The unemployment rate continued its decline in August across the major metropolitan economies in Texas and across the State and U.S. as the recovery from the economic effects of the pandemic continue (see Chart 1). In San Antonio, the unemployment rate declined to 4.8%, This is 1.8 percentage points above the pre-pandemic level, so while the economy is certainly recovering, there is still a ways to go. San Antonio has the third lowest unemployment rate compared to the other major metropolitan economies in Texas with Austin having the lowest at 3.8%. The unemployment rate in Texas stood at 5.9%, a bit higher than the unemployment rate for the U.S. at 5.2%.
However, the total level of employment in San Antonio declined in July and August, as shown in Chart 2. This indicates to me that at least part of the decline in the unemployment rate in San Antonio may be due to people dropping out of the labor force and therefore, no longer being counted in the unemployment rate. This is also occurring in some of the other major metropolitan economies across the state.
While there have been monthly declines in total employment the past couple of months, the year-over-year growth rates in employment continued to be strong in August with growth in San Antonio coming in at 3.94% (see Chart 3), a good bit above the average historical growth rate in the region of about 2.3%. However, these growth rates continue to decline across most regions in the state, as well as across the entire state of Texas and the U.S. This is likely due to a regression to the mean as the recovery continues and some pull back in consumer spending due to the Delta variant. Another possible factor is the lag in business travel due to the pandemic. This especially affects those local economies with large leisure and hospitality industries like San Antonio because the convention activity is not filling in for the decline in leisure travel as the new school year began.
If we can keep making strides against the pandemic, growth should continue into the near future. This does not mean the year-over-year growth rates will increase, as they will likely tend to move more toward their long-term average rates in the respective areas as the economy gets closer to full employment. The sustained growth will also continue to push the unemployment rates down, especially as the structural unemployment is reduced.
Employment in the San Antonio economy actually declined in July compared to June, as shown in the following table. Compared to the employment level in Feb. 2020, the month before the pandemic hit, employment in San Antonio was still down 25,500 jobs as of June and then in July decreased another 900 jobs to now being off by 26,400 jobs. The employment situation worsened in August as total employment was down 29,200 jobs compared to February 2020. These trends are probably reflecting many novel factors at play in the labor market, not only in San Antonio but across the U.S. and the world.
The unemployment rate in San Antonio has declined from 5.5% in June to 5.1% in July, and now it is sits at 4.8% in August. If the unemployment rate is going down while employment levels are also going down, this seems to me to indicate that the decline in the unemployment rate is due to people dropping out of the labor force instead of finding jobs. This may be due, in part, to the reduction/expiration of unemployment benefits, but it does not seem to indicate that the removal of those benefits had the large impacts on employment that some believed would be the case. Other factors seem to be driving workers’ decisions. Dr. David Autor puts forth an interesting explanation of what may be happening in his New York Times opinion piece (Autor, 2021). Regarding the effects of unemployment benefits, he refers to research showing that states which dropped the federal unemployment benefits this summer have seen very small declines in their unemployment rates. The Financial Times also recently published research on this same phenomenon (Smith and Zhang, 2021). Furthermore, Autor points out that Europe and Britain did not expand their unemployment benefits in a substantial way, and yet, they are also experiencing a labor shortage, too (Autor, 2021).
Having to put your son or daughter in child care has also been put forth as a possible explanation for the labor shortage, but as Autor notes, “women with children have since returned to work at almost the same rate as women without children, meaning access to child care isn’t the main culprit” (Autor, 2021).
He argues that the main reason for the labor shortage is “people’s valuation of their own time has changed.” In other words, many potential workers have decided that it is no longer worth working in a low wage job where they are also likely to be without benefits. As shown in the table above, those industries where wages are lowest are also those where there is high person-to-person interaction and thus, where workers are at increased risk of exposure to COVID. Instead, some are choosing to spend more time with their family and pursue other leisure activities that enhance their standard of living even if it reduces their incomes and consumption (Autor, 2021).
