Mixed signals in economic reports: strong job openings, shortage of skilled labor, and “red flag” in late payments on auto loans

Midway through first quarter, the 2019 economy remains problematic. Risks are well known: trade wars, government shutdowns, global uncertainty (Brexit and the Eurozone), labor shortages, and infrastructure deficits. Yet, hiring continues to be strong, even as consumer and small business optimism are receding from 2018 highs.

Continuing the mixed messages comes a new Bureau of Labor Statistics report that job openings at the end of the year reached a record high. 

The number of job openings reached a series high of 7.3 million on the last business day of December, the U.S. Bureau of Labor Statistics reported today. Over the month, hires and separations were little changed at 5.9 million and 5.5 million, respectively. Within separations, the quits rate was unchanged at 2.3 percent and the layoffs and discharges rate was little changed at 1.1 percent. This release includes estimates of the number and rate of job openings, hires, and separations for the nonfarm sector by industry and by four geographic regions.

The Associated Press report on the numbers points out,

The Labor Department said Tuesday that job openings jumped 2.4 percent in December to 7.3 million. That is the most since records began in December 2000. It is also far greater than the number of unemployed, which stood at 6.3 million that month.

Businesses have shrugged off a variety of potential troubles for the economy in the past two months and kept on hiring. The 35-day partial government shutdown began Dec. 22, and growth in China, Europe and Japan has weakened, threatening U.S. exports.

The AP suggests the mismatch between openings and job seekers will lead to increased pressure on wages.

With job postings so high at a time that the unemployment rate is at a very low 4 percent, businesses may be forced to pay more to attract the workers they need.

Paychecks are already increasing, though at a modest pace. Average hourly pay rose 3.2 percent in January from a year earlier, the government said earlier this month. That’s near December’s figure of 3.3 percent, which matched the best pay gain in almost a decade. Still, wage increases typically top 4 percent when the unemployment rate is this low.

We’d add that the persistent skills gap will also challenge employers seeking to hire.

Which brings us to a potential proble we’d not identified before. The Washington Post reports,

A record 7 million Americans are 90 days or more behind on their auto loan payments, the Federal Reserve Bank of New York reported Tuesday, even more than during the wake of the financial crisis era.

Economists warn this is a red flag. Despite the strong economy and low unemployment rate, many Americans are struggling to pay their bills.

The FRBNY economists write on their blog,

The surging auto loan industry has been on our radar for more than five years now. But, the level of loan originations has been commensurate with auto sales, with a steady 50 to 60 percent financing share of combined new and used vehicle purchases—a percentage surprisingly stable in our sample period, which suggests that car loans have been tracking the growth seen in motor vehicle sales. Although rising overall delinquency rates remain below 2010 peak levels, there were over 7 million Americans with auto loans that were 90 or more days delinquent at the end of 2018. That is more than a million more troubled borrowers than there had been at the end of 2010 when the overall delinquency rates were at their worst since auto loans are now more prevalent. The substantial and growing number of distressed borrowers suggests that not all Americans have benefitted from the strong labor market and warrants continued monitoring and analysis of this sector.

We suspect the skills gap has something to do with why not everyone has been able to take advantage of the strong labor marker. The AP story puts the delinquency rates in perspective. 

While defaults on auto loans are a red flag, they are unlikely to take down the entire financial system like mortgages did in the lead-up to the 2008-09 financial crisis. The total auto loan market is just over $1 trillion, far smaller than the $9 trillion home mortgage market.

The amount of money people borrow to buy a car is also much smaller – typically under $35,000 – vs. a home loan where people often borrow several hundred thousand dollars.

Still, the problem is real and may be a sign of some pull back in consumer spending, a key driver of economic growth. Another reason state budget writers may want to protect and build reserves.