I recently gave a speech to the Alamo Chapter of the Government Finance Officers Association of Texas in which I shared my thoughts on the state of the economy and my forecast for the San Antonio economy in 2023. In short, I am about as confident as one can be that we will have a recession in 2023. The biggest uncertainty about the forecast concerns how long the recession will last and how deep it will be. At this point my thought is that the economy will not experience a big decline, and the decline will be for a relatively brief period of time.
Although I am by no means the only economist who is predicting a recession, it seems somewhat odd calling for a recession at this point, since employment growth is strong, the unemployment rate is low, and gross domestic product is still growing. However, there are some key indicators that are pointing toward a recession. One of the main indicators is the yield curve, which has not been this persistently inverted in forty years. Employment growth, while still strong, is declining, and the unemployment rate appears to have hit its bottom. Consumer spending is starting to slow as the large increase in savings due to the various pandemic stimulus programs has been depleted. Delinquency rates on credit cards are also rising indicating consumers are under some financial stress. Private domestic investment is starting to decline, as it has done before every recession since 1980. The housing market has started to soften, as have other lending activities. These trends are what we expect to see as the Federal Reserve has raised their Federal Funds Rate a large amount in a short period of time to try to get inflation under control with the ultimate goal of also keeping the economy on its growth path. In other words, it is trying to execute a “soft landing.” In my reading of the data going back to the recession at the beginning of the 1970s, the Federal Reserve has not been successful at executing a “soft landing,” so I am not confident that they will be successful this time. This is not meant to discredit the Federal Reserve; it is just an extraordinarily difficult task to accomplish.
Given the direction all of these indicators are pointing, I am projecting that employment growth in San Antonio will be flat to down about 1.0%, and the unemployment rate will rise to 4.5-5.0% in 2023.
The San Antonio economy has bounced back from the pandemic-induced recession quite nicely, and I believe the economy will likely continue to show growth at or slightly above its long-term trend in 2022. I project employment growth this year to be in the range of 2.2-2.7%, and the unemployment rate will continue to decline to about 3.5-4.0%. The data, trends, and potential factors that I am seeing in my crystal ball that form the basis for this forecast are discussed in the rest of this post.
After a quick rebound from the pandemic-induced recession, the San Antonio economy has moved toward its more long-term average growth rate in employment. This is somewhat against the pattern seen in the other major metropolitan economies across Texas, as they have continued to maintain historically strong growth. This is especially the case for the Austin economy. These patterns are evident in the following chart showing the year-over-year employment growth. Even though many of these areas have continued to experience such strong growth, it is clear that there is a sizable gap between them and the Austin economy.
As shown in Chart 2, the Austin economy grew 8.11% percent in December, which was still substantially larger than the second-fastest growing region – Dallas – at 5.82% and Fort Worth, the third fastest growing region at 5.02%. The San Antonio economy grew 2.87% in December – the slowest among the major metropolitan regions and below the growth rate across the state of 5.08% and the U.S. at 4.52%.
The large disparities in the growth of the Austin economy relative to San Antonio, and the other major metropolitan economies in Texas for that matter, is worth exploring, and I will have a post on that soon. For now, I want to focus on San Antonio.
Chart 3 shows the year-over-year employment growth by month across broadly-defined industries from January 2019 through December 2021 for San Antonio. As expected, the hospitality industry took the largest dive during the lock down followed by the professional services industry. These two industries have also had the largest immediate recoveries, along with the other services industry.
Chart 4 and Table 1 show the employment growth by industry from the depth of the pandemic-induced recession in April 2020 to a year later in April 2021, i.e., from trough to peak, and then for the remainder of 2021. It needs to be kept in mind that these are similar lengths of time, but it is clear from these numbers that the growth rates across almost all of the industries in San Antonio have slowed considerably. The manufacturing, construction and mining, and education and health industries have seen their growth basically stall or even turn slightly negative in the last three quarters of 2021. The one exception is the hospitality industry that not surprisingly continues to experience growth far above average.
Table 2 compares employment growth in San Antonio over its history leading up to the pandemic (Jan. 1991-Dec. 2019) to the growth rates across industries over the past year. Overall employment growth in 2021 was 2.87%, a bit above the historical average of 2.37% growth. Five of the ten industries – manufacturing; trade transportation, and utilities (TTU); professional services; hospitality; and other services – continued to grow at above average rates in 2021. Not too surprisingly, the hospitality industry continues to lead the growth with a rate of 10.87% in 2021 – far above the industry’s historical average. Only two industries experienced declining growth in 2021 – construction and mining and information. As shown in Chart 3, the declining growth in the information industry is a regression back to the mean based on recent history. Not to give away too much of the punch line for my next post, but this explains, in part, the difference in growth rates between Austin and San Antonio.
I expect these overall slowing trends in employment growth to continue through 2022 in San Antonio. Some of this is just going to be a regression back to the mean from the large growth rates as the economy recovered from the pandemic-induced recession. The structure of the San Antonio economy is an additional reason, and the potential effects of growth in the global and national economies will also play a role, as discussed below.
Similar to the pattern in the other major metropolitan Texas economies and across the state and U.S, the unemployment rate in San Antonio has steadily declined after the precipitous fall following the re-opening of the economy ending 2021 at a rate of 4.2% (see Chart 5). As shown in Chart 6, San Antonio had one of the lowest unemployment rates among the major metropolitan economies in Texas before the pandemic at 3.0%. However, San Antonio experienced one of the largest surges in its unemployment as it climbed to 14.1% in April 2020 at the depth of the recession, but as noted, unemployment has been consistently declining and is similar to the rate in Dallas (4.1%) and Fort Worth (4.2%). The unemployment rate in San Antonio is also lower than the statewide rate at 5.0%, but it is a bit higher than the U.S. unemployment rate at 3.9%. Compared to San Antonio, the unemployment rate in Austin was 0.9 percentage point lower at the end of 2021 at 3.3%. The strong economic growth since April 2020 has surely been the main driver pushing unemployment rates down, but it should be kept in mind that at least part of this decline may be due to the decline in the labor force participation rate due to the Great Resignation phenomenon. In fact, while the labor force participation has been increasing, it is still below the pre-pandemic rate of 63.4% in February 2020 for the U.S.
These structural changes in the labor market are one of the risk factors to this forecast. I can see these changes potentially having both positive and negative effects on economic growth. If the labor market adjusts to these changes fairly quickly and workers fill the jobs at higher pay and with enhanced benefits, this could serve as a boost to overall economic growth. However, if the current trend continues for an extended period of time, this could continue to exacerbate the shortages in many markets and serve to dampen economic growth. These adjustments in the labor market may be forestalled in industries where there is a relative paucity of benefits, such as paid sick leave. If the shortages causing the rapid increase in the inflation rate do not diminish in the near future, the persistent inflation at relatively high rates will also likely be a deterrent to growth in and of itself. In response to this, the Federal Reserve has sent strong signals that it will most likely be raising interest rates several times this year, which will also serve to slow the economy some. There could also be bubbles in many asset markets, such as the stock and housing markets, and if one or more of those bubbles burst, they might also cause the economy to pause a bit, even if it does not push it into a recession. The strong economic growth was, at least in part, driven by the federal government stimulus, and with that coming to an end, consumer spending is likely to move back into a more typical pattern over time causing a moderation in U.S. economic growth. It is also likely that growth in the global economy will also slow this year because of similar trends, and the economic effects of the war in Ukraine may also slow global economic growth a bit. Overall, it seems these various factors combined with the structure of the San Antonio will mean the local economy will continue to grow fairly strongly in 2022 but at a slower rate than in 2021.
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.