The overall US unemployment rate at 3.6% remains at a 50-year low. The metropolitan area rate is a shade lower. I summarized metro area unemployment rates for those which have a city in the top 100 of population. Only 73 metro areas remain, since 27 cities are the second or smaller city in their metro areas. The average metro area unemployment rate for these top 100 areas is 3.4%. The median metro unemployment rate is 3.3%.
Democratic mayors led the main cities in two-thirds of the largest metro areas. Republicans, independents, nonpartisans or split results led in the remaining one-third (24/73).
Democratic mayor lead metro areas have median and average unemployment rates at 3.2%, significantly below the national 3.5-3.6% rate. The Republican+Other metro areas show 3.4% median and 3.9% average unemployment rates, just slightly higher.
The claim that Democrats are “bad” for the economy is not supported by this data.
Republicans and independents/nonpartisans/split mayors lead 8 metro areas with unemployment in the historically unheard of 2% range:
Denver, Colorado Springs, Omaha, Tulsa and Oklahoma City in the prairie states. Miami, Virginia Beach and Honolulu complete the set.
Non-Democratic mayors also lead 8 southwestern cities with higher-than-average unemployment (4%+): Reno, Las Vegas, Laredo, Corpus Christi, Riverside, Stockton, Fresno and Bakersfield.
Only 5 Democratic lead cities, versus 8 Republican/Other cities, had 4%+ unemployment rates in May, 2023: New York and Los Angeles, Houston, El Paso and New Orleans.
31Democratic mayor lead metro areas had strong 3% unemployment. 13 boasted amazing 2% unemployment rates: Boise, Lincoln, Nashville; Madison, Minneapolis-St Paul; Jacksonville, Tampa, Orlando; Richmond, DC, Boston, Baltimore.
Summary
Metro area unemployment is even lower than the 50-year low national average.
Democratic led metro areas have slightly lower unemployment rates.
We have 6 large metro areas with 2.5% or lower unemployment: Lincoln, Madison, Omaha, Boston, Baltimore and Miami.
Our very worst metro areas (of 100) are El Paso, Corpus Christi and Laredo at 4.5% and Las Vegas (5.6%), Stockton (5.9%), Fresno (7.5%) and Bakersfield (8.6%).
The American economy is delivering truly amazing results.
The overall CPI index increased smoothly during the last 30 years until the pandemic. The Great Recession created a small blip up and down. Prices have recently increased by a very large 15% in less than 3 years versus the usual 5% in that time.
From June, 2020 through September, 2021 annual inflation jumped up to 5%. In the 9 months from October, 2021 through June, 2022, annual inflation spiked up to 10%.! This was mainly driven by durable goods prices as the unexpected rapid recovery from the pandemic encouraged consumers to buy “stuff” since they could not buy services. Since July, 2022 annual inflation is CLEARLY much lower, just 3% to 4% depending on the exact months chosen. Inflation appears to be decelerating as the May, November and May indices are 291, 299 and 303. The last 6 months’ inflation is just two-thirds of the prior 6 months.
Unfortunately, the core inflation measure, excluding food and energy, remains near 5%.
Energy prices have fallen quickly from their peak in June, 2022.
Auto gas prices are volatile, determined by the global oil market. The spike from $2/gallon to $4.50/gallon impacted American consumers. The return to $3.50/gallon is welcome, but prices are still 50% higher than the 2015-20 period.
In 25 years, durable goods prices had dropped by 25% due to globalization. In 2 years, they spiked up by 25% as global manufacturers were unprepared for the rapid recovery in demand. Manufacturers, wholesalers and retailers have NOT given back any of that 25% increase in prices, but durable goods inflation has returned to zero.
Nondurable goods followed a similar pattern with a 19% increase followed by flat prices.
The services sector experienced mild inflation during the first 18 months of the pandemic, but has increased to a 6% annual rate as businesses re-established their business models and labor supplies. This sector has slowed to 5%, but remains the greatest concern for reducing the overall inflation rate.
Medical care inflation remains at its 20-year level of 10% or more per year. As medical care has grown significantly as a share of the economy, it’s inflationary disease further infects the economy. Labor shortages play a minor role in this industry. The lack of competition or other incentives for real productivity improvements (Baumol’s disease) drive massive inflation even as US health results such as lifespans decline.
Transportation includes both durable goods and energy prices. A 25% price increase before it flattened off.
The used car and truck market experienced 50% price increases when the new car and truck pipeline was disrupted. Once again, prices have flattened, but not declined significantly to return to the pre-pandemic level.
Housing inflation jumped up from 2% to 7% as the pandemic and subsequent Federal Reserve Bank mortgage interest rate increase disrupted the housing construction market. While housing inflation has declined from its peak, the long-term imbalance between supply and demand predicts some future inflation.
The 40% spike in home values was even higher than that shown for durable and nondurable goods. Flat prices make sense for the next year or two.
The jump in imports was driven by the increased demand for durable goods.
Producer prices were flat for 10 years, then up by 30%. No inflation remains, but some deflation is possible.
From 2015-20 historically high demand for labor drove a 7% increase in real wages as unemployment reached a 30 year low of 3.5%. For the last 3 years wages have trailed inflation. No wage-price spiral.
Until February, the federal government budget deficit had returned to the pre-pandemic 2019 pattern. In the last 3 months spending has accelerated, adding to aggregate demand and causing the economy to expand faster, perhaps beyond its limits, supporting greater price inflation.
The government response to the pandemic threat generated much greater savings and subsequent spending/aggregate demand than any recent recession situation. The benefits have now mostly run out. Consumer demand has remained high but will likely decline.
The unprecedented expansion of the money supply by the Federal Reserve Bank in 2020 is difficult to explain or analyze. The Fed responded to the clear risk of a banking system collapse by providing “loose money” access to all entities. This monetary expansion did not result in immediate consumer inflation, but it did help to inflate asset prices: investments and housing. The Fed has begun to reduce its holdings of assets as it tries to increase interest rates.
