Category: business cycle

Record US New Firm Creation in a Resilient Economy

tomkapostasy1 Comment

https://www.eso.org/public/news/eso1225/

I encourage us to always “look at the big picture”: across time, nations, industries, occupations, institutions and political views when considering the “state of the economy”.

Recent surveys indicate that many (partisan) Americans believe that the economy is in recession, the stock market is down, and unemployment is up (false). The US economy continues to lead the world out of the pandemic driven recession. I’ve documented the tremendous strength of the US economy in GDP growth, job creation, wage growth, profit growth and wealth creation. Today I’d like to focus on entrepreneurship and new firm creation, where the US once again leads the world.

The US economy led the world in creativity, technology, job growth and firm creation in the 1990’s as it recovered from the global economic challenges of the late post-war era. The deregulation and technology driven changes produced benefits into the “oughts”, the first decade of the new century. Unfortunately, the dynamic pace of new firm creation based on economic, trade, relocation and technological changes did not strongly continue in the first 20 years of 21st century. New firm creation lagged. Larger firms held onto jobs as they consolidated industries and protected their positions. Venture capital firms facilitated the most successful new companies to quickly expand market share and vanquish weaker competitors. Many Schumpeter disciples worried that the engines of “creative destruction” had lost their momentum and effectiveness.

The Great Recession of 2007-10 destroyed wealth, slowed economic growth, job creation and new firm starts. The Obama-Trump expansion was longer than expected by historical standards, but slower growing. Many critics and commentators concluded that the US had “lost its entrepreneurial spirit”.

https://hbr.org/2024/01/how-the-pandemic-rebooted-entrepreneurship-in-the-u-s

New firm creation since the pandemic has basically been 50% higher than before the pandemic.

This is an AMAZING and unexpected result for the US. During the pandemic, economic activity ground to a halt. Supply chains stopped functioning. People stayed home. 20 million jobs were lost. 1 million lives were lost in the US. Many firms closed. Global trade and military tensions increased. Trust in governments, corporations and other institutions was damaged. In 2020, there was no reason to believe that the pandemic would be medically controlled soon, or that economic growth would quickly rebound and resume its trend growth rate. But it did!

https://www.census.gov/econ/bfs/current/index.html

The IRS tracks new firm tax license applications. Most firms never really do business, but the ratio of initial applications to real firm creations has been stable through history. The Census Bureau has determined which subset of IRS license applications leads to real new firm creations. Both measures show the tremendous 50% increase between the pre-pandemic and post-pandemic eras.

As Wendy’s Clara spokeswoman exclaimed long ago, “show me the beef”. Did the increased rate of tax applications during 2021-22-23-24 result in new firm creation?

Entrepreneurship, Startups, and Business Formation Are Booming Across the U.S.

Firms less than one year old are up 16%, not 50%, still a significant increase.

https://www.whitehouse.gov/cea/written-materials/2024/01/11/new-business-surge-unveiling-the-business-application-boom-through-an-analysis-of-administrative-data/

New firms are up by about one-third by this measure.

https://www.bls.gov/news.release/cewbd.t08.htm

The growth rate of private industry establishments has accelerated.

https://www.whitehouse.gov/cea/written-materials/2024/01/11/new-business-surge-unveiling-the-business-application-boom-through-an-analysis-of-administrative-data/

Surging business formation in the pandemic: Causes and consequences?

Three measures reinforce the growth of new firms.

https://www.bls.gov/opub/ted/2024/small-businesses-contributed-55-percent-of-the-total-net-job-creation-from-2013-to-2023.htm#:~:text=2013%20to%202023-,Small%20businesses%20contributed%2055%20percent%20of%20the%20total,creation%20from%202013%20to%202023&text=Small%20businesses%E2%80%94firms%20with%20249,the%20first%20quarter%20of%202023.

Overall, small businesses have prospered following the pandemic.

The growth in new business formation is real, solid and sustained. Who benefitted?

