Commerce Lexington

Throughout the economic crisis, which some have taken to calling “The Great Recession,” interest in things such as monthly unemployment figures, obtuse analysis by economic number crunchers, and complicated PowerPoint charts has been at an all time high. Though the recession seems to be over, attendance at the recent 21st annual Economic Outlook Conference continued this trend of economic excitement. The always-engaging speakers presented on a variety of topics, including tax reform and monetary policy, but the one that will probably garner the majority of interest was the outlook for Kentucky’s economy in 2010.

Presented by Dr. Ken Troske, University of Kentucky Sturgill Professor of Economics and Director, Center for Business and Economic Research, the overview wasn’t nearly as gloomy as one year ago. To quote Dickens, “Marley was dead: to begin with. There is no doubt whatever about that.” Or at least the recession is dead, and everyone on the panel of experts was in agreement that, economically speaking, we are in the recovery phase. Unfortunately, during the recovery phase, unemployment can still be quite high and output growth can still be minimal.

As we start to look back and review some of the data from last year’s recession, a few things stand out and were noted by most, if not all, of the presenters. First, Kentucky was hit pretty hard. Our GDP declined more and our unemployment as a commonwealth is higher than the rest of the country. Second, manufacturing and communities that rely heavily on manufacturing have been hit extra hard. Kentucky has lost close to 50,000 manufacturing jobs since January 2008, which is 17% of the total manufacturing industry in our commonwealth. This doesn’t necessarily mean that all of our manufacturing is leaving Kentucky, just that a lot of companies may also not be employing nearly as many people as they used to.

The third concept that came up again and again was how well Lexington and its metro area is doing compared to the Louisville and Cincinnati/Northern KY metro areas. Not only has Lexington had lower unemployment between these three metros, it also had the lowest decline in Metro GDP, the best score on the Federal Housing Finance Agency’s Housing Price Index, and the best retention of manufacturing jobs. In short, if you had to weather the recession in one of three places in Kentucky’s Golden Triangle, Lexington was the place to be. Dr. Troske mentions in his report that, “while the growth in the Lexington area has slowed recently, the Lexington economy continued to grow throughout 2008 and appears to be the most dynamic of the three regions.”

So what is in store for 2010?

High unemployment. The fact is that unemployment is one of the most persistent effects of a recession and it takes a great deal of growth to help start pushing that number down. Even in the recovery phase, employers have a significant number of people who still aren’t working at full capacity. Getting these workers up to full capacity is a positive thing, but won’t be reflected in the unemployment rate, as they are already employed. Further still, firms that have learned how to get by with fewer employees will not be in a rush to hire new people. Eventually, however, employment will grow as the economy grows.

Overall, Dr. Troske is pessimistic about Kentucky’s economy in 2010. Persistent unemployment and slow growth won’t have the feel of a strong recovery for many people all over the commonwealth. However, my opinion is that places and firms that have positioned themselves properly throughout the chaos will be in a position to take advantage of the growing economy. My personal belief is that Lexington will lead the charge for Kentucky in this regard due to its diverse economy and resilient manufacturing sector. The problems facing the commonwealth of Kentucky and the nation as a whole will continue to affect the Lexington economy, but I believe that Lexington has the pieces in place to be a leader in returning our economy to its normal vibrancy.

For the full report from CBER, visit their website.

This has been a year of firsts for a lot of individuals in the business community. Those of us on the younger side of life have certainly never seen an economic collapse like this one and even the older population will probably struggle to remember anything comparable this side of the Great Depression. As I tracked the numbers during the start of the recession late last year, I had a cautious optimism that Lexington wouldn’t be affected as badly as the rest of the state or the country. I don’t think I’m going out on a limb in saying that the recession didn’t stay away from Lexington entirely, but there are also some bright spots that have made themselves apparent as the year has progressed.

Although I’m a couple months shy of having a complete data set for 2009, the first ten months should be enough to paint a good picture for Lexington. I’m going to focus on three specific data sources: residential unemployment, establishment employment, and construction. Coincidentally, these also happen to be three of the best monthly sources of readily available data to help us understand what is going on around Lexington in numerical, as opposed to anecdotal, terms.

I’ll start with one of my favorite discussion points, residential unemployment. It is over-publicized and often misunderstood, but residential unemployment does provide us with a good, monthly indicator of the workforce for a given geographical area – in this case, Fayette County. As a reminder, this is a monthly survey of the labor force. In essence, you have to be employed or unemployed and looking for work to be counted as part of the labor force. The unemployment rate is simply the number of unemployed in the labor force divided by the total labor force.

