Pace of Job Growth Remains Lackluster

by Anirban Basu 18. October 2011

Anirban BasuThis was supposed to be a decent year for job growth in Maryland.  With the nation’s economy now in recovery and adding jobs, positive base realignment effects, cyber-security, healthcare, higher education, the Port of Baltimore, BWI, retail and other industry drivers, expectations were probably higher coming into the year than at any point since 2007.

But the state’s job engine has generally sputtered.  According to the most recent data available from the Bureau of Labor Statistics, Maryland’s economy shed 2,500 jobs in August, a 0.1 percent drop from the previous month and only up 0.1 percent from one year prior.  That year-over-year performance ranks the state 43rd in terms of job growth.  During the same twelve-month period, the nation added 1.49 million jobs or 1.0 percent.

While the nation has outperformed Maryland along this dimension, data indicate that job growth has been softening nationally.  This may seem like a strange claim to make since the most recent employment report from the Bureau of Labor Statistics revealed that the nation added 103,000 nonfarm jobs in September, the best performance since July and better than August’s 57,000 net new jobs figure.

But dig into the data, and the message from September is not as clear.  The 103,000 figure includes roughly 45,000 Verizon workers who came back to work.  Strip out those jobs, and the September figure looks more like 58,000.  What’s more, those 45,000 information industry workers went missing from the August jobs data, which means that actual job creation in August was closer to 100,000.  However, approximately 22,000 State of Minnesota employees came back to work in August, meaning that the adjusted August figure is around 78,000.  Consequently, while many people are under the impression that job growth accelerated in September, it did not when one takes extraordinary items into account

What’s more, the pace of job growth continues to fall well short of what is needed to bring down the nation’s unemployment.  For several months, the nation’s leading measure of unemployment has been stuck at 9.1 percent and the nation still has roughly 6.6 million fewer jobs than it did when the recession began in December 2007.  The industries that have suffered the largest job losses include manufacturing, construction and distribution, all key industries in the Baltimore metropolitan area.

The employment look remains cloudy.  Financial markets swooned during the third quarter, perhaps implying further economic slowing in the months ahead.  Were that to occur, job growth would remain lackluster at best.

Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, Maryland. Mr. Basu is one of the Mid-Atlantic region’s most recognizable economists, in part because of his consulting work on behalf of numerous clients, including prominent developers, bankers, brokerage houses, energy suppliers and law firms. On behalf of government agencies and non-profit organizations, Mr. Basu has written several high-profile economic development strategies, including co-authoring Baltimore City’s economic growth strategy. His opinions do not necessarily reflect the opinions and beliefs of 1st Mariner Bank.

Is the Cost of Living and Inflation Higher in Washington-Baltimore Area?

by Anirban Basu 18. July 2011

The Difference between Inflation and Cost of Living

Inflation is defined as an increase or change in the general price level. Generally, inflation is viewed negatively since (all things being equal) an increase in prices reduces purchasing power. The cost of living can be understood as the general price level itself. In other words, a place that is terribly inexpensive to live in can be associated with high inflation, though if that high inflation persists, that place will not remain inexpensive. Conversely, an area that is expensive can be associated with low inflation.

  • Maryland is an Expensive Proposition

Data indicates that Maryland and the Washington-Baltimore area are associated with both a high cost of living and higher rates of inflation than national averages. For instance, 43 states were associated with a lower cost of living than Maryland during the final quarter of 2010 according to the Council for Community and Economic Research (Exhibit 1). Maryland’s overall cost of living is roughly 25 percent higher than the national average, housing is 69 percent more expensive and utility costs are 17 percent higher. Transportation and grocery costs are also higher in Maryland by 8 and 10 percent, respectively.