An unusual cluster of SE and SW US showed the highest percentage growth rate.

Entrepreneurship, Startups, and Business Formation Are Booming Across the U.S.

Once again, a very broad set of states adding new businesses.

The Startup Surge Continues: Business Applications on Track for Second-Largest Annual Total on Record

The southeast is winning, but growth is widespread.

Business Applications Eked Out a New Record in 2023

Nine out of 15 industries saw very strong growth out of the pandemic.

https://www.uschamber.com/small-business/new-business-applications-a-state-by-state-view

The initial surge in new businesses did NOT include the IT or manufacturing sectors which look ready to benefit from AI and government investment policies. Firm creation should continue at its record pace for the next 2-3 years.

https://www.economist.com/finance-and-economics/2024/05/12/america-is-in-the-midst-of-an-extraordinary-startup-boom

https://hbr.org/2024/01/how-the-pandemic-rebooted-entrepreneurship-in-the-u-s

Why/how did this happen? US economy did not see wealth destruction during the pandemic as occurred in the Great Recession. Bipartisan government funding during the pandemic protected small businesses and individuals. The US labor market was strong before the pandemic and recovered very quickly to full employment with high quit rates, high job openings, low layoffs, wage growth, high labor force participation, and new immigrants included. There was no “credit crunch” destroying businesses. Venture capital firms were flush with capital, able to invest in the very best prospects. The US economy was mature as an “information age” economy, identifying opportunities. The virtual economy was mature, allowing individuals with minimal technical skills to easily create new businesses, market their services, and engage skilled resources. Individuals experienced being out of work and at home and determined that they could create new firms from home.

The Biden administration claims that its various public policies have leveraged the “natural” rebound.

https://www.sba.gov/article/2024/01/11/new-business-applications-reach-record-16-million-under-biden-harris-administration

https://www.whitehouse.gov/briefing-room/statements-releases/2023/11/21/fact-sheet-ahead-of-small-business-saturday-biden-harris-administration-announces-latest-steps-to-support-small-businesses/

https://www.whitehouse.gov/cea/written-materials/2024/01/11/new-business-surge-unveiling-the-business-application-boom-through-an-analysis-of-administrative-data/

https://www.sba.gov/article/2024/04/11/new-small-business-applications-soar-over-17-million-under-biden-harris-administration

Various moderate to conservative sources have documented this positive result.

https://www.uschamber.com/small-business/new-business-applications-a-state-by-state-view

https://www.inc.com/melissa-angell/new-small-business-applications-surged-55m-in-2023-marking-yet-another-record.html

https://ny1.com/nyc/all-boroughs/news/2024/06/12/biden-touts-18-million-new-business-applications-since-he-took-office

https://www.forbes.com/sites/rhettbuttle/2024/01/12/three-year-small-business-boom-is-unprecedented/

https://www.entrepreneur.com/business-news/why-are-new-business-applications-at-all-time-high/474614

Surging business formation in the pandemic: Causes and consequences?

The US Economy Leads the World

tomkapostasy2 Comments

https://www.nrel.gov/computational-science/artificial-intelligence.html

The US economy became the largest in the world in 1890. It still leads the world today 134 years later.

https://en.wikipedia.org/wiki/Economy_of_the_United_States#:~:text=Many%20workers%20shared%20the%20success,of%20GDP%20since%20around%201890.

Of 10 largest economies in the world, the US has the 3rd highest GDP growth rate at 3.0%. Less developed China (5%) and India (8%) lead the way. The median growth rate is 1.2%. The UK and Germany have negative annual growth rates (recession)! The US has the second lowest unemployment rate at 3.8%, only bettered by Japan at 2.6%. The median is between China at 5.2% and Canada at 6.1%. France and Italy record 7.5% while Brazil and India trail at 8%.

https://www.economist.com/economic-and-financial-indicators/2024/05/02/economic-data-commodities-and-markets

The US economy is as large as China, Germany and Japan combined or as large as the 3rd through 10th largest economies combined.

https://www.usnews.com/news/best-countries/articles/the-top-10-economies-in-the-world

The US dollar is worth 10% more than before the pandemic, reflecting its above average recovery.

https://www.goldmansachs.com/intelligence/pages/how-to-diversify-as-stock-markets-concentrated.html#:~:text=The%20US%20stock%20market%20has,with%20about%2030%25%20in%202009.