The Fed has more than doubled interest rates. This has slowed down the housing, stock and acquisition markets.
Corporate profits tripled from $500 billion in 2000 to $1.5 trillion in 2007. Profits slowly grew up to $2.0 trillion by 2019. Profits spiked by another 40% in response to the pandemic opportunities.
The drivers and components of inflation mostly point towards lower inflation in 2023 and 2024. The Fed is going to increase interest rates again this year which will reduce housing starts and corporate capital and inventory investments. The economy has so far resisted the higher interest rates, but the cumulative impact of tighter credit and lower savings will eventually offset the optimism of a historically positive labor market.
Summary
The pandemic caused producers to initially reduce their productive capacities. The unexpected rapid recovery of demand prompted by loose monetary and fiscal policies caused demand to greatly exceed supply. Inflation peaked at 7% and then began to drift back down. Corporations took advantage of the disruption to sharply increase prices, which have now flattened but not declined. Excessive fiscal policy (budget deficits) and high consumer spending driven by extremely tight labor markets driven by historically high corporate profits have maintained aggregate demand and prices.
There is a “tipping point” situation in this economy. The Fed is increasing interest rates. This is slowing consumer borrowing and housing demand in the face of demographic factors that normally promote new household formation and the economic benefits that typically accompany this investment. Consumers are using their pandemic driven savings to consume but are now running out of savings. The stock market very quickly recovered from the pandemic, but then declined and has since partially recovered based on a narrow set of AI based tech companies. The banking and credit sector is at risk, with several high-profile bankruptcies, but no clear evidence of a panic. Corporations are earning record profits, benefitting from prior low-cost debt, but struggling to hire employees. Overall, I think that prices will fall back to the 2% level by the middle of 2024.
The relationships between firm size, age, growth, survival, death, locations and job creation and retention are many, complex and politicized. However, the core relationships expressed in my 2 recent posts are well supported by data and theory. I’d like to share more background information.
The 10-year job survival rate for startups is roughly 80% and has improved in the last 10 years. However, the FIRM survival rate is much lower. The surviving firms, through economic natural selection, grow rapidly from a low (4 average employees) initial base.
This study of 2011-14 highlights the initial start-up job surge, followed by 10 years of net job attrition and then modest net job growth by mature firms when low firm death rates (5%) are exceeded by decent levels of net jobs added.
The Small Business Administration (SBA) reports the average firm survival rates for 1994-2019 as roughly two-thirds for 2 years, one-half for 5 years, one-third for 10 years and one-fourth for 15 years.
My review of the 10-year data confirmed the 33% rate for most of the period, with an increase to 36% for firms that began after the Great Recession in 2010-12.
In 2010, Kauffman Foundation researchers summarized the detailed Business Dynamics Statistics (BDS) data, showing the relatively slow decline in net added employment from 100% initially to 80% at 5 years to 70% at 15 years and the rapid decline in the surviving firms rate to one-half at 5 years, 40% at 10 years and just 20% at 25 years.
Another Kauffman report from 2010 shared similar results. The universe of firms is dominated by young firms because the cumulative attrition makes “mature” firms quite rare.
Another Kauffman report in 2009 summarizes this competition between dying firms killing jobs and surviving firms adding jobs. In the first 5 years, the firm failure rate is so high that it overwhelms the high job growth rate of those successful startups. In years 6-10, the death rate is still winning, but the total net job destruction is much smaller. For this 18-year data set, firm deaths exceed added jobs at every age, although 29+ year-old firms basically break-even. This is a critical insight when thinking about the claim that all or nearly jobs are added by startups. It is “true” due to the firm survival and jobs added rates at different ages. It is possible to have quite different results, with existing firms accounting for relatively more jobs, but that would require either the firm/establishment death rates to fall or the job creation rates of surviving firms to increase significantly. It looks like there has been some of that change after the Great Recession. This chart also helps to show that the “net, net” addition of jobs from start-ups, when considered as the sum of their first 5 years is in the 75-80% range, because the net jobs lost in those early years is only 5% per year, despite the more rapid loss of firms.
My summary of the last 30 years of data shows that startup firms do account for “all” new job growth. As others note, in a way this is almost “by definition”, because this is the only age group that only has “adds”, but no “losses”. It always must be positive. As we’ve seen in the details on job departures/hires, jobs created/lost, firms created/lost and establishments created/lost the positive and negative flows tend to be “roughly equal”. Hence, even a single year which is not burdened with an offset will stand out as the “big winner”. So, on the one hand we can discount the critical, essential, vital role of startup job creation, but we can’t ignore it. It is a necessary part of the life cycle of firms that delivers a growing economy.
The 2010 Kauffman study combined the initial jobs created with the jobs lost in the next years to emphasize the vital role of startups, using 2007 data. Mature firms also made a small contribution to jobs added.
A follow-up report in 2011 by Dr. Haltiwanger summarized the data slightly differently but tells the same story. New firms, nearly all “small”, account for almost all job growth. Other small firms destroy jobs in their first 10 years at a high rate and as mature firms at a modestly high rate. Middle-aged firms lose jobs while successful firms grow to more than 500 employees and become large firms! Young large firms add a few net jobs. Old large firms lose a small percentage of jobs for this time period (1992-2005).
The central takeaway remains valid with more recent data across industries. The initial growth of jobs is not offset by the net losses in the next 5 years. Firms more than 6 years old do not add jobs overall.
I don’t know how to reconcile these competing claims but expect that the time periods chosen, and firm sizes chosen, are keys to understanding the significantly different claims.
In the early papers the Kauffman Foundation explains that it is new firms that drive new jobs. There is an overlap between new firms and small size that makes an analysis based on size alone appear to say that “small firms create most new jobs”; but the “newness” logically comes first. Existing small employment firms tend to shed jobs through firm death or internal job reduction.