Exhibit 1. State Cost of Living Rankings, Fourth Quarter 2010
State Cost of Living 2010The recent housing downturn, which has been disproportionately felt on the coasts, has both reduced inflation and diminished the difference in cost of living with the balance of the nation more recently. Consumer prices excluding food and energy expanded 1.9 percent in 2009 in the Washington-Baltimore region and just 1.4 percent in 2010. According to the Federal Reserve Bank of Richmond, the average value of homes in Maryland has declined 21.4 percent since 2007. This has reduced the overall pace of inflation.

However, inflation ran at more than a 2 percent pace during the first three months of 2011 locally, in part a reflection of growing pricing power among area businesses. Between May 2010 and May 2011, core prices in the Washington-Baltimore area climbed 2.3 percent compared with 1.5 percent nationally.

Exhibit 2. Core CPI Growth by Select Metropolitan Area, 2000 v. 2010
]Bureau of Labor Statistic
Implications

Despite the recent and ongoing housing downturn, Maryland remains an expensive proposition. Like other Americans, Marylanders have had to deal with a host of rising costs, including food and energy prices.

Indeed, Moody’s Analytics cites high business costs as being one of Maryland’s biggest obstacles to recovery. Operating costs are higher in Maryland because businesses consume pricey energy and transportation. Moreover, the overall higher cost of living necessitates higher wages, which creates further operating cost disadvantages.

This may help explain Maryland’s lackluster job creation in recent months, which has significantly underperformed the nation. One of the questions for state and local policymakers is whether or not there are possible shifts in policy that would help reduce business operating costs without generating substantial harm to quality of life.

Maryland's Economy: There is Still Plenty of Reason for Concern, but the Reasons Have Changed

by Anirban Basu 15. April 2011

Focus Shifts from Growth to Inflation

Economy Now Enjoys Self-Sustaining Momentum

Coming into 2011, economists remained largely fixated on the inadequacy of demand for labor, housing, commercial real estate and other aspects of economic life. Economists have been busily pouring over reams of data regarding senior bank loan officer attitudes, consumer credit availability and other indicia of credit market thawing. The conventional wisdom has been that until banks begin lending more aggressively, the U.S. economy will continue to be lackluster and the recovery that began in mid-2009 will remain fragile.

With the first quarter now over, many of the principal economic concerns coming into the year have been largely addressed. For instance, demand is building. Retail sales are up 9.5 percent on a year-over-year basis through February. Overall consumer spending is up 2.5 percent with the purchase of durable goods up 11.9 percent on an inflation-adjusted basis. Adjusted for inflation, private nonresidential fixed investment was up 1.9 during the fourth quarter and 10.6 percent year-over-year.

Moody’s Economy.com presently predicts that consumption will expand 3.3 percent in 2011, with motor vehicle sales rising 13.6 percent. Fixed investment is predicted to rise nearly 9.6 percent this year, with investment in equipment up 10.3 percent.

Foreign demand has also been strong. Despite a sea of troubles ranging from Portugal to Japan and engulfing Tunisia, Egypt, Libya, Greece, Yemen and Pakistan, the world increasingly looks to America for output. That is very encouraging. Since January 2010, U.S. exports are up 6.9 percent on a seasonally adjusted basis and 18.9 percent on a not seasonally adjusted basis, with sales to China, India and Brazil up 17.3 percent, 42.2 percent and 7.4 percent, respectively.

The accompanying increase in production has led to the emergence of a new trend in America: employment growth in manufacturing. For six months running, the number of manufacturing jobs in America is up on a year-over-year basis, with March 2011 industry employment totals 196,000 jobs above the corresponding month one year prior.

Employment growth has generally been accelerating in America. Nonfarm payroll employment increased by 216,000 in March according to the Bureau of Labor Statistics (BLS) and the nation’s unemployment ticked down to 8.8 percent. BLS observed job gains professional and business services, health care, leisure and hospitality and mining. However, the number of long-term unemployed (those jobless for 27 weeks or more) totaled 6.1 million in March and their share of the unemployed increased from 43.9 percent to 45.5 percent over the course of the month.