The US stock market has overperformed for 15 years, growing from 30% to 45% of global stock market value.

https://www.goldmansachs.com/intelligence/pages/how-to-diversify-as-stock-markets-concentrated.html#:~:text=The%20US%20stock%20market%20has,with%20about%2030%25%20in%202009.

Despite its high wages, high standard of living and highly valued currency, real dollar US exports exceed the pre-pandemic level.

Real dollar imports have returned to their growth trend level, allowing US consumers to take advantage of the differentiated global economy’s strengths.

https://www.axios.com/2023/12/21/misery-index-economy

The misery index, the sum of the inflation and unemployment rates, is down to 7% and trending lower, materially below the 8% average of this century.

US inflation reached 8-9% in 2022 and has fallen to 3%. The “stickiness” is half caused by the lag in housing and rental prices in the index and half due to the continued high 6% federal government budget deficit as a percent of GDP.

How does the Consumer Price Index account for the cost of housing?

https://bipartisanpolicy.org/report/deficit-tracker/

There is nominal inflation or actual deflation in most sectors of the US economy today!!!!

On average, the US economy has been adding 2 million new jobs per year for 14 years. 28 million jobs. This is an amazing result.

During the same period, 12 million more people have retired.

The unemployment rate is at a 50-year low. When I was studying economics in 1974-78, there was a big debate about 5% becoming the lowest possible “structural” unemployment rate possible without escalating inflation. 1997-2007 established that a 4.5% to 5.0% unemployment rate was possible. We raced back up to 9% during the Great Recession. The 35-year average was 6.5%. We experienced 3 years of sub-4% in 2017-19 as economists claimed that this was simply impossible. Unemployment rates are still below 4%.

The Black unemployment rate has been chopped in half, from 11% to 5.5%.

The demand for labor remains high. Job openings peaked at 7.5 million before the pandemic. Job openings remain 20% higher at 9 million 5 years later.

The core labor force participation rate has rebounded from the pandemic reaching a level last seen in 2008.

10% fewer black men participated in the labor force between 1973 and 2013. Participation is now solidly increasing.

Real wages stagnated from 2000-14. They have increased by 10% since then.

Real GDP per capita continues to grow.

If you’re a homeowner, the recent one-third increase in home values is a windfall. If you’re a prospective buyer, housing is much less affordable.

US stock market values are up 50% in 5 years.

Coincidentally (?), corporate profits are up 50% in 5 years.

Entrepreneurship, Startups, and Business Formation Are Booming Across the U.S.

New business creation increased after the pandemic surpassing the pre-pandemic level and exceeding the pre-Great Recession level. Start-ups typically account for all job creation and ensure competition in product and service markets.

Overall productivity growth in the last 5 years has been the same as in 1973-1990 and 2007-19. In recent quarters productivity has begun to increase at a higher rate and many commentators believe that AI will drive productivity at a higher rate for the next 20 years.

The US has achieved energy independence, doubling its production of natural gas in 20 years.

https://www.eia.gov/todayinenergy/detail.php?id=61242

Renewable energy accounts for 22% of US energy generation.

US manufacturing employment has increased by 15% since the Great Recession. It is higher than before the pandemic despite the increase in real median wages and the increase in the value of the US dollar.

Net farm income has doubled since before the pandemic.

We have one-third more voluntary retirees in 2024 versus 2014.

Those retirees are receiving significantly higher incomes.

Retirement assets have increased by 50% in the last 10 years.

https://www.census.gov/library/stories/2023/09/income-inequality.html#:~:text=The%20ratio%20of%20the%2090th,a%206.7%25%20decrease%20from%202021.

