Analysis: Economy continues to show slower growth ahead

By Uric Dufrene
Sanders Chair in Business
Indiana University Southeast

After losing 4,000 jobs in April, Louisville Metro resumed acceleration in payrolls for May, according to recent data released by the Bureau of Labor Statistics. The latest metropolitan report shows that total payrolls in Louisville Metro now stand at 617,000, just 10,000 shy of the recession peak that occurred in January 2008.

My November outlook suggested that Louisville payroll growth would exceed expectations and that we would likely see total payrolls surpass the 627,000 peak of 2008. Indeed, first quarter growth for Louisville Metro has been quite favorable, achieving year over year gains that were among the highest since the late 1990s.  Despite the strong growth in the first quarter, and the impressive payroll growth in the last BLS report, I do now expect Louisville Metro payrolls to see some deceleration, and a cooling from first quarter growth. Even though we are now only 10,000 payrolls shy of the 627,000 recession peak, the erasing the shortfall for the remainder of 2012 might be a challenge.

Rising unemployment claims

Why the change for the outlook? The national data released over the past couple of weeks have been less than favorable. The last national payroll report was perhaps one of the ugliest in quite some time. Payrolls came in much lower than expectations, and the nation’s unemployment rate ticked up a tenth of a percent. The next payroll report will likely not show any significant improvement.  One of the reasons can be found by observing weekly new claims for unemployment. The trend has been upward, and the last report out yesterday showed that the latest number was up to 387,000. Last week’s number was revised to 389,000, inching closer to that slower payroll growth-associated number of 400,000. Claims need to move down to the 350,000 region before we begin to see sizeable payroll gains of 150,000 and higher. Same time last year, new claims for unemployment was approximately 425,000. So on the plus side, the recent acceleration in new claims for unemployment is not quite as high as levels observed during last summer’s slowdown.

Manufacturing: Up or down?

Recent media reports out of Louisville Metro point to the addition of manufacturing jobs, and the latest BLS data also show noticeable gains. However, we may likely see manufacturing enter a cooling phase for Louisville Metro. Despite some of the positive anecdotal stories on manufacturing and actual manufacturing payroll growth, total job counts will stabilize and slow from any recent gains.

There are certainly some tailwinds supporting regional manufacturing. Gradually increasing building permits nation-wide do support regional manufacturing growth, and some of the recent gains in payroll growth could be explained by increased construction activity in housing. An improving auto sector, despite deceleration in recent auto sales, also has aided regional manufacturers and parts suppliers. Lastly, lean inventories also continue to support production, justifying recent gains in hiring.

Unfortunately, the national data out the past couple of weeks point to a slowing manufacturing sector. What happens nationally, impacts Louisville Metro locally. It is only a matter of time for this to occur. As evidence, the Chicago Area PMI, a manufacturing indicator for the Chicago region, declined significantly the past two months, and is now closer to the important 50 level. Any number below 50 represents contraction, and any number above represents expansion in manufacturing. Last year, the lowest level was at 56, occurring during the summer slow-down. The last report out shows the index now at 52.7, down sharply from 64 in recent February. As the figure shows, there is a relationship between year over year changes in Louisville Manufacturing and the Chicago PMI. The most recent months show a divergence from the Chicago PMI and Louisville manufacturing growth, a trend that is not likely to continue.

Yesterday’s report out of Philadelphia was simply a disaster for the manufacturing outlook. The number came in at -16, a significant decline from the previous month of -5.80 (the graph below does not include the most recent data point of -16), and approaching last year’s lowest number of -22.  Both the Philadelphia and Chicago numbers, and last week’s report showing significant deceleration in manufacturing for the New York region, suggest that manufacturing may be entering a cooling period, and this will show up in softer payroll growth for Louisville area manufacturing.

 Services growth continues, but could stall

On a positive note, growth in Louisville professional and business services has been the primary driver of overall job growth for the metro region. Strong growth in this sector is usually associated with payroll growth nation-wide, as the graph below shows. Professional and business services growth accounts for almost half of year over year Louisville Metro payroll growth, an overall favorable sign for the region’s outlook. While one data point does not suggest an underlying trend, the most recent data out also show a deceleration in professional and business services growth. A few additional months of data will be necessary to determine any underlying trend for professional and business services for the remainder of the year.

Our Mid-Year Outlook in May called for the possibility of an overall slow-down in the economy, and this appears to be happening nationally. For the most part, Louisville Metro has not been significantly impacted yet, with the exception of the payroll report a couple of months ago.  However, unless we see a quick turnaround at the national level, the deceleration occurring nationally and across other regions will begin to impact the broader Louisville Metro region. Or for a different take on the Las Vegas tag line, what happens nationally does not stay national.