Home » ANALYSIS: A change to the outlook?

ANALYSIS: A change to the outlook?

By Uric Dufrene
Sanders Chair in Business
Indiana University Southeast

(April 13, 2012) — The past couple of weeks have not pointed to an accelerating labor market, or a sustained robust recovery.

The big announcement last week was the monthly release of U.S. non-farm payrolls for March. The Bureau of Labor Statistics announced that non-farm payrolls only increased by 120,000. The lower end of the consensus range was 180,000. So in addition to the number not meeting expectations, it also was well outside the range of estimates. The unemployment rate declined slightly, but this was because of a shrinking labor force. Overall, it was a nasty report, and the markets indicated their displeasure with selling that took place the following Monday and Tuesday.

Adding to the bad news was the report on unemployment claims Thursday morning. New claims had been approaching the 350,000 level for several weeks, and this coincided with healthy gains in the monthly non-farm payroll number. Thursday’s number shot up to 380,000, well above the consensus estimate of around 355,000. The weekly number is quite volatile, and one week is not sufficient to determine if this is the start of a near term trend. Any way one would like to spin it, it was a terrible number. The market rebounded favorably Thursday, but this was because of Federal Reserve officials suggesting that interest rates will remain at current levels into 2014.

One of the key indicators prior to last year’s midyear slowdown was unemployment claims. As Figure 1 shows, unemployment claims began showing gradual increases during the first quarter, and this was followed with subdued non-farm payroll gains. On a year-over-year basis, jobs had dipped, and the economy then registered weaker GDP numbers. Are we now about to go through a repeat of last year, and experience a similar summer slowdown? It is too early to definitively conclude that Thursday’s weak unemployment claims number is the start of an underlying trend? The combination of unemployment claims over the next several weeks, and non-farm payroll numbers from April and May will be important indicators of overall growth in the economy for the rest of the year.

Metropolitan employment numbers were released this week, and the report showed a potential deceleration for Louisville Metro employment. Seasonally-adjusted data indicated a slight decline in non-farm payrolls from the beginning of the year, and payrolls did show a deceleration in gains from the previous month on a year-over-year basis. From February 2011 to February 2012, the report indicated that the metro region added 14,900 jobs.

The unemployment rate for Louisville Metro dropped from 9.6 perccent in January to 9.5 percent in February. Last February, the unemployment rate was at 10.7 percent. So while the local unemployment rate has improved since last year, the regional rate continues to be higher than the national average. The region saw a small increase in the labor force (+2,000) from January to February. Compared to February of last year, the labor force has increased by 7,300. An expanding labor force is a helpful sign, but on a percent basis, the 7,300 addition from last year is a relatively weak number.

The number of unemployed in the metro region now stands at 60,300, down slightly from January’s total of 60,700. Despite some of the gains to non-farm payrolls, the number of unemployed remains stubbornly high. Compared to the same time last year, the number of unemployed has declined by about 7,000.

This 2.5 percent year-over-year change in non-farm payrolls is not a disappointment for Louisville Metro. Over the same time frame, Kentucky registered a 2.2 percent change and Indiana’s year over year change in jobs was only 1.7 percent. In Indiana, Columbus had the greatest percent change in jobs since last year (+9.7 percent), followed by Elkhart-Goshen at 5.6 percent. In Kentucky, Owensboro observed the greatest change on a year over year basis at 4.2 percent.

This week’s metropolitan report suggests that Louisville Metro job growth may be seeing a deceleration in gains compared to the last quarter of 2011. The latest national report out last Friday suggests that metro areas may also see a deceleration in job gains in the next couple of months.

While the metro region continues to experience a recovery, we still have a long way to go. The number of unemployed remains elevated, but the metro area should see a return to non-farm payrolls that existed at the start of the recession.

Risks remain to the recovery. We have to continue to monitor the impact of higher gas prices on consumer confidence, and the impact on consumer items such as durable goods, a key driver for the Louisville Metro economy and both Indiana and Kentucky. Since November of 2011, my outlook has been favorable. The last two labor reports on unemployment claims and non-farm payrolls might call for a revision to this outlook in the next several weeks. Additionally, several indicators have been coming in less than expected. The next month or so will be quite telling, and the data might be sufficient to conclude that the remainder of the year will see a slowdown in growth. Not quite ready to change the outlook, but clouds definitely are starting to appear.