(Source: Kentucky Office of Employment and Training)

As you can see in the chart above, Lexington is trending about 3% to 4% above our normal unemployment rates in this decade. Another thing that is apparent from the chart above is that we are not alone. Both Kentucky and the United States as a whole are suffering from larger than normal unemployment rates in 2009. The key to remember here is that although Lexington’s unemployment rates are only loosely correlated with the United States’, they are highly correlated with the state of Kentucky’s. Part of the reason for this is the movement of the labor force. Just because you live in Lexington doesn’t necessarily mean you work in Lexington and vice versa. It is also not uncommon for large companies with a presence in Lexington to have offices in Louisville, Northern Kentucky, or a variety of other areas in Kentucky.

The bright spot of all this rampant unemployment in the United States in 2009 is that Lexington emerged as the least affected of all 120 of Kentucky’s counties. To be sure, times have been rough for a lot of people and businesses in Lexington. However, my personal opinion is that in times of national economic malaise, survival can be considered a small dose of victory.

Measuring unemployment for the residents of Fayette County is a blunt tool because of Lexington’s diverse economy. We know that Lexington was affected by the recession in 2009, but what industries took the largest hit? Thankfully, there is also data on the number of employed persons by industry for our metropolitan area.

(Source: Kentucky Office of Employment and Training)

As you can see, manufacturing has been hit the hardest in a direct comparison from a year ago. Because these data come from our entire metro area, and not just Lexington, you can see the effect of the variety of manufacturers in the automotive industry that have closed or experienced mass layoffs over the past year. Also hit hard is the trade, transportation, and utilities industry. This industry segment includes retail trade, which corresponds with a large number of retail closings in and around Lexington as well as a general slowdown in consumer spending that is evident throughout the United States.

Though still down 5% from this time last year, the professional and business services sector showed signs of growing employment after being down 10% on average for the first nine months of the year. My hope is that this trend will continue. In a very rough sense, it appears the traditional “blue collar” industries were much more vulnerable during 2009.

One of these industries is construction. The last of my reliable monthly data sets is building permits. You can see in the table below that building permits in Lexington peaked in 2007 and aren’t really significantly changed from 2008 to 2009.

(Source: Lexington-Fayette Urban County Government)

Single family home permits are essentially unchanged at this point compared to 2008. The real difference is in the construction costs. This tells me that the homes that were built in 2009 were considerably less expensive than in 2008 and especially compared to 2007. This also means that despite the quantity of homes being built, they are contributing significantly less to the local economy.

Overall, 2009 has been challenging on many fronts for the local economy and the business community. Most signs of optimism have been tempered by the fact that success in 2009 can only be measured against what could have been. I still stand by Lexington’s diverse economy and educated workforce for hope that 2010 will bring a return to growth and prosperity.

So if you read my previous post, you were witness to a little careless analysis on my part regarding the reasons for the larger than average drop in the unemployment rate between August and September. My theory was that due to to a larger than average drop in the labor force, there was a possibility that discouraged workers might have been a real factor in the drop in the unemployment rate. This would make the drop a little artificial – an artifact of the methodology and not necessarily a good sign.

While I try very hard not to explicitly link data to real-world conditions (correlation does not imply causation), it is still sloppy because I was only looking at the denominator in the equation, not the numerator. If there were simply a drop in the labor force, it would have made unemployment go up, not down. Let’s take a little deeper look at what constitutes the unemployment rate.

The unemployment number reported monthly is from the LAUS or Local Area Unemployment Statistics. It is an offshoot of the CPS or Current Population Survey. The CPS essentially functions to place people into one of three groups on a monthly basis. So for the civilian (i.e., non-military) non-institutionalized (i.e., non-incarcerated/committed) population, you can be either employed, unemployed, or not in the labor force.

Employed means that during the week that includes the 12th day of the month being surveyed, you did any work as a paid employee, worked in your own business or on your farm, or worked 15 hours or more as an unpaid worker in a family business. You also qualify as being employed if you were temporarily absent because of vacation, illness, bad weather, childcare problems, maternity or paternity leave, labor-management dispute job training, or other family or personal reasons, whether or not you were paid for the time off or were seeking other jobs. Oh, and if you have more than one job, you only have to be employed at one of them to count.