In addition to the explanation put forth by Autor, other factors may also explain what is happening in the labor market in San Antonio. It is clear in the table above that the leisure and hospitality industry and the education and health industry account for most of these job losses. As of June, leisure and hospitality accounted for 17,900 of the decline in jobs, and 8,600 of the jobs lost were in education and health. The employment situation improved in the leisure and hospitality industry in July where the reduction in employment compared to Feb. 2020 declined to 15,800, but the employment level worsened in August to 18,000 jobs. I think this may be due to the rather robust summer vacation season coming to an end followed by convention activity that is still depressed due to the pandemic. The situation got a bit worse in the education and health industry with employment being down 12,100 in July over this same time period but improved in August as the decline reduced to 10,200 jobs. The leisure and hospitality industry and education and health comprise a large part of the San Antonio economy. Besides the shift from leisure visitors to conventions as summer has ended that is possibly affecting employment in the leisure and hospitality industry, there is also much anecdotal evidence of workers in the leisure and hospitality and education and health industries leaving their jobs to seek employment in other industries for many of the reasons already stated. I suspect other metropolitan areas where these industries are a big component of the local economy are seeing similar effects.
It is also worth noting that in the industry that has shown the largest growth since Feb. 2020 by a wide margin, professional and business services, the growth declined from being up 9,900 jobs in June to only being up 6,300 jobs in July. Looking at the data on this industry in more detail, most of the decline occurred in the administration and waste services industry, for which I do not have an explanation. Employment levels did improve a bit in August with total employment in this industry being 7,100 jobs above the February 2020 level.
It is also important to keep in mind the wage levels of the workers most impacted by the economic effects of the pandemic. The average wage is presented in the table above and is calculated using data from the Quarterly Census of Employment and Wages for Bexar County. The average wage across all industries is $56,126 as of 2019, and of the four industries with below average wages, three of those industries are also the three most impacted by the pandemic in terms of declines in employment. This is no surprise as we have known that the economic effects of the pandemic have disproportionately fallen on those at the lower end of the income scale. As mentioned earlier, these are also likely to be the people most impacted by the loss of unemployment benefits, and given the other aforementioned factors at play in this labor market, it may also be deleterious to the overall economic recovery as their spending and engagement in the economy possibly declines.
Even more so, the adjustments happening on the supply-side of the labor market as discussed above indicate that the persistent labor shortage is due to structural changes, as workers reassess the value of their time and/or seek to transition to employment in different industries or different jobs in the same industry. The upshot is that the recovery back to pre-pandemic employment levels will take longer than if these effects were not occurring. This means that facilitating these adjustments is of utmost importance to helping those seeking to transition to new careers, but it is also vital to reducing the time it takes the economy to fully recover.
Recently, the unemployment rate in the U.S. in April was reported at 14.7%, which may actually be about 5% higher as discussed in my post from yesterday. In my projection of the effects of the pandemic on the San Antonio economy, I forecast that the unemployment rate in San Antonio might reach between 14-21%. The unemployment rate for Texas and the metropolitan areas will not be reported until May 22, so the question is: what will the unemployment rate in San Antonio be in April? Going back to January 1990 (as far back as data on the unemployment rate in San Antonio are reported), the monthly average unemployment rate in San Antonio was 4.9% compared to the average U.S. unemployment rate of 5.8%. So, the unemployment rate in San Antonio is 0.9 percentage point lower than the U.S. rate on average. If this relationship holds, this means the unemployment rate in San Antonio in April will be 13.8%. “If this relationship holds” might be a big assumption, since the industries that have taken the brunt of the impacts of the pandemic – accommodations and food services, retail, and health care – are such a large part of the San Antonio economy. This could mean that the unemployment rate in San Antonio in April will be about the same or possibly even higher than the rate for country.
The unemployment rate in the U.S. was recently reported to be at 14.7% in April. Here is a link to the full report released by the U.S. Bureau of Labor Statistics. It is somewhat lengthy, but as always, it is worth a quick look, especially since this report contains some insightful information beyond the headline unemployment rate.
One insight is the difficulty in being able to correctly capture the data due to the unique situation caused by the pandemic. This is highlighted in the following statement from the report.
However, there was also a large increase in the number of workers who were classified as employed but absent from work. As was the case in March, special instructions sent to household survey interviewers called for all employed persons absent from work due to coronavirus-related business closures to be classified as unemployed on temporary layoff. However, it is apparent that not all such workers were so classified.
If the workers who were recorded as employed but absent from work due to “other reasons” (over and above the number absent for other reasons in a typical April) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been almost 5 percentage points higher than reported (on a not seasonally adjusted basis). However, according to usual practice, the data from the household survey are accepted as recorded. To maintain data integrity, no ad hoc actions are taken to reclassify survey responses (pp. 5-6).
As noted in the statement, they calculate that the unemployment rate would have been close to 20% if this data was accurately reported.
A second data point of note is that when those who are marginally attached to the labor force and the total employed part time for economic reasons are considered, the unemployment rate (technically referred to as U-6), was 22.8% in April (see Table A-15 in the report).