A simple model focuses on just the first 5 years of a firm’s life after the initial startup year and defines four buckets of job growth and loss due to adding new establishments or experiencing deaths versus internal job growth (up or down) at the survivors. All four buckets matter. New establishments are infrequent for startup firms. Deaths are a major job killer. Job creating firms outweigh job losing firms. But the net gains from internal job growth is less than the drag from firm deaths.
Kauffman also created a complete theoretical model of job changes through time based on the key parameters and demonstrated that the model was a good match with the observed relative consistency of the parameters and the net output of jobs created. In a prior life, we called this the “layer cake” graph, using it to explain the composition of revenues or profits in a business based upon the year of customer contracts signed or new products introduced. At any point in time, there is a history of additions of various ages. Employment tends to decline over time based upon the combination of firm deaths, establishment gains/losses and internal job growth. Each year a new group of firms is added, all with job gains in the first year. This group too follows the pattern of job erosion in the first 5 years, smaller erosion in the next 5 years, close to break-even by age 20 and small net job creation for the mature surviving firms. Again, the parameters could be different, and the results would be different. But this framework provides economists and statisticians with the tools to analyze the components.
Another author created a dynamic model which illustrates how this process works through time.
The Small Business Administration promotes the view that small businesses (less than 500 employees) are essential to the US economy and create a majority of all jobs. As noted above, startups are the key. Size is a byproduct.
In my earlier post I discounted the importance of the decline in the share of new to total firmsbecause the corresponding decline in failure rates and improved job creation by mature firms was still delivering solid annual job creation. However, this warning signal is worth monitoring together with the other measures. The Brookings Institution provides some other “warning signals” about the health of the new firm/job creating capacity of the economy in light of reduced measurable competition in many industries (a topic for another day).
New firms account for a smaller share of total employment.
Business formation takes longer. Recent Kauffman reports shows that this trend has continued.
The entrepreneurship rate of college educated Americans has fallen most significantly.
One professor analyzed this and concluded that it was the result of American firms taking advantage of the low cost of capital and paying the higher salaries and incentives needed to attract and retain high potential employees. He says that job creation is happening more in existing firms and less in startups with no negative overall effect. He says that “marginal” (low return) entrepreneurs have been removed with little negative impact on the economy as a whole.
The slowdown in the new firm/job creation rate after the Great Recession attracted much attention from the media and politicians. Two representative articles are listed below, mostly bemoaning the decline of startups/small firms and the relative growth of large firms.
With the renewed emphasis on small firms and public policy to support them, others have responded by emphasizing the benefits of large firm growth and questioning the need to support/subsidize small firm growth.
Using less than 250 employees to define “small business”, this article shows a 4% decline in small business share and 4% increase in large business share.
Professor Haltiwanger reports that large, mature firms have increased their share of total employees from 50% to 60% between 1992 and 2018. Both large and small young firms have lost offsetting market share.
A recent Census Bureau article documents the increased employment share of older firms (6 years+) in many key industries.
It also highlights the increased concentration of workers in large firms in the retail, health care, accommodation and food services sectors.
The WSJ articles itemizes the increased concentration of employment in large firms in the retail, services and finance sectors and documents that these are the growing segments of the economy.
Summary (It’s Complicated)
The Business Dynamics Statistics database provides researchers with the consistently defined and reported data since 1977 to document the key role of startup firms in adding net new jobs to the US economy. Startup firms are one part of an ecosystem of firm, establishment and job creation and destruction that plays out through time in relatively predictable ways. The death rates of young, middle age and mature firms play a similarly important role. The growth and decline of new establishments in existing firms matters. The internal job growth rates of young, middle age and mature firms matter. The relatively small size of startups compared to mature firms has an impact on job growth. Historical parameters are generally similar and change slowly, causing the layers of employment by firm age to be similar in this 50-year period. The model and framework for measuring firms, establishments and jobs is solid. Startup firms are essential, but they are not the only driver of success.
“Jobs created by firm size” is similarly shaped by all of these factors which describe the typical firm life cycle. Small firms are not superior job creators. New firms are job creators, and they happen to have small individual employment levels (4 on average), so small firms have higher measured rates of job creation.
In the last 10-20 years there has been a significant decline in the rate of new firm creation as a share of total firms. New firms created have not lost as many jobs due to firm deaths in their first 5-10 years. Mature firms continued to shed a disproportionate number of jobs during recessions, but after the Great Recession began to add more net jobs due to internal growth than they had in the prior 40 years. The overall number of jobs created has remained in the 2-4 million per year range across the 50 years.
The conservative SBA, Kauffman Foundation, WSJ and Republicans promote policies to ensure a thriving entrepreneurial environment for new and small businesses. The more liberal Brookings Institute, college professors and Democrats have an instinctive distrust of big business and concentrated economic power, so also lend support to some pro-small business policies. If job creation falters during periods of economic prosperity, this may be a rare place where bipartisan agreements could be reached to promote new firm and job creation.
Many people complain that the US economy does not create enough new jobs or soon won’t create enough jobs or won’t create enough good jobs or … People worry about employment. Writers and politicians cater to that worry. Fortunately for us, the US economy creates jobs year after year after year, only briefly interrupted by increasingly less frequent and brief periods of economic recession. I’ll share the core numbers on healthy firms and new jobs and provide some context and history which indicates that this is inherent in the modern US economy. The economy is not relying upon any major political change or special insight to continue adding jobs. It just happens.
For 9 straight years, from 2011-2020, across 3 presidential terms and 5 congresses, the US economy added 2 million new jobs each year. In the 1980’s, it added 2-4M per year. In the 1990’s it added 3M per year. In the “oughts”, it added 2M per year. 30 years of expansion, 7 lesser years that averaged more than zero. 4 strong years for every 1 weak year..
The recovery since the pandemic has been even stronger, starting at 8M new jobs per year in 2021 before sliding to 6M per year and most recently 4.5M per year.
The total number of firms in the US grew slowly in the last 40 years, from 3.5 million to 5 million. The growth rate was much faster prior to the Great Recession (2007-9). Much of this growth was accounted for by single employee firms. Despite this tame 1% growth per year, the economy was able to add more than 2 million jobs per year.