Many people assume that the remainder of people who aren’t employed are classified as unemployed. But to be counted as unemployed, you have to, of course, not be employed, not be on disability, and you have to have been specifically looking for work at some point during previous month. For clarification, if you have been laid off and are awaiting a recall to that job, you don’t have to look for work in order to be counted in the unemployed group. If you think about it, these conditions eliminate kids (who can’t look for work legally), a lot of older people (who aren’t looking for work), and a great deal of students (specifically, the ones that aren’t looking for work or employed while in school).

If you are neither employed nor unemployed according to the above definitions, then you just don’t exist in the unemployment rate. It is that simple. The number of employed people gets added to the number of people who are unemployed. This sum is the total labor force. The unemployment rate is the simple division of the number of unemployed by the total labor force.

So the kicker is: if someone drops out of the unemployed group for anything other than getting a job, then they will also drop out of the labor force total as well. This has the effect of taking one person out of the numerator and denominator of the unemployment rate calculation, which has no discernable effect on the first few decimal places unless it is seriously happening en masse.

So, for example, when the unemployment rate in Fayette County dropped from 8.2% in August to 7.7% in September this year, we can assume that the drop was partially seasonal (it is, Fayette County has averaged a .2% drop at this time every year in this decade), but also that any other positive effects could actually be more people moving from the unemployed to the employed category and not just discouraged workers. As always, one month is never enough of a time period to evaluate the economy as a whole, but I have my fingers crossed for more positive news in the future.

A bit of a respite in unemployment terms. The official unemployment rate for Fayette County dropped .5% to 7.7%. This is along seasonal change lines (there is often a drop between Aug and Sept) but it was also a bit more than expected. This means two things to me: one, employment following seasonal trends is a good thing. When employment is following seasonal trends, it often means that it there are no other major forces acting on it. Two, if I expected unemployment to drop around .2% and it dropped by .5%, that gives me hope that we may have eliminated some of that excess unemployment that we have racked up during the recession. Here is a visual view of what I am talking about:

From February when we were about 3% above normal, to June/July/August when we were about 4% above normal, Lexington still managed to follow it’s normal seasonal trends. From the averages of the rest of the years in this decade, one would expect September unemployment to drop around .2%. So it is definitely good news that it dropped farther than that.

So you may be asking yourself, “Self, what about the labor force? Is this drop in unemployment due to a large number of people dropping out of the labor force (i.e., no longer looking for work)?”

Well I’m glad you asked, because I did the same thing with the labor force that I did with the unemployment rate – with one caveat. Because Lexington is a population growth city, the labor force naturally grows as well. So I had to normalize it by using the average percent change instead of the raw number. Here is what I found:

It does look like that a contraction in the labor force may have played a role in the greater than anticipated drop in the unemployment rate. The average percent change from August to September is a positive .08%, whereas this year, it was a negative .26%. I still stand by my statement that a drop in the unemployment rate is a good thing. However, like most things, it has to be taken with the grain of salt that the labor force contracted. I’ll continue to keep an eye on the trends and keep my fingers crossed that our nagging unemployment problem will eventually subside.

August unemployment figures (released a couple weeks ago) show a continued seasonal decline in the unemployment rate. Lexington dropped from 8.3% to 8.2% and the region from 9.3% to 9.0%. See picture below:

Probably the most interesting parts of the above chart are the July spikes in unemployment returning to normal. Still not entirely sure what they represent, but something happened in Scott County in late summer that I really would like to have some more information on. The funny thing is that despite the spikes from a few counties, overall, unemployment for the region was relatively unaffected overall. This would be due to the 800lb gorilla in the room, Lexington. With just under half of the labor force residing in Fayette County, large changes in Lexington’s unemployment will have a much more pronounced effect on the region than the smaller counties. Here is what that looks like visually for August:

A more comprehensive breakdown for the statistical table geeks like me looks like this:

As you can see, there is a pull between Fayette and Woodford counties and the rest of the region’s counties. Fayette and Woodford are contributing more labor force than unemployed persons, the rest of the counties, the opposite.

Big word of caution here: the program that these statistics come from, the Local Area Unemployment Survey (LAUS), measures unemployment based on residence, not place of work. Many of the unemployed in the surrounding counties could have lost a job in Lexington and vice-versa. I’ll try to dig up some way to flesh that out in a later post.

