By Uric Dufrene
Sanders Chair in Business
Indiana University Southeast
After a noticeable drop in April payrolls, Louisville Metro payrolls bounced back in May, getting closer to the pre-recession peak in total payrolls. Released this week, the Bureau of Labor Statistics monthly report on Metropolitan Employment and Unemployment showed Louisville Metro gained 20,000 jobs year over year or a 3.4 percent change. Even though the metro area’s unemployment rate increased to 8.1 percent, up from April’s 7.8 percent (non-seasonally adjusted), this report on preliminary payroll counts was quite favorable for the metro region.
With the latest metropolitan numbers, Louisville Metro is about 11,000 jobs shy of the pre-recession peak. My outlook earlier in the year was that Louisville Metro would likely surpass the pre-recession jobs deficit this year, and that growth would exceed expectations. To this date, with the exception of the April payrolls dip, job growth in Louisville has been quite strong. The 3.4 percent change in May is the highest since the late 90s, except for a similar gain in March of this year.
As discussed in prior writings, this relatively high rate of job growth will likely decelerate in the coming months, with national indicators continuing to point to an overall slowdown. Now, recovering the 11,000 Louisville jobs in the jobs deficit for the rest of the year will not be automatic. Yesterday, new claims for unemployment dipped slightly, but remain elevated compared to earlier in the year. New claims for unemployment in June suggest that the July jobs report will be less than favorable, providing another adverse impact on consumer confidence. Local areas can certainly exhibit payroll changes that exceed national rates, and this has been particularly evident in petroleum-producing states. However, at some point, the slower national payrolls will begin to impact the metro region.
Last week, we pointed to slower growth in a couple of regional manufacturing surveys. The Philadelphia Survey showed a significant decline for manufacturing in that region, and the New York region showed expansion, but at a lower rate. This week, two other regions showed similar results. The Richmond Fed Manufacturing Index showed contraction in that region, and the Kansas City Fed showed deceleration from prior months of activity.
To this date, Louisville Metro has escaped the deceleration in manufacturing being reported for other regions of the country. Year over year, Louisville manufacturers have added about 3,000 payrolls, an impressive number compared to prior years. Despite some of the weak indicators observed in other regions, a report out this week showed a gain to U.S. durable goods orders. As mentioned in prior writings, Louisville payroll changes track closely with national durable goods numbers. So while some of the manufacturing indicators have been flashing an overall slow-down, this week’s durable goods orders did provide evidence that manufacturing may not be quite done. Auto-related components in the report were quite favorable, and this is beneficial to Kentucky and Louisville Metro. This strength shows up in durable goods manufacturing for Louisville Metro. Payroll gains for durable goods manufacturers have been running above 7 percent for the past two months, reflecting hiring automotive and related industries.
Weaker national job numbers continue to serve as a headwind to consumer confidence, with the latest confidence numbers showing another decline. Consumer confidence is a key to consumer spending and related durable goods, which is important to both Kentucky and Louisville economies. The impact of lagging consumer confidence was visible with this morning’s Bureau of Economic Analysis report on consumer spending. The BEA reported that consumer spending for May was basically flat, a 0 percent change from the prior month. The actual number showed a small decline in consumer spending. On the plus side, personal income did increase by .2 percent. This flat change in consumer spending is not altogether surprising. Consumer spending changes had exceeded personal income changes for 10 of the last 16 periods. This imbalance between consumer spending and income was not sustainable, and this morning’s flat change in spending is early evidence.
One number is not a trend, but today’s consumer spending slow-down is further evidence of this overall slowing anticipated. The decline in consumer confidence and subsequent weakness in consumer spending have yet to show up in decelerating payrolls for Louisville Metro. As the graph below shows, U.S. personal spending does have an impact on Louisville Metro payrolls, with declines in U.S. personal spending typically occurring prior to any slow-down in Louisville Metro payrolls. What happens in the past is never a predictor of the future, and maybe Louisville Metro might buck historical trends. The next three to six months will be quite telling.