Income inequality has finally peaked in the last 5 years.

Click to access figure1.pdf

The poverty rate has declined by one-third in the last 10 years.

https://www.economist.com/finance-and-economics/2024/04/16/generation-z-is-unprecedentedly-rich

Each generation earns higher incomes in the productive US economy. My first post college job paid $800 per month, $9,600 per year in 1978.

Click to access revenue-statistics-united-states.pdf

US citizens pay very low taxes compared with their developed nation peers.

Summary

The US economy recovered from the uncertain pandemic period faster than other countries due to the combination of very loose fiscal and monetary policy. The fiscal policy boost was bipartisan. The monetary policy boost was nonpartisan. As the strength of the US recovery became apparent by the end of 2021, both Congress and the Federal Reserve Board should have reduced their stimulus levels. The FRB adapted slowly and increased rates. Congress and President Biden have not adapted.

The US economy is experiencing an extra year of excess inflation due to these actions.

It is important to look at the long-run trends and many indicators of economic health. Monetary policy in an independent Fed is effective. Fiscal policy is ineffective. Inflation is higher than ideal.

Let’s list the positive economic indicators. GDP growth, US dollar value, stock market value, exports, employment, retirees and incomes, unemployment, job openings, labor force participation, home values, corporate profits, startups, productivity, energy independence, green energy, manufacturing employment, farm incomes, income equality, poverty, generational progress, and tax burden.

The US economy continues to deliver very positive outcomes for our country. President Biden could do better on reducing the federal budget deficit by increasing taxes or reducing expenditures. Overall, his policies have allowed the economy to continue to deliver benefits.

2.0% Inflation: Not in 2024

tomkapostasy1 Comment

Last July, I predicted that inflation would be “near 2% by the middle of 2024”. That is not going to happen. Let’s look at the components to assess the last year and the likely future.

Year over year inflation rate peaked at 8.6% in 2nd quarter of 2022. It was more than cut in half at 4.0% a year later in the 2nd quarter of 2023. The last 2 quarters have been 3.25%. The “easy work” is complete. The “hard work” remains.

More volatile Food and Energy prices do not explain the continuing 3%+ inflation rate.

We have enjoyed energy price deflation for 3 quarters.

Food consumed at home prices have been nearly flat for the last 2 quarters after the 12-13% inflation during 2022.

The price of food consumed away from home continues to rise at 4-5% annually. A tight labor market has increased staffing costs for restaurants. High food input costs taught them to better manage their menu prices. Many restaurants went out of business during the pandemic. Restaurants, large and small, lost money during the pandemic and are fighting hard to recover these losses. Following the lean pandemic years consumers have largely returned to their habits of eating out. This is a business sector where high aggregate demand driven by government deficit spending is creating inflation. It is not the “wage-price spiral” of the 1970’s in a manufacturing intensive economy but it is a similar situation in our retail-intensive economy.

We have enjoyed deflation in durable goods prices for 5 quarters as US and global manufacturers realigned their supply chains with more predictable demand patterns.

Nondurable goods inflation has been below the 2% benchmark for 4 quarters.

The broadly defined “services” sector at 5-6% inflation remains a stubborn problem area. It contains a number of sub-sectors with very different market conditions.

As inflation soars, a look at what’s inside the consumer price index

Medical care inflation above the overall inflation rate has been an issue for decades, but it has averaged just 1% for the last 5 quarters.

Transportation services prices have increased by 10% annually. This includes public and private transportation. Public sector transportation is attempting to recover from the pandemic driven decline in ridership. Private rail and truck carriers were disrupted by the pandemic as goods movements plummeted. The prospect of driverless trucks kept freight firms and drivers from returning. Transportation drivers are on the low end of wages. The overall increase in real wages at the low end of the labor market has made these physically demanding, away from home, jobs less attractive. This inflation is part long-term structural adjustment and part short-term recovery of freight flows in the economy. Transportation services is 5% of the CPI, material, but not large enough to drive the total.