Time for the monthly unemployment update. Good news in July as Lexington saw their unemployment drop from 8.5% to 8.2%. Our larger Bluegrass Alliance area saw its unemployment drop from an adjusted 9.3% to 9.2%. Unfortunately this is a bad combination for our surrounding counties. When Fayette County’s unemployment drops significantly and the larger area (which includes Lexington) doesn’t drop as swiftly, it means that the other counties are probably experiencing rising unemployment. As you can see from the graphic below, that is exactly the case.

The arrows point to the three counties (Bourbon, Scott, and Woodford) where unemployment rose instead of dropped in July. While the spikes (Woodford and Scott) can be scary, their number of unemployed really didn’t change by more than a few hundred, probably due to manufacturing closures that were announced earlier in the year actually taking affect. We’ll have to keep an eye on these counties and see if the unemployment has continued to grow or leveled off.

June’s unemployment numbers were released last week to the tune of 8.5% in Fayette County and 9.2% in our Bluegrass Alliance region. This compares with 7.7% and 8.6% in May respectively. The trends for all of the areas we monitor are below. You can see that Fayette County is basically following local, state, and national trends. NKY is the one oddball here that refuses to go along with everyone else. I would love to see some analysis on their region’s economy.

The uptick in unemployment can be disconcerting, but as always, it is good to put the changes from month to month in historical and seasonal context. The actual change of .8% from May to June in Fayette County is higher than any other year in this decade, however, the magnitude of the change is still high, but not unheard of, in the past few years.

The volatility of employment in the current economy can be hard to observe some months. Even when an economy seems to be either “out of the woods” or on the upswing, unemployment can be persistent. Unfortunately, the data needed to make really solid assumptions on the underlying problems is rarely available in as timely of a manner as the LAUS (Local Area Unemployment Statistics) numbers are each month. As I’ve said before, we’ll know a great deal more about the most recent recession in a couple of years.

Here is how the unemployment numbers look after the most recent release of April. I took out the “Lexington MSA” line and replaced it with a more representative “Bluegrass Alliance” line. The Bluegrass Alliance includes all the Lexington MSA counties (Bourbon, Clark, Fayette, Jessamine, Scott, and Woodford) and adds both Franklin and Madison counties. The most surprising thing to me is that Northern Kentucky (Boone, Kenton, and Campbell counties) didn’t have the large dip in unemployment that is typical in April. Hopefully this is not indicative of any lingering economic issues.

I’ve looked a little deeper into April’s unemployment numbers. As with every monthly unemployment figure, the context is extremely important. Lexington’s April unemployment rate was 6.9%, a .5% decline from March. However, unemployment typically is at its lowest level of the year in April, so a decline isn’t all that surprising (the reason for April’s low unemployment numbers hopefully will be the subject of another post on another day).

Below, I’ve plotted every decline in the unemployment rate from March to April since 2000. As a side note, every drop of .1% in the unemployment rate equals about 150 jobs for Lexington and 300 jobs for the Bluegrass Alliance.

As you can see, the drop in unemployment is normal for this time of year, although some years it drops more than others. My main takeaway from all of this analysis is that we may be at the start of getting back to our normal employment trends. With the wild swings and record numbers of the past six months, I’ll take normal any day. It is one encouraging sign that things hopefully won’t get any worse.

We still have a solid chunk of unemployed persons in our labor force to help and unemployment can be very persistent. Economic downturns often help companies find the bare minimum number of employees they can get by with on a day to day basis. It will take a marked increase in activity for some of these jobs to be rehired.

Just a quick post to let you know that April’s Unemployment figures were released today. Lexington-Fayette County is still the lowest in the state (tied with Woodford County) at 6.9%. This is down .5% from February and March’s levels of 7.4%.

Our eight-county Bluegrass Alliance is at 7.8%, down from 8.4% in March.

April typically has the lowest unemployment of the year according to seasonal trends, so it is good news that unemployment rates dropped, but not unexpected. I’ll get more in depth on this issue with a longer post tomorrow.

Employment figures were released on Tuesday and Fayette County still has the lowest unemployment rate of any other county in Kentucky, holding steady at 7.4%. I’ll interpret this as good news, even though Fayette County usually sees a slight decrease in unemployment from February to March. The true test will be in April, which is a typical trough in the normal seasonal trends (see April 2008 below).

There is no getting around the fact, however, that Fayette County’s unemployment rate is higher than at any point in the past two decades. Each percentage point of unemployment means 1,500 people in the labor force are unemployed. At 7.4%, this equates out to around 11,000 people. Regardless, Lexington is persistently better than Louisville, Northern Kentucky, the state of Kentucky, and the US as a whole.