source: http://www.in.gov/igc/2363.htm
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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This information is provided by
Uric Dufrene.
Uric Dufrene, Ph.D. holds the Sanders Chair in Business in the School 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.
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