With capital markets a bit calmer today, we’ll update a few important macro topics we have been tracking in recent months.
#1: Regional trends in US unemployment. While the national level of joblessness is now 5.2 percent as of August, the state-level differences remain quite wide:
- 14 states have unemployment rates below 4 percent, typically considered “full employment”: Nebraska, Utah, Idaho, South Dakota, New Hampshire, Vermont, Alabama, Oklahoma, Georgia, Montana, North Dakota, Kansas, Minnesota, and Wisconsin.
- A further 16 states show unemployment rates between 4 and 5 percent, or almost full employment: Missouri, Virginia, Indiana, Iowa, Arkansas, South Carolina, Kentucky, North Carolina, Tennessee, Michigan, West Virginia, Maine, Oregon, Wyoming, Florida, and Massachusetts.
- Of the remaining 20 states, 14 have unemployment rates between 5 and 7 percent (still elevated): Washington, Delaware, Ohio, Rhode Island, Colorado, Maryland, Texas, Mississippi, Arizona, Louisiana, Alaska, Pennsylvania, Hawaii and Illinois.
- The 6 states with still troublesomely high unemployment (+7 percent): Connecticut (7.2 pct), New Jersey (7.2), New Mexico (7.2), New York (7.4), California (7.5) and Nevada (7.7).
The upshot here is that American unemployment remains clustered largely in the Northeast (NY, NJ, CT) and California, two densely populated areas of the country. Urban unemployment is at the center of the problem:
- New York City’s unemployment rate in August was 10.2 percent. While that’s the lowest reading of 2021 YTD, it is still almost 3x pre-pandemic levels of 3.8 percent.
- Los Angeles’ August unemployment rate was 9.7 percent, also more than double its 2019 rate of 4.2 percent.
Takeaway: the next leg of the recovery in US labor markets must, mathematically, come from reemployment in large cities like New York and Los Angeles. There are supply and demand components that suggest this will occur over the next 3-6 months. On the supply side, enhanced unemployment benefits have expired; this should increase the pool of available labor. On the demand side, post-summer vacation return-to-office trends as well as incremental tourism (especially in NYC) should increase the need for marginal labor.
#2: “Return to office” trends are therefore a critical component of sparking incremental urban employment, as workers go back to at least partial in-office attendance and drive demand for personal services and leisure/hospitality.
Here is the latest urban office occupancy data from corporate security ID/pass card company Kastle Systems for its 10 largest markets. On the plus side, occupancy has rebounded post-Labor Day, to 33.6 percent from lower levels in the prior 3 weeks. This was led by increasing levels in New York City, up to 28.1 pct last week. On the downside, not one market shown on the right side of this data panel has office occupancy of even 50 percent.
The other chart Kastle Systems publishes weekly, of US urban office occupancy since March 2020, vividly shows just how far we have to go. The red line in the chart below is the one to focus on – the Top 10 Average. From +90 percent pre-pandemic, the best we’ve seen since is 32 percent in early July 2021. Concerns over the delta variant hit right after, delaying return-to-office initiatives.
Takeaway: work from home remains an important feature of the US labor market, with both economic pros and cons. The positives include lower commuting costs and related expenses like childcare, which certainly helps discretionary consumer spending. The primary negative goes back to Point #1: until office occupancy gets closer – much closer – to pre-pandemic norms it is hard to see urban employment fully recovering.
#3: US used vehicle prices have been a key driver of CPI inflation for much of this year, and after a brief respite they’ve started to climb again. This sounds like an “inside baseball” discussion fit only for econ-nerds, but it is not. Rather, it is a practical example of the difficulties in labeling inflation pressures as either “transitory” or “permanent”.
The latest Manheim Used Vehicle Value Index (link below) from the start of 2020 through mid-September tells the story:
- Used car prices began 2020 on reasonably good footing, showing 4.6 percent higher levels the year before – a normal level.
- They then declined by 11.2 percent through April 2020, as lockdowns limited demand and, to a lesser degree, supply.
- Once the American economy started to reopen, used car values recovered strongly, ending the year 28.1 percent higher than April levels.
- As the global chip shortage hit new vehicle production, used car prices took another leg higher in 2021, rising by 24.5 pct from January to May.
- Summer 2021 saw used car prices fall by 4.2 pct from May – August.
- But September 2021’s mid-month reading shows them rising by 3.5 percent.
Manheim’s own discussion of this remarkable September increase for used vehicle prices is uniformly positive on near term trends and it’s hard not to conclude that these will see fresh highs before the year is out.
Takeaway: as long as 1) the US economy remains strong and 2) new vehicle production is hurt by chip shortages, used car prices will continue to rise. Will they do so forever? Of course not, and by that definition this is “transitory” inflation. Will they remain high into 2022? That seems all but certain, and so they will see the 2-year anniversary of their April 2020 lows while still at/near record levels. That will make them feel quasi-permanent and given their effect on CPI readings that’s important to understand.
Kastle Systems office occupancy: https://www.kastle.com/safety-wellness/getting-america-back-to-work/
Manheim Used Vehicle Index: https://publish.manheim.com/content/publish-manheim-com/en/services/consulting/used-vehicle-value-index