The US economy requires some growth in the number of firms or establishments each year to drive job growth. Fortunately, it does not require heroic growth rates.
The number of new establishments added per year is remarkably consistent, averaging about 700,000 per year on a base of 5-7M. Of course, this means that the RATE of new establishments is shrinking, from 14% to less than 10%.
Establishment exits have increased from 500K to 600K to 700K before returning back to 600K per year. Big picture, 700K new establishments and 600K lost establishments each year across 4 decades.
Firm deaths have also been consistent at 450,000 per year.
Data calculated from BDS data. Direct graph not available.
Firm births have also averaged about 450,000 per year but present a different pattern. Firm births were much lower in the troubled time around 1980. Births ranged from 450-500,000 per year in the next 25 years. The Great Depression destroyed businesses, access to capital, personal net worth and aggregate demand. Hence, new firm creation dropped back to the 400,000 level. It recovered back to the 450,000 per year rate by 2015. As with firm deaths, the rate has fallen from 14%+ to less than 10%. Most importantly, the birth and death rates have been relatively consistent and have both been relatively flat, leading to a slow increase in the number of US firms.
The BDS database shows that job gains and job losses generally move together, but that in a recession job gains fall and job losses increase. This is a very important result. Without active government or policy intervention, the economy creates 12-14M jobs each year and destroys 11-13M jobs each year. There is no guarantee that net jobs will be created in any given year, but overall that is the normal result.
Writers who wish to emphasize the decline of entrepreneurship focus on firms instead of establishments because of the slower growth rate. They emphasize the growth rate rather than the growth numbers because this is less positive. They don’t compare the growth and death rates or numbers, which move together. They focus on the aftermath of the Great Recession which did greatly slow firm creation, resulting in slower than historical numbers and rates of job creation from new firms. Nevertheless, the economy created 2M new jobs per year for 9 years. During that period, existing firms captured a larger than usual share of the job growth required to provide demanded goods and services.
New establishments have driven 5-6M new jobs each year. The late nineties to early “oughts” reported the higher 6M per year figure.
Existing (continuing) establishments have added 10-12M gross new jobs each year.
Establishment deaths (including firm deaths) resulted in 4-5M jobs lost each year.
Continuing establishments trimmed 8-9M jobs each year, and many more during recessionary times. Although there are many moving parts, continuing firms eliminate more jobs than they create, especially during recessionary periods when they are adapting to lower demand. Firms die and they close locations, removing 4M jobs each year. New firms and new establishments add the new jobs required to fill the 2M net new jobs each year. This does not happen automatically or precisely, but overall, through time, the pattern is clear.
The US job market has grown from 90-150M positions during the last 40 years.
Firms hire 75M people each year. The typical job tenure is just 2 years.
Separations and hires generally move together. The net 2M jobs added annually is a small fraction of employment, hires, separations, gross job adds and gross job losses.
Establishment births exceed establishment deaths except during deep recessions.
New firms have high failure rates. Fortunately, firms that survive their first year have high percentage rates of new hires. They start with a small number of employees (4) and grow rapidly. The survival rate improves with the age of the firm and the employment growth rate of surviving firms tends to decline as they grow. The combined effect is that 80% of the new employees added by startup firms remain after 10 years. This employment survival rate has been improving in the last 15 years, partially offsetting the reduced number of start-up businesses.
The share of “new employer businesses” dropped after the Great Recession and has not fully recovered.
The number of application for new business tax ids increased significantly after the Great Recession and jumped by 50% after the pandemic.
The Census Bureau also tracks a subset of the total new business applications based upon industry classification that is a better predictor of actual businesses eventually started. This measure shows modest growth after the Great Recession and a 30% spike after the pandemic.
About 10% of new business applications become new businesses. Hence, the rate of new business formation to be reported for 2022 is expected to be very high.
About 80% of new businesses are formed based on opportunity and 20% based on necessity. Kauffman estimates that 2020 business formation was 30% based on necessity.
Summary
The US economy continues to generate 2 million new jobs in each non-recession year, even more in boom periods like the last 2 years. Firms and establishments are born, grow and die. The net employment growth rate for established firms is less than zero in their first 5-10 years and then slightly positive. The annual death rate of existing firms and establishments is relatively low, but on a 150M employee base it is 4M per year. The new jobs added by startup firms and new establishments allow the total number of employees to grow in normal years.
There is no “iron law of employment” that requires new firms or establishments to be created in numbers greater than the job losses. There is no law that requires surviving young firms to nearly offset job losses by young firms that die at a high rate. There is no law that requires mature firms (10 years old+) to add new employees or to die at slow rates. But these results have been consistent or improving for the last 40 years. I look forward to continued success.
Allison V-1710-7 (V-1710-C4) V-12 engine (A19600125000) engine. One-half left front view.
New hires remain above 6 million at the end of 2022! The high in 2002-7 was 5.5 million. The economy barely reached 6 million during the historic 10-year expansion from 2009-2020. New hires in 2021 were above trend, but 2022 remains on the positive track. We’ve been in a “negative” economic climate for 18 months, but the economy has just slowed a bit.
The “distribution” business is doing very well. People are embracing the Amazon model of home delivery. This requires more staff here and less in retail and wholesale trade. 1.1M new hires prior to the Great Recession. Drop to 0.8M afterwards, recovering back to 1.1M for 2015-19. Growing to 1.3M after the pandemic!
The “leisure” industry continues to grow as a share of the US economy, from 900K new hires to 1.2M new hires. There is some slowdown in the second half of 2022.
The broadly defined business and professional services industry continues to grow as a share of the US economy, from 800K new hires in 2004 to 900K by 2011 and 1.1M in 2016. This industry continues to grow, although it has clearly backtracked a bit at the end of 2022.