The education and communications pair of service sectors has low inflation. Education is higher. Communications is lower.

Housing is one-third of the total CPI. It is a very technical, wonky area. It combines a blend of actual rental charges and the estimated rental value of owned homes. Increases in home prices are smoothed out and their impact on the CPI tends to lag by 2-8 quarters. Housing inflation has fallen from 8% to 5%.

Housing sales prices have declined for 4 quarters. This will increasingly blend into the housing CPI, soon producing deflation rather than 4-5% inflation.

https://www.nerdwallet.com/article/finance/rental-market-trends

How does the Consumer Price Index account for the cost of housing?

Market rent inflation remains in the 3-3.5% range based on the cumulative lack of US housing construction since the Great Recession of 2007-9. Combined with falling housing sales prices the combined housing CPI should decline to 2% by the fourth quarter of 2024.

Dreaded “cost-push” inflation is not a major factor for the US economy. A tight labor market has delivered 1% annual real wage increases for the last 5 quarters. This is a factor in inflation but not a driver or barrier to reaching 2% overall.

https://bipartisanpolicy.org/report/deficit-tracker

2024 looks like 2023, a very high budget deficit for a full-employment economy. In classical Keynesian economic terms, the aggregate demand pressure indicates continued 3% inflation.

An overheated economy typically shows a strong increase in imports as demand reaches out globally. This is not the situation in the US this year.

The money supply has a long-term impact on the economy, prices and inflation. The Federal Reserve Bank has been shrinking the “money supply” by 10% annually.

Commodities are the most volatile element of the global economy. Prices jumped by 20% with the unanticipated quick recovery from the pandemic. The last year has delivered commodities price deflation.

Changes in relative market power can drive inflation. Corporations increased profits by 50% in the first year of the pandemic. Profits have been relatively flat since then.

Summary

A dozen sectors point towards 2% inflation by year end. Energy, food at home, durable goods, nondurable goods, medical care, education/communication, housing prices, real wages, imports, money supply, commodity prices and profits.

Four sectors indicate concerns. Food away from home continues to drive high inflation.

https://www.axios.com/2024/02/13/cpi-food-inflation-dining-out

Public and private transportation services have not yet reached equilibrium. This pressure may continue for another 4 quarters but should not be a long-term inflation driver.

https://www.census.gov/construction/nrc/current/index.html

The “Great Recession” destroyed the construction industry. It has slowly recovered. Total construction has increased, perhaps not enough to bring housing supply into balance with demand 15 years later. Rental inflation at 3% is likely to continue.

The federal budget deficit is the greatest concern. 6% of GDP is a huge deficit.

Net, net, I predict that the Urban Consumer CPI increase in the fourth quarter of 2024 versus the fourth quarter of 2023 will be 2.25%. The federal government spending deficit will directly and indirectly boost inflation.

US Economy Consistently Exceeds Expectations (Index)

tomkapostasy1 Comment

https://www.artnews.com/art-news/news/wall-street-bull-sculptor-arturo-di-modica-dies-digital-animation-sells-morning-links-1234584300/

Good News: Golden Age for US Jobs Growth (21st Century)
Good News: US is Leading the Global Recovery
Personal Value Creation and Capture
Really Big Changes in the USA: 1776 – 2026
Statistical Illiteracy and Logical Fallacy
Good News: Real Mortage Rates Are 2%
Mostly Good News Since the 2008 Great Recession
11 Million Open Jobs! 2 Jobs for Every Applicant
Go Brandon: Record Low Unemployment Rates
Good News: Exceptionally Low Metro Area Unemployment Rates
Are We Heading Towards 2% Inflation?
Firms and Jobs 3: It’s Complicated
Good News: Firms and Jobs
Good News: US Startups Still Create Many Jobs (!!!)
Good News: The US Economy is Still Firing on All 12 Cylinders
Inflation is Slowing
Recession!?, Recession!?, I Can’t Find Any Recession!
Has Inflation “Turned the Corner”?
Good News: The US Economy
A Very Robust Long-term US Labor Market (1970-2021)
Dynamic Labor Market: 1970
A Very Responsive US Labor Market: 1970 – 2021
Houston, We Have A Problem. Corporate Profit Growth Has No Limit
Economy: Solid Landing

