Louisville’s economy likely will take a bigger hit during the next recession than the rest of the state, but the city’s long-term growth outlook remains above average, a PNC economist said.

Augustine Faucher

Gus Faucher, the senior vice president and chief economist of PNC Financial Services Group, said that Louisville has experienced a strong economic expansion since the Great Recession, with job growth that exceeded the national average.

However, the local economy is highly cyclical and tied to national dynamics in the U.S. auto industry and the logistics sector. UPS and Ford Motor Co. are two of Louisville’s largest employers, with more than 30,000 jobs combined. Faucher said that means that the city’s economy likely will experience a greater impact from the next recession than the rest of the state and nation.

But long-term, Louisville’s prospects for economic growth look better than average, he said, because the region, compared to the rest of the state, has lower business costs and a more educated and skilled workforce.

Faucher said he does not expect a recession this year as economic fundamentals, supported by job growth, wage growth and profitable businesses, look “pretty solid.”

The economy is growing at about 3 percent, but Faucher projected that growth would slow toward the end of the year and in 2020 as the stimulative effects of higher federal spending and lower federal income taxes wane and the dampening effect of higher interest rates intensifies.

Actions by the Federal Reserve Bank in the last couple of years have pushed interest rates higher, increasing consumer borrowing costs for such items as homes and cars.

“I expect to see slower auto sales this year,” Faucher said.

The economist said that he believes a recession is ”plausible” in 2020, but more likely in 2021, as the administration of President Donald Trump will do everything in its power to avoid an economic malaise in a presidential election year.

Faucher warned, however, that potential downside risks to the U.S. economy have increased in the last couple of years. Risk factors include:

  • The Fed could raise rates more aggressively than the underlying economics justify.
  • Potential presidential impeachment talk could create uncertainty.
  • Great Britain crashing out of the European Union without a negotiated exit would almost certainly push England, Scotland, Wales and Northern Ireland into a recession.
  • Increasing international trade tensions.

“There are lots of risks out there,” Faucher said.

Tight labor market good for workers

The continued low unemployment rate is prompting employers to increase wages to better attract and retain workers, and while that’s increasing business’ labor costs, it has been good for workers, Faucher said.

Some Louisville businesses had told Insider in the fall that they were struggling to find and retain employees and, as a result, that they were raising pay and adjusting recruitment strategies.

Faucher said the dynamics also have prompted some employers to consider hiring people with fewer skills and expanding on-the-job training programs. That’s also good for workers, he said, especially for those who may not have benefited as much or at all from the economic expansion. If some of them now re-enter the labor force, it boosts both economic growth and the workers’ long-term prospects.

While the re-entry of some formerly sidelined workers also is increasing the labor force participation rate in the short term, Faucher said that in the long run, the baby boomer retirement boom will produce a structurally lower domestic unemployment rate.

And that, he said, could hamper economic growth as employers struggle to find or retain enough workers. Businesses may be able to compensate for some of those labor force challenges with higher productivity and higher levels of immigration, though, Faucher said, the latter seems unlikely in the current political climate.

The Fed has indicated that it plans to be more patient with additional rate hikes, and Faucher said that if in the middle of this year, it becomes clear that the federal government shutdown did not cause any permanent economic damage, that trade relations are not deteriorating and that the labor market remains in good shape, the Fed will be more comfortable raising rates again in late summer or early fall.

Consumer debt service payments as a percentage of disposable income, through the third quarter of 2018. Shaded areas denote a recession. | Courtesy of the St. Louis Federal Reserve Bank

While national media including The Washington Post reported last week that a record seven million Americans are three months behind on their car loans, Faucher said that consumers’ overall levels of debt remain low compared to historical averages. Since the last recession, which was prompted primarily by a housing bubble and lax lending standards, financial institutions have been more cautious in extending loans, Faucher said.

Whenever the next recession occurs, Faucher said, it will be milder than the last one and more in line with contractions in 1990 and 2000. In both of those recessions, the U.S. economy lost fewer than two million jobs, and the unemployment rate rose no higher than 7.8 percent. Employment during the Great Recession fell by 8.6 million, with the rate peaking at 10 percent. 

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Boris Ladwig
Boris Ladwig is a reporter with more than 20 years of experience and has won awards from multiple journalism organizations in Indiana and Kentucky for feature series, news, First Amendment/community affairs, nondeadline news, criminal justice, business and investigative reporting. As part of The (Columbus, Indiana) Republic’s staff, he also won the Kent Cooper award, the top honor given by the Associated Press Managing Editors for the best overall news writing in the state. A graduate of Indiana State University, he is a soccer aficionado (Borussia Dortmund and 1. FC Köln), singer and travel enthusiast who has visited countries on five continents. He speaks fluent German, rudimentary French and bits of Spanish, Italian, Khmer and Mandarin.