The retail trade sector has generally been weak for the last 2 decades, with new hires plummeting from 800K to 550K after the Great Recession before recovering to 750K from 2015-19. Retail hiring actually increased after the pandemic before falling back to its historical level of 750K hires.
Health Care continues its forward march to consume all of the US economy. 😦
Manufacturing new hires dropped by one-third after the Great Recession, but very surprisingly recovered from 250K to 350K new hires by 2018-19. Manufacturing new hires grew even faster, above 400K after the pandemic.
The government sector has less variability. New hires have increased to 400K after the pandemic.
New hires in the Construction industry peaked before the pandemic and have drifted downwards ever since.
Hiring in the Financial Services industry dropped by one-third due to the Great Recession, but has slowly recovered to almost the 240K level.
The Arts sector has recovered to its pre-pandemic level of hiring.
Hiring in the Wholesale Trade industry fell from 180K to 120K with the Great Recession but has since recovered to 160K.
The Education industry has continued with its increased hiring.
Summary
The annual rate of new hires has dropped by 10% from 6.6M to 6M. 9 of the 12 sectors have drifted sideways. 3 have fallen significantly in the last 9 months: professional and business services, retail trade and transportation, warehousing and utilities. The economy is clearly in a slow-down period, but the ongoing trend of growth is clear.
Since July, overall inflation is immaterial (1%), about 2% on an annual basis.
The Services sector is the most concerning, with annual inflation still running near 6%. The recovery from the pandemic started with the goods sector and then slowly rotated into the services sector as “in person” services re-emerged.
Since March, 2022 durable goods have reassumed their long-term price Deflation.
Nondurable goods are back to 0% inflation.
Energy prices are clearly falling now.
Gas prices have retreated back to $3 per gallon as quickly as they increased.
Food prices have fallen but remain abnormally high, growing at 6% annually. Global pressures may keep this category above normal during 2023.
Wage-push inflation remains a thing of the past. Real wages remain flat.
Strong economies with solid currencies are able to import cheaper goods and reduce domestic inflation.
Producer prices have fallen by 6% from their peak.
US fiscal policy for 2022 was at the same expansionary level as pre-pandemic 2019. I think it was a little too expansionary, but this level of deficit did not significantly drive the increased inflation in 2022. The budget deficit for fiscal year ending September, 2023 is expected to increase by a small amount, even though the latest official CBO forecast showed a smaller deficit.
Monetary policy was very loose in 2020, attempting to offset the many threats to the economy. It has since been closer to “neutral”. There is no solid historical or theoretical basis to carefully predict the effect of this huge increase in the money supply two and a half years later.
The Federal Reserve Bank has increased interest rates and the housing, stocks, bonds, construction and commercial investment markets have been impacted, slowing aggregate demand for assets, goods and services.
The stock of “excess savings” which supported the rapid recovery from the pandemic peaked in early 2021 at $2.25T. It had fallen by 20% to $1.75B by the 3rd quarter of 2022 and continues to fall, reducing aggregate demand.
Summary
The scariest inflation scenarios are no longer plausible. Durable goods, nondurable goods, producer and energy prices are falling. Food and services prices remain elevated at 6% but are not in double digits and are not increasing. Real wages spiked briefly during the heart of the pandemic but quickly returned to pre-pandemic levels where they have remained.
The federal budget deficit in 2022 was the same as in 2019 when inflation remained low. Even with a slowing economy, the forecast 2023 budget deficit remains about the same as in 2022, not adding materially to excess demand. Monetary policy in 2022 has consistently been tighter and tighter, with the Federal Reserve chairman promising to “do whatever it takes” and highlighting the much greater negative consequences of inflation that does not return to the target level. Weakened fiscal and monetary policy should help to further reduce any remaining supply chain constraints in the global economy. The housing and capital investment sectors are declining. The impacts of changed monetary and fiscal policies are seen 6-24 months later.
Double-digit and accelerating inflation are no longer credible. Deflation is the rule in a large part of the US economy. Monetary and fiscal policies are tightening. Overall inflation is falling. The economy has already slowed, so we may even be entering a period of self-reinforcing lower rates of inflation.
The IndyStar reported on the final recommendations of the “Governor’s Taskforce” earlier this month. I didn’t see much response locally. I believe this is a HUGE opportunity to cooperatively invest in Indiana’s future, by both parties. Indiana’s governor and two houses have been governed by a single party for many years. The historical low-tax, low-service, selective investment strategy has delivered low taxes, responsible local government services, respectable education, solid infrastructure, a diversified economy but mostly growth in just the Indy metro area and lower average incomes for the other 80 counties. The current very low unemployment rates are further squeezing employers reliant upon abundant relatively low wage/skills employees.
Focus. 30 Items are Too Many.
Eliminate One-third of the Lowest Value Initiatives.
Digital development grants. Employers will invest in high ROI projects by themselves.
2. Indiana Talent Agency. No extra bureaucracy.
3. Career Network. No extra bureaucracy. Finding jobs on-line is easy today.
6. College retention incentives. Colleges already have incentives.
10. Immigration reform. Yes, but Indiana will not drive this nationally.
11. Miscellaneous student grants. These would help, but not critically.
12. Transportation funding. Helpful, but not critical.
21. High school diploma flexibility. Critical thinking skills or true CTE skills are essential, Don’t dilute them further.
23. Incentivize CTE credentials. Not needed. If credentials were clearly defined and understood, students and workers would pursue them out of self-interest.
24. STEM curriculum, courses, etc. Focus on schools and teachers first.
29. Scholarship for dual credit completers. These highly talented and motivated students are already moving in the right direction.
Digital Skills (1)
No need for #4 bureaucracy. Basic digital skills should be completed in junior high school. Is the state requirement clear? Advanced digital skills courses should be required in HS and community college for graduation. Make existing courses available for free to firms for remedial on-site training. Make relevant Western Governor’s University courses free. Digital skills should be like “breathing” for Indiana residents. No extra state overhead is required.
