If the economic recovery were likened to a college basketball game, we would now be in the early to mid-stages of the second half. With the arrival of mid-June, the nation completed its sixth year of economic recovery and has entered its seventh.
Once upon a time, people would have been right to fret that the end of the recovery was fast approaching. The average post-World War II recovery has lasted about 58 months (or slightly more than 4.5 years). However, the previous three economic recoveries lasted an average of 95 months (or nearly eight years). The average duration of economic expansions between 1860 and 1945 was just 26 months, so people might want to stop grumbling about the current one.
It took us a long time to arrive at the mid-phase of the recovery. This is typically the lengthiest phase of recovery and ultimate gives way to the late phase when the economy overheats. Already, signs of overheating are emerging, particularly with respect to emerging skills shortages in key industry categories, like trucking and construction.
Despite that trend, average hourly earnings are up only 2% over the past year nationally, well below the Federal Reserve’s national goal of 3.5%. The nation added another 223,000 net new jobs in June and has added nearly 3 million positions during the past year, but that and increases in minimum wages in certain parts of the nation have not been enough to trigger rapid overall wage growth.
Eventually, the Federal Reserve will have to respond to emerging inflationary pressures. Many analysts continue to believe that the Federal Reserve will begin to raise short-term interest rates later this year, in part because of Janet Yellen’s most recent testimony to Congress. Such a move would be in response not only to any existing concerns regarding near-term inflation, but also in response to fears pertaining to the production of additional capital market distortions.
Though unemployment is now low enough to justify higher rates, the nation’s labor force participation rate stands at a multi-decade low. In June, the nation’s labor force participation rate dipped to 62.6%, the lowest rate since October 1977. While much of this is attributable to retiring Baby Boomers, according to Bureau of Labor Statistics data, one in five (22%) of those who left the labor force in June were between 25 and 34 years old, a sign of discouragement among younger workers, many of whom recently graduated from school. Interestingly, 93% (402,000) of all dropouts were men.
Blossomed in Spring
Like much of the balance of the nation, Maryland struggled through the first three months of 2015. According to the United States Bureau of Labor Statistics, Free State employment fell by 4,500 workers during the year’s first three months.
What a difference two months can make. Maryland collectively added 29,800 jobs in April and May, the best two months of job growth in more than five years. Over the past year (through May), Maryland ranked 20th in percentage job growth among the 50 U.S. states and the District of Columbia, adding jobs at a 1.8% clip, which translates into 46,800 net new jobs. That represents the best year-over-year performance since March 2005–March 2006, when Maryland added 55,200 jobs (with one weather-induced exception in 2011). The state’s unemployment rate in May was 5.3%, and would have been lower if not for the labor market entry of 12,934 people that month.
The state’s top four growth segments during the past year have been education and health services (with 12,200 new jobs, up 2.8%), leisure and hospitality (11,400, 4.4%), professional and business services (7,300, 1.7%) and construction (6,800, 4.5%).
While many of the jobs created have been entry level, health, education, professional services and construction are largely oriented around middle-income positions and job quality appears to be improving.
Non-farm employment in the Baltimore region expanded a bit more quickly (1.9%). The most net new jobs were generated in leisure and hospitality (7,600, 5.6%), educational/health services (6,300 jobs, 2.5%), trade, transportation and utilities (3,100, 1.3%), and government (3,000; 1.3%). The May 2015 data represented the first reading of the local labor market since the worst of the unrest in Baltimore City in late April.
Inevitably, this pace of job growth will soften. Still, leading indicators remain consistent with continued strong performance. According to the Federal Reserve Bank of Richmond’s Maryland Business survey, the general business activity index remained at 31 in June, unchanged from May. The employment index registered 25 in June, still positive though a bit lower than the previous month.
In addition, surveyed employers are increasingly concerned by skills shortages. That’s an indication that wage growth is poised to accelerate.
The Corridor: Back to Life
For several years, the Baltimore-Washington Corridor economy languished due to the impacts of the 2007–09 recession and the passage of the Budget Control Act in 2011. Job growth became unusually soft, home prices stagnated and office absorption turned negative all too frequently.
However, the tide has turned. At 4.2%, Howard and Montgomery counties boast Maryland’s lowest unemployment rate. In May, Howard County’s labor force expanded by 2,031 people, the largest monthly increase since January 1999. Anne Arundel’s labor force expanded by 3,341 in May, that county’s largest monthly increase since June 2007.
Each of the Corridor’s counties have experienced strong net job growth on a year-over-year basis, but Prince George’s County’s performance has been particularly impressive. Between May 2014 and May 2015, the number of county residents that acquired positions on a net basis was 9,366, the largest increase of any Maryland county in absolute terms and third best in percentage terms.
Part of this is attributable to the rebound in economic activity in the Washington metropolitan area. Between May 2013 and May 2014, the region added just 21,000 net new jobs; during the subsequent 12-month period, the region added 57,000 net new jobs, led by education/health services, professional services, construction and a number of other industries.
While federal spending growth remains inconsistent, a growing number of Corridor companies are successfully transitioning away from dependence on agencies for business. This seems to be particularly true for cybersecurity firms and construction businesses.
With the broader U.S. economy still improving, the local housing market progressing and wealth effects associated with (still) high stock market valuations rippling through the region, the Corridor’s economic outlook has not been this bright in roughly a decade.
Anirban Basu is chairman and CEO of Baltimore-based Sage Policy Group. He can be contacted at 410-522-7243 and [email protected].