Good News: US is Leading the Global Recovery

tomkapostasy2 Comments

https://www.c7f.navy.mil/Media/News/Display/Article/1937171/commander-carrier-air-wing-five-1000th-landing-on-carrier/

Global GDP growth in 2023 averaged 1.2%, slow but not recessionary. We have rebounded from the pandemic without a secondary recession despite the “soft landing” which has been achieved and we are now moving into take-off mode.

The US leads the “developed” world at 2.4% real growth, twice the global average.

https://www.economist.com/economic-and-financial-indicators/2023/12/14/economic-data-commodities-and-markets

The “less developed world”, which typically leads the world in growth has median growth of 2.8%, just above the US rate. 

The US ranks in the top one-third of the leading countries tracked by The Economist.

The US stock market has achieved a new all-time high based upon this solid progress and the outlook for the future.

Good News: Golden Age for US Jobs Growth (21st Century)

tomkapostasy3 Comments
What is the Golden Age of Greek Mythology

Economists prefer to measure data at business cycle peaks and troughs. After the Millenium Y2K scare, we endured a mini recession. Employment peaked at 132.8 million jobs in March, 2001. Today, in October, 2023, we have 156.9 million jobs, an increase of 24 million jobs in 22 1/2 years, almost 1.1 million new jobs created each year! This is despite the job destroying effects of the Great Recession and the Pandemic.

The longest business expansion in US history ended after 10 years in February, 2020. The pandemic eliminated almost 22 million jobs in 2 months, leaving the economy with just 130.4 million employed, barely above the trough of 129.7 million in February, 2010.

The economy replaced those jobs in just 26 months when the June, 2022 figures were reported! In addition to replacing the first 22 million jobs, the economy has added another 4.5 million jobs in the last 16 months, averaging 280,000 per month or 3.4 million per year! At the same period after the Y2K recession, the economy averaged 2.6 million new jobs per year. At the same period after the Great Recession, the economy averaged 2.8 million new jobs per year. Our economy averages 1 million new jobs per year and can accelerate to 3 million per year when recovering from a recession. The current recovery is stronger than either of the last two.

Another way to gauge progress is to measure jobs added from peak to peak. The economy added 5.6 million net new jobs by December, 2007, or 836K per year. In the 13 years until February, 2020 the economy added 22.7 million jobs, or 1.141M per year. Since then, the economy has added 4.5 million jobs, or 1.240 per year, a very solid result.

Where are the extra 4.5 million jobs? 38 states exceed their pre-Pandemic totals. Texas (1.1M), Florida (750K), California (500K), North Carolina (300K) and Georgia (250K) lead the way. Arizona, Utah, Tennessee, Nevada, South Carolina, Washington, New Jersey and Indiana each added at least 100K, for a total of 4 million by these 13 states. On the downside, New York remains 125K short and Vermont, DC, Hawaii and Rhode Island are more than 2% below February, 2020.

The post-pandemic economy is creating jobs slightly faster than the post-Great Recession economy. 17 states are growing at least 2% faster than their pre-Pandemic trend rate. Idaho, Nevada, Montana, Utah and Florida are growing at least 4% faster than before. 9 states trail their prior growth rates by at least 2%. North Dakota, Hawaii, New York and DC trail their prior growth rates by 4% or more, for various reasons.