University STEM Degrees (2)
No incentives to universities required (5). Provide STEM degree completers with a $25K graduation cash rebate. IU/Purdue (7) should offer more diverse STEM degrees, but so should all Indiana publicly funded universities. Let the students drive the faculty levels.
Career and Technical Education Certifications (3)
Fine-tune the certification program to really recognize workplace, digital, team, industry and technical skills. If the program was recognized like a CPA, licensed plumber, six sigma blackbelt, PMP project manager, Microsoft IT skills, state licensed professional, etc., it would have great value, increasing employee pay and transferable value. (8, 9, 22, 30).
Early Childhood Education (4)
Fund pre-K and K for all. Fix the detailed regulatory limits (13). Defining pre-K detailed results is not essential (26).
Community College (5)
Clearly define “advanced manufacturing” curriculum and degree (1). Reduce community college tuition fees further with state subsidies to encourage universal participation in higher education (like Tennessee). Radically change community college to be local county (or county groups) funded and managed educational institution. Ivy Tech has failed repeatedly as a state-run organization to graduate students. Let local counties decide if they want to invest in education and actively manage this.
Reading (6)
Invest whatever it takes to ensure that all 3rd graders can read at grade level. This is the most essential gateway (28).
Administrative Improvements/Investments (7)
15. Offer employers a $1K fee per class to offer on-site classes.
16. Simplify criminal expungement.
17. Auto enroll eligible students in 21st C scholars.
18. Require HS seniors to file FAFSA.
19. Increase college funding grants for lower income students.
20. Increase credit for prior learning.
28. Fund Dolly Parton library to encourage reading.
High School STEM Classes (8)
25. Allow any person with a BS degree to teach any STEM class at HS and community college level. No need for more detailed subject matter or education course qualifications. They will “figure it out”.
Indiana is not winning the modern global competition for value added jobs and firms. Students and adults must have modern skills. Educational institutions must provide these skills. This requires focused investments and administrative changes.
15 of the 50 states have unemployment rates in the TWO’s!
The Great Plains region has 7 states with 2% unemployment rates: MN, SD, ND, Mo, KS, NE and IA.
Utah (2.1%) and Idaho (2.9%) standout in the Rocky Mountain states.
In the Southeast, Alabama (2.6%), Florida (2.7%) and Georgia (2.9%) enjoy minimal unemployment.
New Hampshire (2.4%) and Vermont (2.3%) represent New England and Virginia leads the Middle Atlantic (2.7%).
Another 20 states report 3% unemployment rates, for a total of 35 (70%) at 2-3%.
The remaining 15 states and the District of Columbia (4.8%) enjoy 4% unemployment, historically considered better than “full employment”. Illinois (4.6%) and Nevada (4.6%) have the highest unemployment.
A plurality (40%, 149) of the 370 US metropolitan areas report employment rates of 3%, consistent with the 3.5% overall national rate.
More than one-third (34%, 124), enjoy rates in the 2% range!
About one in seven (14%, 51) reflect better than classic “full employment” rates in the 4% range.
24 metro areas (6%) enjoy astonishingly low 1% unemployment rates.
22 metro areas (6%) are outside of “full employment” at 4.9%. 17 are in the 5% range. 5 exhibit 6%+ unemployment rates.
The statistics for just the top 100 metro areas show the same pattern. The distribution of unemployment rates weighted by population shows less dispersion, with just 3% each in the 1% and 5%+ ranges and a heavier 47% in the central 3% range.
22/370 Metro Areas Not at Full Employment (5-7% Unemployment Rates)
California: Yuba City, Madera, Fresno, Hanford, Merced, Bakersfield, Visalia
Texas: Corpus Christi, Brownsville, Beaumont, McAllen
Illinois: Danville, Kankakee, Decatur, Rockford
Michigan: Muskegon, Saginaw, Flint
Pueblo, CO, Rocky Mount, NC, Farmington, NM and Las Vegas, NV
42 of the 50 states enjoy having all of their metro areas with full employment.
24 Metro Areas with Far Better than Full Employment (1% Unemployment Rates)
Missouri: Columbia, Jefferson City, Springfield, St Joseph, Joplin, Cape Girardeau
Lincoln, NE and Ames, IA
Minnesota: Mankato, Rochester, St Cloud, Minneapolis-St Paul
Dakotas: Fargo, Grand Forks, Bismark, Sioux Falls, Rapid City
Utah: Provo, Logan, Ogden, Salt Lake City
Burlington, VT, Columbus, IN and Bloomington, IN
Summary
The labor market stands out as a very positive measure of the health of the US economy in October, 2022. A general, prolonged, material decline in economic health is difficult to see on top of this broadly very positive economic base. A slow-down? Highly likely.
The stock market reacted quite positively yesterday to the slightly better than expected news regarding measured inflation. The total measure and the “core inflation” measure excluding more volatile food and energy prices were both a little lower than expected for the month and for the 12-month calculation.
I don’t think that trend inflation was ever as high as the markets and voters perceived (double digits) and I don’t think that today’s reaction/perception of a peak or recovery in the inflation rate is correct, as inflation totals and details have been slowing for seven months, since March. In hindsight, the business cycle tends to reflect a smooth “sine-wave” curve of increasing, flattening and then decreasing various measures. It is VERY difficult to separate the “signal from the noise” as the monthly data is released on GDP, employment, inflation, etc.
As usual, we need to look at nearly a dozen measures of inflation and its components and 2-3 views of each component to try to identify the “signal”.
When I look at the consumer price index, I see an inflection point in March, 2022, when a quickly accelerating curve paused its growth rate. Inflation appeared to resume at its prior pace in April and May, not faster than in prior months, indicating that March was a fluke, but at about the same pace, indicating that, overall, there was the beginning of a slow-down in Feb-May. In June, I see a second inflection point, and the pace of price growth has clearly slowed for the next 4 months. The annual inflation rate from March to October was 6.2%
The inflation rate from September, 2021 to March, 2022 was 9.8%. This was the highest rate indicated by this data. 6.2% is a good one-third lower than 9.8%, strongly indicating that the inflation rate has peaked. It might not be declining, but it has clearly peaked.