All of this positive economic news has allowed equity markets to bounce higher. At the beginning of the year, the Dow Jones Industrial Average stood at 11,577. By the end of March, the Index stood at 12,320 and as of this writing has risen above 12,400. The S&P 500 is up 6.0 percent since the beginning of the year. That’s simply remarkable in light of the tragedies in Japan, sovereign debt issues in Europe, civil war in Libya and oil prices that are now above $110 a barrel.

Inflationary Pressures Have Been Building

For months, we have been suggesting that it is still too soon to tell whether or not inflation will become problematic. Indeed, recent core inflation data (all components except food and energy) indicate that inflation remains mild. Through February, core inflation was running at a 0.2 percent monthly rate and 1.1 percent annual rate in America despite increases in medical care expenses (up 0.4% for the month and 2.9 percent year-over-year).

That said, inflationary buzzards have begun to circle. There are a number of factors that collectively conspire to support the emerging view that at some point later this year or in 2012 the U.S. Federal Reserve will begin to find it necessary to constrain inflationary pressures by reducing money supply growth and increasing short-term rates.

While much of the recent focus has been upon food and energy prices, commodity prices generally have been marching higher. For instance, steel and iron producer prices are up 16.8 percent through February on a year-over-year basis. Gold now stands at $1,471 a troy ounce, up 27.9 percent from a year ago. Cotton prices recently set a record at $2.11 a pound. Certain non-commodity prices have also been drifting higher, including airline fares, which are up 12.3 percent year-over-year through February.

What’s more, import prices are also up with a growing number of nations reporting widening inflationary issues. In India, inflation is up 18.9 percent year-to-date through February. In China, the corresponding statistic is 10.0 percent. In Mexico, consumer prices are up 10.8 percent through March. Presumably, this inflation will continue to be exported to America in the form of higher priced clothing, food and household items.

Thus far, many prices have been constrained due to productivity gains and the inability of producers to pass along input price increases (including those associated with oil prices) to consumers. But with the economy steadily improving, consumers are likely to face rising prices for many goods and services, and that will ultimately prompt the Federal Reserve to begin to meaningfully chip away at the massive monetary accommodation it has been providing to the economy in the wake of the financial crisis that gripped us in September of 2008 and the accompanying Great Recession.

Implications for Investors

It has been wonderful to be exposed to equities over the past two years. The Dow Jones Industrial Average is up roughly 92 percent since its March 9, 2009 intraday low. The simple laws of gravity suggest that at some point, some of these gains will be returned. But the specter of inflation is now becoming more apparent, with the primary implication being that the current interest rate environment is about to shift. That would impact the multiple on corporate earnings and therefore stock prices.

Emerging inflationary pressures render bond investing particularly challenging. Even in the absence of inflationary pressures, bond market fluctuations have been unusually difficult to predict. Sovereign and municipal debt issues have unnerved many investors and yields have been drifting higher on various forms of debt. As of this writing, the yield on the 10-year U.S. Treasury stands at 3.59 percent, up 41.3 percent from early November 2010.

On top of that, commodities have enjoyed a remarkable run as well. It is unlikely that this can continue in conjunction with an ongoing equity market rally. To put it in the simplest terms, something has got to give. Therefore, while underlying positive economic momentum implies that substantial exposure to equities remains sensible as we approach mid-year 2011, investors should be thinking about quick response strategies to a potential market correction that could be triggered by bad news regarding core inflation.

Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, Maryland. Mr. Basu is one of the Mid-Atlantic region’s most recognizable economists, in part because of his consulting work on behalf of numerous clients, including prominent developers, bankers, brokerage houses, energy suppliers and law firms. On behalf of government agencies and non-profit organizations, Mr. Basu has written several high-profile economic development strategies, including co-authoring Baltimore City’s economic growth strategy. His opinions do not necessarily reflect the opinions and beliefs of 1st Mariner Bank.



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