During the full 23 years, Texas (4.5M), California (3.3M), Florida (2.7M), New York (1.1M) and North Carolina (1.0M) added the most jobs. Washington, Nevada, Arizona, Utah, Colorado, Tennessee, Georgia and Virginia each added more than one-half million, for a total of 18 million in the 13 leading states. While the nation added 18% more jobs during this period, 9 states grew by 3% or less: Louisiana, Mississippi, Illinois, Michigan, Ohio, West Virginia, Rhode Island, Connecticut and Vermont. These states accounted for more than one in six citizens in 2001, so their weak performances limited the overall economy.

Summary

The economy started the 21st century slowly with a small recession and weak jobs growth during the Bush years. Obama started his first 2 years with a 9 million job deficit before starting a very strong and long 10-year recovery that added 23 million jobs. Economists did not expect the recovery to last during the Trump administration but almost 9 million net jobs were added on his watch before the pandemic. Biden refilled the 22 million lost jobs in 26 months and has added 4.5 million more in the next 16 months. With the Fed’s higher interest rates, job growth is slowing but is generally expected to exceed 1.25 million in 2024. The US economy continues to outperform.

https://www.bls.gov/web/laus/statewide_otm_oty_change.htm

Job Growth by State

https://www.cbpp.org/research/economy/tracking-the-recovery-from-the-pandemic-recession

US job growth is expected to slow in 2024. Here’s what you can do now

https://www.stlouisfed.org/publications/regional-economist/2023/nov/slower-gdp-growth-falling-inflation-us-economic-outlook-2024

https://www.forbes.com/sites/jackkelly/2023/11/18/heres-why-the-job-market-will-improve-in-2024/?sh=eedb8d139ead

https://www.morningstar.com/markets/why-we-expect-job-market-slow-2024

Indeed’s 2024 US Jobs & Hiring Trends Report: Reasons for Cautious Optimism

Good News: Metro Indy is a Midwest Jobs Leader, 1990-22

tomkapostasy3 Comments

Between 1990 and 2008 US jobs grew by 22% but trailed in Midwest metro areas, increasing by only 14%. US jobs have grown by 9% since the Great Recession, with the Midwest trailing slightly at 8%. Metro Indianapolis has been a percentage growth leader in both periods, at 27% and 18%. Columbus and Kansas City show similar figures. Minneapolis has higher actual jobs added but slightly lower percentage growth on its twice as large base.

Chicago has added more total jobs, but its 18% growth is far behind Indy’s 49% and most of its growth took place back in the 1990’s. Nashville is typically grouped with the Southeastern states but if it was included in the Midwest, it would be the clear winner, nearly doubling its job base in 3 decades.

Our Hamilton County: Low Unemployment

tomkapostasy1 Comment

https://www.misoenergy.org/about/

One of the “control centers” at MISO Energy in Hamilton County.

Hamilton County’s unemployment rate has averaged 3.1% since 1990, a little more than one-half of the nation’s 5.8% average. The Indy metro area has averaged 4.6%. In the last decade, Hamilton County has still averaged 2.0% lower than the national average of 5.3%.

https://fred.stlouisfed.org/series/UNRATE#0

https://fred.stlouisfed.org/series/INHAMI5URN#0

https://fred.stlouisfed.org/series/INDI918URN

Statistical Illiteracy and Logical Fallacy

tomkapostasy1 Comment

The stock market overreacted today. Job openings increased by 700,000 between July and August. Oh no! The labor market is too strong! Wages will increase! Cost-push inflation will build. The Fed will increase interest rates. We’ll be in recession soon! Boo!

Job openings are clearly falling. From an all-time high of 11.5 million to about 9.5 million in 18 months. With another 18 months of a “cooling” labor market, there will still be an historically high 8 million open positions in February, 2025. The labor market is slowly returning to “normal” after the Pandemic disruption.

This is a solid labor market, not an overheated labor market. Real wages finally grew during 2016-2020, by 7%. They spiked during the pandemic but have been flat for the last 18 months.

The number of unemployed people remains at 6 million, low by history, but not declining to unsustainable levels. 6 million is better than 8 or 15 or 23 million.