The annual, 12-month price change measure tells the same story. At September, 2021, the trailing annual inflation rate was 5.4%. At March, 2022, the rate had reached 8.6%. It appears to have peaked at that time, levelling off in the low 8% range. A peak was reached in June at 9%. The next 5 months have shown a declining trend to less than 8%.
The monthly percentage change is much more volatile. Monthly changes reached 0.88% in Jun 21 and 1.32% in Jun 22. There were also lower monthly changes during this period, keeping the 12-month measure to 9% or less. The last 4 months have shown good news, with monthly inflation of 0%, 0.1%, 0.4% and 0.4%, a total of 0.9% for 4 months, or 2.7% annually. This measure is too volatile to claim victory, but it reinforces the notion that inflation has peaked and is beginning to decline significantly.
The “core” inflation index appears to have peaked at 6.4% of annual inflation in Feb, 2022. Most economists focus on this measure because the excluded food and energy components are much more volatile and tend to return to their low long-term inflation rates, so high monthly increases tend to be followed by offsetting declines. The core inflation index appears to have levelled off at 6.5%, but evidence of a future decline is not obvious in this measure.
The monthly core inflation measure fluctuates between 0.4% and 0.6% for the last 18 months, indicating annual inflation of 5-7%. A lasting decline is not obvious, but the October measure is encouraging.
The food consumer price index clearly accelerated from late 2020 through mid 2022. Monthly inflation grew from 0.2% in late 2020 to 0.6% in the last 2 quarters of 2021. Food inflation reached 1% monthly in February, 2022 and stayed at that level for 6 months, before beginning to decline quite sharply to 0.6% in the next 4 months.
On a year-over-year basis, it took a little longer for food price inflation to become noticeable, as the earlier lower inflation months were combined with the growing inflation months. In June, 2021, the trailing 12-month food inflation rate was just 2.4%, comparable to the last 30 years. The annual inflation rate reached 6% by November, 2021 and peaked at 11.4% in August, 2022. The monthly food inflation rate and the trailing 12-month rate are clearly declining. Consumers face a grocery bill each week and are sensitive to these changes for key items.
Energy prices are volatile. That’s why they’re excluded from the “core” inflation measure. Nonetheless, from a consumer experience and future inflation expectations perspective, they matter. They matter greatly. The gas and electric bills arrive each month. Automobile fuel is purchased weekly or more often with huge price signs at the station. Monthly energy prices increased by 5% in June, 2021 alone and averaged about 2.5% per month for the next year and one-half. Energy prices then briefly increased by 19% in the next 4 months combined before finally dropping a bit. The monthly experience was one of 2 years of increases and 30% annual inflation for more than a year. The recent price reduction is seen as a release from relentless large increases.
The most visible energy price. for regular auto fuel, dropped from $2.50 per gallon to just $2.00 per gallon during the first year of the pandemic before increasing to $3.00 per gallon in the second year and then up to nearly $5.00 per gallon in June, 2022. It has since declined to a slightly elevated $3.60 per gallon. Consumer perception of “gas prices” is mixed. It’s clearly higher than in 2019, 2020 or 2021, but it has come down from the peak level. Various threats and weekly volatility make consumers shy to conclude that gas prices are “really” declining.
Housing/shelter is the largest component of the CPI. Both rental and home ownership costs are estimated, with adjustments used to try to smooth out variable month-to-month changes.
Annual housing inflation remained in the 2-3% range for the first year of the pandemic, but very quickly climbed to 6-8% as the supply of new homes was reduced and demand for housing of all kinds increased. Consumers saw this inflation in record high rent and housing prices (new or used).
With the Fed driving higher mortgage interest rates, consumers can afford less housing, so demand for new and used housing has dropped, causing owned and rental prices to flatten or fall.
Consumers have clearly seen the substantial increases in housing values and rents, and the subsequent flattening in recent months. Most consumers would estimate experienced annual housing inflation at more than 10% for the last 2 years and be unsure as to expected future housing and rent prices. When in doubt, consumers are likely to expect the worst; some level of continued increases in rents and total costs (mortgage payments).
The pandemic’s large consumer and business subsidies lead to a 20% spike in demand for durable consumer goods, which drove a 25% price increase in 18 months. Consumers obviously experienced this large price increase, even though it was implemented over more than a year. Prices effectively peaked by February, 2022 and then returned to their usual 0-2% annual level. Consumers can feel that “everything costs more”. Many durable goods are purchased infrequently, so the new zero inflation will take some time to shape consumer perceptions, but we are already 9 months into this cycle, so consumers are mostly feeling better about this category.
The “transportation” subset of the CPI looks like the durable goods graph. It contains the prices of cars and trucks, the cost of fuel, insurance and maintenance. I think that most consumers would say that transportation costs are up and have not yet begun to fall, even though the index indicates that they plateaued beginning in March, 2022. This is another category where expectations should slowly change to match the numbers.
Used car and truck prices stayed flat or declined in the 7 years before the pandemic. In the 17 months from June, 2020 to November, 2021 they increased by 45% as private vehicle demand increased and new car supplies shrunk. Used car prices have essentially flattened in the last year. Consumers are aware that prices have stopped increasing but suspect car dealers of still trying to raise prices further. A little more positive experience on this higher profile measure will help to reduce inflation expectations.
Medical cost inflation was a bit elevated at 5% heading into the pandemic, then fell to less than 2% during 2021. It has since returned to 5%. Consumers have relatively weak perceptions of medical costs due to the buffer of insurance policies. Most service prices were restrained during the first 2 years of the pandemic as demand for durable goods was up, but demand for services was down.
