Urban Unemployment: The Fed’s Blind Spot

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Urban Unemployment: The Fed’s Blind Spot

Two Data items today:

#1: The latest state-level US unemployment data shows American joblessness continues to be heavily concentrated in a handful of geographic regions:

  • 33 states have unemployment levels below June’s national reading of 5.9 percent.
  • 11 states show jobless levels below 4 percent, typically considered full employment. The range here goes from 2.5 pct (Nebraska) to 3.9 pct (Wisconsin).
  • 14 states have unemployment rates between 4 and 5 percent. Four are at 4 percent (Georgia, Iowa, Minnesota, and North Dakota). Two (Massachusetts and Tennessee) are at 4.9 percent, the high end of this band.
  • 17 states are between 5 and 7 percent. At the low end of this bracket are Florida and Michigan (each at 5 pct) and Pennsylvania is at the high end at 6.9 pct.
  • Eight states still show +7 percent unemployment, including New York (7.7 pct), California (7.3 pct) and Illinois (7.2 pct). Also in this group: Connecticut (7.9 pct) and New Jersey (7.3 pct).

We also have the non-seasonally adjusted June 2021 unemployment data for America’s three largest cities:

  • New York City: 10.1 percent last month, up from 9.9 pct in May 2021, the first uptick since January 2021.
  • Los Angeles: 10.5 percent last month, up from 10.2 pct in May and the first uptick since December 2020.
  • Chicago: 9.2 percent last month, up from 7.9 percent in May and the highest levels of 2021.

Takeaway (1): 13.4 percent of America’s unemployed live in 3 cities which only make up 4.6 percent of the population, which says joblessness is heavily concentrated in urban areas. Moreover, as the June data for NYC, LA and Chicago clearly shows, the trend in urban unemployment is moving in the wrong direction. This helps explain why June’s national 5.9 percent unemployment rate was slightly higher than May’s 5.8 percent.

Takeaway (2): if the Fed has a blind spot in terms of its interest rate policies, this is it. We live and work in New York City, right in the heart of midtown Manhattan. We can tell you that the local economy here is still nowhere near back to normal, and it has nothing to do with interest rates. Office buildings are still largely empty due to work-from-home. Tourism is coming back slowly, although the foreign component is still very light. Broadway is still largely closed. We suspect LA and Chicago face many of the same challenges. In the meantime, the rest of the country is doing much better.

New Yorkers like to think Gotham is the center of the world, but (sadly) it is also a center for US unemployment at present, along with other major American urban areas. The discrepancies between these regions and the rest of the US are large enough to skew the unemployment data the Fed uses to make policy. If urban joblessness remains a problem through to 2022 – and that’s likely – it could mislead the Federal Reserve into thinking rates should stay lower for longer than would be prudent.

#2: Two points about Friday’s US June Retail Sales report:

The beat to expectations (+0.6 pct versus -0.4 pct) came primarily from consumer spending at “Food services and drinking place”, a.k.a. restaurants and bars. This was up 2.3 percent from May and is a much larger category ($71 bn last month) than other areas which saw growth last month such as Clothing ($25 bn) or Health and Personal Care ($32 bn).

As this chart of category spending back to 2018 shows, Americans are just recently getting back into the swing of leaving the house for a meal or drinks with friends. It took until May 2021 to see new highs for monthly spending. June was slightly better.

Takeaway: US “retail sales” include important consumer spending categories like dining/drinking outside the home that still have room to grow. As Jessica has been outlining in recent reports, Americans are coming out of the pandemic differently than was expected earlier this year. The most notable difference is a preference for socializing either at- or close to-home rather than travel. That skews the measurement of their spending patterns, and the Retail Sales report captures the beneficiaries (bars and restaurants) but not categories like hotels or airplane tickets. Bottom line: we expect retail sales, as measured by the Census Bureau report, to remain strong for several more months.

The other point of interest in the Retail Sales report is American ecommerce’s percentage of total applicable US consumer spending. We calculate this ratio using “nonstore retail” sales divided by total sales excluding car dealers and gas stations.

As this chart shows, ecommerce accounted for 20.0 percent of applicable consumer spending last month, up from 17.2 percent in January 2020 but down from the April 2020 peak of 24.2 pct. That 20.0 percent current ratio is just about even with the average of pre- and peak-ecommerce (20.8 pct) and holding steady over the last 2 months.

Takeaway: US ecommerce is holding on to roughly half its pandemic share gains, or 3 points of market share, even as physical stores have largely reopened. This shows the behavioral changes of the last 18 months are sticking, a positive for Amazon and other ecommerce companies going into Holiday 2021.

Sources:

US State Level Unemployment: https://www.bls.gov/web/laus/laumstrk.htm