I hate to highlight more bad news, as if 14.7% of the labor force being unemployed was not bad enough, but in order to really understand the depth of the economic recession we are in, I think it is important to consider these figures.
Some definitions: Those marginally attached to the labor force include people who are not currently looking for a job but have indicated they would like to work and have looked for a job in the past 12 months. This also includes discouraged workers who have become discouraged about their prospects of finding a job and have dropped out of the labor force. Those employed part time for economic reasons are the workers who would like to work full time but can only find part time work.
It is that time of year for economic forecasts, so here is my forecast for the San Antonio economy in 2019. An update of the San Antonio economy through October and more detail on the forecast can be found here.
Like the U.S. and Texas economies, the San Antonio economy continues to show healthy growth. Employment through October grew 2.47% compared to October 2017, which is about at the historical average growth rate for the region. This is not bad given the extraordinary length of this expansion. The unemployment rate in San Antonio was at 3.2%, the second-lowest among the major metropolitan economies in the state. However, growth in San Antonio has been pretty strong across all sectors of the economy up until about six months ago when year-over-year employment growth in many sectors started to slow and even turn negative. These trends are shown in the following graph where it is clear that growth in the information, construction and mining, manufacturing, and professional and business services industries has started to decline.
It is also a sign of economic strength that the unemployment rate in San Antonio is so low. There is mounting anecdotal evidence, though, that the labor market is very tight. There are surely people who are still underemployed or who are not counted as unemployed because they have dropped out of the labor force, but I think we are at the point where growth is going to be driven by growth in the labor force and/or increases in productivity. This is going to be a constraint on growth into the near future.
Similar trends are also occurring at the state level, and the leading index for the Texas economy has been trending down since about May. It is too early to tell if this is an indication that the Texas economy is headed for a downward turn, but it bears watching.
On the national front, one of the best predictors of a downturn in the economy is the yield curve. The yield curve is very close to inverting, and in fact, the yield curve based on the difference between the 5-year and 2-year bond rates has already inverted. Once the yield curve inverts, it is a good bet the economy will move into a recession not too long after the inversion. Relatedly, recessions are typically preceded by the Federal Reserve raising interest rates, which they have been doing and are most likely going to continue to be doing. The housing market nationally and in San Antonio has been strong for a number of years now, but it got a bit frothy, again, and while it remains strong in San Antonio, it is starting to soften in other major metropolitan areas in Texas, particularly Dallas, and other parts of the country.
There are also some worrying trends in the global economy as growth has slowed in China and many countries of the European Union. While there are surely many factors playing into this, the trade war is not helping matters.
The current expansion is now the second-longest in our nation’s history. It is not going to go on forever. Sorry, but if we learned anything from the Great Recession, it is that the business cycle is not dead. There is typically a trigger, though, that turns the economy into a recession. As already mentioned, the inverting of the yield curve, raising of interest rates by the Federal Reserve (which, by the way, is the right thing for them to do, in my opinion), the trade war, Brexit, severe downturn in the housing market, and slowing global growth could each be that trigger. There may also be others not mentioned.
The upshot is that I believe we will continue to see the San Antonio economy grow into 2019, but I predict (as do many other economists) that we will move into a recession toward the end of 2019 or in 2020. It may not be as severe as the Great Recession, but I am very concerned about the federal government’s ability to respond to it. This is due to the fact that the Federal Reserve may not have as much room as they need to lower interest rates, which may mean they have to resort to quantitative easing again. But, there could be pressure not to implement such a policy again. A similar issue concerns me with respect to the ability of the federal government to provide any sort of fiscal stimulus given the increasing federal budget deficit due to the recent tax cuts of the Trump Administration. If the deficit is over $1 trillion by the time the recession hits, are the policymakers going to be willing to provide an economic stimulus large enough to pull the economy out of the recession, since it will make the deficit even worse?
In this environment, I think San Antonio will continue to see growth in 2019, but the growth in employment will likely slow to somewhere in the range of 1.75-2.25%. The unemployment rate is also likely to tick up a bit to about 3.5-4.0%.
The unemployment rate in San Antonio in July was at a seasonally adjusted rate of 3.2%. Since May 2017, it has been in the range of 3.1-3.5% each month. This is about as low as the unemployment rate has ever been in San Antonio since January 1990, as far back as the data goes. The lowest it ever got was in March and May 1999 when it reached 2.9% in each of those months.