It’s a great time to be a job seeker, 3 jobs for every 2 job seekers. This is an historically positive ratio. It has been maintained for 2 years.

The unemployment rate remains at an historical low of 3.5% but is not falling.

Low unemployment is a widespread phenomenon. 22 states are below 3%. Only California, Nevada and DC are above 4.1%.

The labor force participation rate is at a 15 year high, with positive hiring and wage conditions attracting greater participation.

The quit rate remains above the pre-pandemic high, indicating that employees still see a positive labor market, but not an exploding market.

Total employment was flat for the first 11 years of the new millennium, parked at 132 million. Job growth accelerated for the next 8- and one-half years, adding a very solid 20 million new jobs. Post-pandemic, the economy has added another 4 million jobs.

Summary

This remains a Goldilocks labor market, neither too weak nor too strong. The Millennium pause, Great Recession and Pandemic have made us gun-shy. We don’t want to claim victory for fear of disturbing the labor market gods. But we are enjoying victory. 156 million employed versus 132 million employed a dozen years ago. An 18% increase.

Good News: Real Mortage Rates Are 2%

tomkapostasy2 Comments

Real mortage interest rates can be calculated as the difference between nominal mortage interest rates and the 10-year Treasury Bond interest rate. Although nominal interest rates have ranged from 3% to 16%, the real, after expected inflation, interest rates are remarkably consistent, averaging just 1.7% and ranging between 1.3% and 2.1% in 70% of the last 52 years. The peak real rate was 3.0% in 1982 following the unexpectedly high and remaining high nominal rates of the prior 4 years.

Banks, mortgage-backed securities investors and mortgage borrowers all take risks when they complete mortgage transactions. Lenders are betting that their present and future borrowing interest rates are and will be low enough to fund their mortgages at a profit. Each lender locks in funding commitments for a reasonable share of the loan life and counts on the consistency of interest rates over the business cycle to fund the remaining portion. Lenders that experience a mismatch put their stockholders’ equity at risk and face bankruptcy. Investors in mortgage-backed securities are subject to valuation change risks throughout the period in which they are invested. Most such investors hold diversified portfolios of mortgages (region, amount, riskiness, urban vs suburban vs rural) and non-mortgage assets to ensure that any investment decision will not be too damaging.

Fixed-rate mortgage borrowers are betting that inflation will not fall too much lower than the expected inflation rates when they borrowed. If so, they will be paying back the mortgage in higher real value dollars than expected. If inflation and mortgage rates drop by more than 2%, most borrowers will seek to refinance their mortgages at the new, lower market rates, paying another round of closing costs for this privilege. Fixed rate borrowers are also hoping that inflation will be higher than the expected inflation rates at the time they borrowed, allowing them to pay back their debt with cheaper real dollars. Mortgage originators do not generally have the legal right to “call” the debt and require a change in the rates and terms as many commercial lenders and bond issuers do.

The “good news” is that the US mortgage market is very efficient and the real interest rate premium for borrowing to own a home is just 2% more than what the US government pays for borrowing. Borrowers face interest rate change risks, especially being caught with a high interest rate mortgage when inflation rates fall if they are unable to refinance.

The market has been tested through 7 business cycles and held up very well. The “Great Recession” exposed excessive risk taking by mortgage originators and funders. They lost money and many went out of business. Riskier mortgages are rarely issued today, and government regulations provide some added protection against any future overreach.

For higher income households that itemize deduction on their federal tax returns, the nominal interest rate paid is a tax-deductible offset to earned income. These individuals typically pay 22%, 24% or 34% marginal tax rates. A 5% nominal tax rate can provide a 1%, 1.25% or 1.65% reduction in the effective interest rate, thereby making the 2% real mortgage rate less than 1%. Higher income households can benefit greatly from this tax benefit.

https://fred.stlouisfed.org/series/MORTGAGE30US

https://fred.stlouisfed.org/series/RIFLGFCY10NA