Another way that consumers gauge inflation is through their “real”, inflation-adjusted incomes. Real incomes were increasing slowly in the 3 years before the pandemic, following many flat years. Businesses bid up wages during the first year of the pandemic, but then reduced the increases in their offered wages to less than the increase in inflation. Hence, real wages have decreased by about 2% annually in each of the last 2 years. Hence, at a total level, workers are feeling inflation, because their wages are able to buy a little less at the end of 2022 than at the end of 2020 or 2021.
Summary
The data clearly indicates that inflation has peaked and is heading downward. The rate of decline is unclear. It’s unclear how long it will take to return to a stable 0-2% rate. Consumer perceptions are likely to lag the data by 3-6 months.
Total inflation reached an inflection point in June, 2022, pointing to 3% inflation, rather than 8-9%. Core inflation increased quickly throughout 2021 to a 6% annual level, but has remained flat at 6%. Food inflation reached a 12% annual level, but has slowed to 7%. Energy inflation reached 30% for an extended period of time, but has decreased to “just” 20% with high variability. Official housing costs rose by 8% annually, while consumers experienced 10% plus cost increases. The official housing inflation rate has declined a little to 6%, while consumer perceptions of current and future housing inflation are mixed. Durable goods inflation exceeded 12% annually, but has dropped back to its typical 0-2% range. Broadly defined transportation costs increased by 12%+ for more than a year and have flattened out recently at close to zero percent. Medical cost inflation was low after the pandemic, but has increased back up to 5%. Real worker wages have declined by 4% in the last two years, making inflation a felt reality. There is no sign of a wage-price spiral.
The worst of the post-pandemic inflation appears to be over. Key sectors show flat or declining inflation. Gas prices and used car prices are down. Consumers have used up most of their excess savings. Government spending is way down in real terms. Increased interest rates and a tight labor market are slowing the economy. Consumer inflation expectations are coming down with experienced inflation. Barring another major supply chain disruption, inflation should be under 3% before the end of 2023.
Real, inflation adjusted, GDP has quickly resumed its long-term growth rate. GDP grew in the 3rd quarter and on an annual basis has continued to grow through the 3rd quarter of 2022. Employment recovered more slowly, but has exceeded the pre-pandemic peak. Very solid job growth has continued through September, 2022.
Real, inflation-adjusted, consumer spending quickly recovered from the pandemic and continues to grow. Consumers have enough income and savings to spend more, despite inflation challenges.
This is the labor market we have been waiting for since I graduated from high school in 1974. Record low unemployment, twice as many job openings and real wages above those of 2018-19, after inflation.
The overall US economy continues to grow, faster than other countries, including China. Exports are up by 20% as US companies continue their competitive wins. This is in spite of a much stronger US dollar. Imports are also up by more than 20%, providing consumers with the best of all global choices. Manufacturing output and employment have recovered to pre-pandemic levels. Farm incomes and output are up significantly.
The federal budget deficit has been cut in half, with fiscal year 2022 back to the 2019 level. States have strongly recovered from the pandemic with increased revenues and slowly growing expenditures. State reserve funds are at record levels. 11 states had enough reserves to provide rebates to their taxpayers.
Retirement savings is at a record high. House values are up by one-third. The US stock market is up by one-third, despite the significant declines in 2022. Used car values are up by one-third. Retirement after age 55 remains very attainable for a majority of individuals. This growth in personal asset values has taken place while corporate profits have increased by one-half.
Most Americans today have fixed rate mortgages at 2.5%-3%-4%, locking in advantageous low mortgage payments for 10-30 years. New home buyers and those who must move and get a new mortgage do face 7% interest rates. Mortgage delinquencies are down by 80% and credit card delinquencies are down by one-third. Child poverty, after transfers, is at a record low.
Summary/Interpretation
The news media and politicians want to highlight the negative aspects of the US economy: higher inflation, lower personal savings rates, higher mortgage rates, higher home and apartment rents and prices (lower affordability).
It’s important to put all of the pieces in perspective. Inflation is higher and threatens fixed income and low-income households. Households are using up their extra pandemic period savings. The real estate market is slowing, but prices remain high. Economic growth is close to zero, so there are relatively fewer open positions and net new jobs created. There is a threat of a mild recession continuing through the second half of 2023. BUT …
The overall economy has quickly recovered from the pandemic and exceeded record pre-pandemic levels. Recall that the post-Great Recession recovery continued for almost a full decade. The economy recovered from the record pandemic lock downs and “lost jobs” faster than anyone expected.
Economic growth was low, marginally below the arbitrary 0.0% level in the first and second quarters, but recovered to 2% in the third quarter. Annual GDP growth is likely to be in the -1% to +1% level for the next 3-4 quarters as the Federal Reserve Bank’s increased interest rates work through the economy. We may have an “official recession”, but households will encounter limited negative effects.
The labor market is likely to continue its very positive status. Firms still have 10 million open positions that they expect will EACH deliver positive net economic results. We have a labor shortage. At some point, business Republicans will join Democrats to revise restrictive immigration rules and other policies that limit labor force participation.
Firms, businesses, retirement plans and state governments are in very solid economic shape. Assets are very high, liabilities are low. Net assets are at record levels. The Federal government budget deficit is back to the pre-pandemic level.
There is no evidence of a wage-price spiral of inflation. The president and most Democrats seem to accept the Federal Reserve Bank’s actions to increase interest rates, slow the economy and return inflation to its prior 30 years of modest 2%.
Behavioral economists have repeatedly shown that most people are much more sensitive to losses and risks than they are to economic gains. Hence, it is natural to focus on higher inflation and slower growth and discount the many other positive results.
The US economy quickly recovered from the severe pandemic recession with less collateral damage than anyone expected. The growth in the money supply and federal spending/transfers to ensure that we avoided a business, banking and personal meltdown drove a faster than expected recovery resulting in supply chain disruptions, labor shortages and inflation. The “experts” were slow to identify this situation and take offsetting policy steps. Fortunately, fiscal and monetary policy during 2022 have been tight, slowing the economy. We are in the difficult months of transition. No one knows if the steps taken so far are adequate, exactly right or too much. We need another 3 quarters to decide.
Good News 