As shown in the graph, for about the past year, the unemployment rate has been near the level it was during the dot come bubble leading into the recession in 2000 and about one-half to almost a full percentage point lower than the unemployment rate during the housing bubble preceding the Great Recession.
It seems to me that the San Antonio economy has been at its full-employment level of unemployment, so it is most likely the unemployment rate will only be going up over the next year or so. It may continue to hover in the aforementioned range for several months, but it appears to have hit its floor.
Yesterday The New York Times published an article titled, “What’s the Yield Curve? ‘A Powerful Signal of Recessions’ Has Wall Street’s Attention” (https://www.nytimes.com/2018/06/25/business/what-is-yield-curve-recession-prediction.html). If you have the time, it is worth a read because the author, Matt Phillips, discusses the importance of the yield as a predictor of recessions. As I have discussed in at least one previous blog post, the yield curve is one of the best indicators of recessions. As Phillips notes, “every recession of the past 60 years has been preceded by an inverted yield curve, according to research from the San Francisco Fed.”
The graph below shows the yield curve through June 25, 2018. The gray bars indicate recessions, so the relationship between the inversion of the yield curve and recessions is pretty clear. It is also pretty clear that the yield curve is trending toward flattening (i.e., approaching zero in the graph). As noted in the article, the inversion of the yield curve does not give much of an indication of when the recession will occur, except that it will be in the fairly near future. As I have mentioned before, I think we will see the U.S. economy dip into recession by late 2019 at the earliest or sometime in 2020.
The U.S. economic expansion is now the second longest in history at 107 months.
Of course, this is great, but I think we also have to consider the possibility that the economy is going to run out of steam in the near future and start to go in another direction.
My thought is that by the end of 2019 or at least in 2020, this will start to occur. As shown in the following table, the expansion will be the longest in history if it keeps going through the middle of next year. Despite the nonsense spewed by some renowned economists before the Great Recession, we were reminded that expansions do not go on forever.
The business cycle is clearly not dead, and this expansion is likely to end in the near future.
I gave a speech today to the San Antonio chapter of the Government Finance Officers Association of Texas on the San Antonio economy. I will pull out specific charts and talk about them in detail over the next couple of weeks, but here is the entire speech for now. In short, the economy looks strong and should continue to be strong for the next year or so, but I think the probability of another recession starting within the next couple of years is pretty high.
I have been saying for the past few months that I think we are likely to have a recession within the next couple of years. One reason for this is that it seems the credit cycle is starting to reverse itself, especially as it relates to consumer credit.
The following four graphs pulled from the Federal Reserve Economic Database give some indication of this. As shown in Charts 1-3, delinquency rates for other consumer loans, credit card loans, and consumer loans declined pretty steadily since the economic recovery began, but since 2015, the delinquency rates have started to rise.
Furthermore, the increase in delinquencies seems to pick up pace in 2016 for all of the categories of loans with consumer loans and credit card loans maintaining the increase through 2017. Delinquencies in automobile loans have also been rising (see here).
On the positive side, delinquency rates on single-family mortgages appear to continue to decline (see Chart 4). This might just indicate that consumers are clearly financially stressed, but they are continuing to pay their mortgages on time in an attempt to at least keep their homes. If the economy does go into recession, we will see delinquency rates rise on mortgages, as well.
Consumers under financial stress are not likely to maintain their strong spending patterns, and since consumer spending is two-thirds of gross domestic product, a slowdown in consumer spending is not going to bode well for continued economic growth.
On the commercial side, the credit market seems to be fairly strong as delinquency rates are continuing to fall. It is just a matter of time, though, before this trend reverses course, too. If consumer spending starts to decline, this means goods and services will go unsold, eventually causing businesses to decrease production as inventories increase and demand for services falls. With less revenues flowing into the business, we will likely see delinquency rates start to rise. A recession cannot be far away at this point.
Chart 1. Delinquency Rate on Other Consumer Loans, All Commercial Banks (Seasonally Adjusted – gray bars indicate recessions)
Chart 2. Delinquency Rate on Credit Card Loans, All Commercial Banks (Seasonally Adjusted – gray bars indicate recessions)
Chart 3. Delinquency Rate on Consumer Loans, All Commercial Banks (Seasonally Adjusted – gray bars indicate recessions)
Chart 4. Delinquency Rate on Single-Family Residential Mortgages, All Commercial Banks (Seasonally Adjusted – gray bars indicate recessions)
Maybe this is all just a regression to the historical mean, but I think these trends are a bit concerning and worth watching.