By Uric Dufrene — Sanders Chair in Business, Indiana University Southeast
March 16, 2012 — Indicators continue to point generally in a favorable direction. Consequently, Kentucky and Indiana labor markets will continue to improve, and 2012 growth will exceed 2011.
Regional Federal Reserve regional manufacturing indicators released this week surprised investors to the upside. Both the Philadelphia and New York regions showed continued expansion of manufacturing. As the graph below shows, these two regional indicators provide an early indication of job growth in the Kentucky and Indiana region. This past week the Bureau of Labor Statistics released the state report on employment and both Indiana and Kentucky showed healthy job gains. Unlike the year or two following the recession, Indiana is now observing diversified job growth across various sectors. Previous post recession growth was relegated to manufacturing, and the state saw the cost of this with last year’s slow-down in manufacturing. Manufacturing growth slowed, and job growth came to a complete halt. Kentucky saw more diversified growth, and this contributed favorably to overall non-farm payroll growth. Official metro data have yet to be released for January, but the next report is going to show continued acceleration for Louisville Metro.
Domestic demand will be a key for the overall manufacturing outlook. The slowing global economy will serve as a headwind for domestic manufacturing, and so the strength of the U.S. consumer will be a factor to monitor. This week, retail sales came in quite favorable, a positive indicator regarding the domestic demand necessary to sustain manufacturing growth. As the graph below shows, both Kentucky and Indiana manufacturing growth depends on the strength of the U.S. consumer and retail sales in general.
One potential threat to consumer confidence and retail sales is higher gas prices. At this point, it is too soon to place a more negative outlook on the economy with regard to gas prices. While consumers may not like to pay higher gas prices at the pump, households are better prepared to face higher gas prices today compared to 2008. Since the Great Recession, households have been shedding debt, and consequently can absorb the initial shock of higher gas prices. As the graph below shows, the 2008 increase in gas prices was also accompanied by a high level of household debt service. Today’s debt service level is significantly lower, and will provide a protective barrier against pronounced slower growth. However, if gas prices continue to increase and then remain elevated for an extended time period, the protective barrier will break down, and slower retail sales will result. This could disrupt state economies like Indiana and Kentucky that rely on durable goods purchases and favorable consumer sentiment. It is too early at this point, but the gas price situation does deserve some attention.
The overall outlook continues to be on the upside. Declining unemployment claims will support overall non-farm payroll growth, and both will contribute to personal income growth. Personal income growth will support retail spending and manufacturing necessary to replenish inventories. Interest rates are expected to remain suppressed for all of this year, and core inflation is relatively contained. As mentioned above, gas prices do deserve monitoring, and could serve as the biggest threat to what should be a relatively strong year.