MainStreet Macro: The goods on goods

We all know by now that the labor market is tight. But it’s also fragmented, with different sectors responding differently to labor shortages and higher interest rates. As Main Street employers scout for workers, for example, big tech companies continue to announce big layoffs.

In other words, the labor market is not a one-note story. It’s a complex symphony of hiring and quitting played across industries, employer size, and geographies. Inflation and other macroeconomic drivers can vary the tone and timber of each orchestra member.

In advance of jobs week – ADP will release its private-payroll estimate Wednesday and the Bureau of Labor Statistics will publish new data Friday –  I thought we’d look at the labor market’s complexity.

One simple way to explore this complexity is to divide the economy between goods and services. This week and next, we’ll look at these two broad sectors and how they contribute to economic growth, inflation, and job creation.

The goods economy

This week we start with goods. This sector comprises three major areas — manufacturing, construction, and natural resources and mining. In all, the manufacture and processing of goods account for roughly 20 percent of the economy.

Last year, goods producers hit a soft patch, shrinking by 1.3 percent in the third quarter of 2022. The decline was led by construction, one of the most rate-sensitive sectors of the economy.

We won’t get data on the last four months of 2022 until March 30, but there are signs that goods producers are continuing to feel the pain of supply shortages and rising costs. A closely watched survey of manufacturers shows that sector output and hiring are continuing to contract even as supply pressures ease.

Homebuilding too, is signaling a contraction amid soaring mortgage rates. The cost of a 30-year, fixed-price home loan has gone from 3.76 percent a year ago to 6.65 percent today.

Yet even as the sector as a whole remains sluggish, the weight of inflation has lightened considerably.

The price of goods began climbing in the second half of 2020 due to supply logjams and a surge of consumer demand for both big- and small-ticket items. That inflation surged in 2021, but as supply chain disruptions eased and consumers redirected their spending to services, the trend reversed. The pace of inflation actually slowed in 2022.

After a measure of prices that producers received for final goods peaked in June 2022, rising a staggering 17.6 percent from year earlier, producer prices for goods have risen at a slower pace. In January, they were up 7.5 percent from year earlier.

Though goods prices are moderating, they’re still growing at a much stronger pace than before the pandemic, when they were almost flat.

Which brings us to the data of the week – jobs. Goods producers account for only about 16 percent of  private-sector employment. And manufacturing, construction, and natural resources and mining companies were less affected by the pandemic, which hit consumer-facing service industries much harder.

Moreover, goods producers benefited from a pandemic shift in consumer spending to more big-ticket items and away from restaurants, vacations, and other services.

So despite the headwinds from higher interest rates and labor shortages, goods producers added 711,000 jobs in 2022 according to the Bureau of Labor Statistics, a 4.1 percent increase from 2021.

My take

Economists tend to use a broad brush when speaking about the labor market. Yet, at its core, the labor market is merely a collection of big and small companies, government agencies, and individual workers.

It’s important to understand these individual players – how they react to adversity or behave in the face of change, and how they contribute to the economy as a whole.

The goods sector is small relative to the rest of the labor market, but it can have outsized importance to Main Street, as we saw during the pandemic. Goods producers were a big driver of price increases, but they continued to hire. Now they remain job creators, even in the face of the inflation they helped create.

Job headlines are important, but they don’t always tell the whole story.