North Carolina’s unemployment rate ticked up a little, from 3.6% in September to 3.8%. Economists debate what level of unemployment is required to bring down inflation, but it is higher than 3.8%. The national rate in October was 3.7%. The North Carolina economy was still adding jobs in October, 8,300, compared with a 17,400 increase in September.

Laura Ullrich, a senior regional economist with the Federal Reserve Bank of Richmond, pores over the BLS data to see where the region is headed. She also talks to a lot of business folks, constantly. I talked to her after the numbers came out.

North Carolina is up more than 200,000 jobs pre-Covid, which is a 4.3% increase. (For those of you who like comparing to South Carolina, another Ullrich focus, that state is up 50,600 jobs, or 2.3% since pre-Covid).

Most of North Carolina’s sectors gained jobs in October, but two that didn’t included leisure and hospitality (-6,300) and financial activities (-1,100). The job losses in leisure and hospitality were not in restaurants or hotels, but were in the arts, entertainment and recreation subsector. It’s not clear what’s happening there. The losses in financial activities are probably related to lower mortgage applications because of rising interest rates.

Shift in jobs

There has been a shift in the state’s industry structure over the past three years, says Ullrich, that can be seen in the employment data. Three sectors— (1) trade, transportation and utilities (2) professional and business services and (3) financial activities — have grown a greater share of the workforce.

For example, in February, 2020, 14.2% of employees in the state worked in professional and business services. Now it is 15.4%, says Ullrich. Other sectors have lost share. Government employment fell from 16% pre-Covid, to 15.1%. Leisure and hospitality has gone from 11.3% to 10.6%, down 12,700 jobs.

“You’ve seen this shift from customer-facing jobs — where you see people in the economy, so people working in a restaurant, people working in education, people working at a hotel – to jobs where you don’t necessarily see them.” “That contributes to the labor shortage that we are seeing in some industries, and it also contributes to the type of jobs where we’re seeing those labor shortages.”

For example, employment in private colleges and universities is down around 10% compared to pre-Covid. Employment in nursing homes and assisted living facilities is down around 12%. Government — which includes state and local government and local education — is down almost 10,000 jobs compared with pre-Covid, although it added 2,300 jobs in October.

“If you talk to people who are developers, they’ll talk about significant job shortage in local planning offices, like permitting offices,” says Ullrich. Teaching jobs have dropped.  “It’s not that school districts are laying off teachers.  It’s that they’re leaving, and they can’t replace them.  But that still shows up as a job loss in the data.”

Waiting on the Fed

The tight labor market will loosen up if the economy tips into a recession, but it is hard to say when or if it will happen. The Federal Reserve’s Open Market Committee meets again Dec. 13-14. It is expected to raise its target for a key interest rate — the Fed Funds rate— again. To review, this target rate was zero in March. With inflation accelerating, the Fed started raising rates every meeting, six times since March, and 0.75 percentage point each time since June. So, the question is whether the December increase will be another 0.75 of a point, or something smaller, like 0.50. This matters to you and me because the Fed Funds rate is the interest rate target that the Fed wants to see banks charge each other for overnight loans. To drive it up, the Fed starts draining cash from the banking system. When those loans get more expensive, interest rates for mortgages, car loans and business loans go higher, and that’s how you slow down an economy, by making credit harder to get and more expensive.

One argument for a smaller increase might be the recent data for the Producer Price Index, a leading indicator that tracks wholesale prices before goods reach consumers. The PPI rose 0.2% for October, less than the 0.4% forecasted. This raised hopes that inflation may have peaked and is heading downward, meaning that maybe the Fed can ease up on interest rate hikes.

But one data point is just one data point. Retail sales for October also came out last week, and they were up 1.3%, which suggests that consumers still have a lot of money they didn’t spend during the pandemic. And more spending is fuel for inflation.

Right now, the markets expect that the Fed will keep raising until the Fed Funds rate is in the 5% range. The target rate is now 3.75 to 4%, and if the Fed goes up another half point in December, that would take it to 4.25-4.50%. But on the Open Market Committee – made up of Fed governors and a rotating cast of regional Fed bank presidents – there’s a faction that believes it will take continued, steady rate hikes well into mid-2023 to get inflation under control. St. Louis Fed Bank President James Bullard, a voting member of the Open Market Committee (for one more meeting, then he rotates off), said last week that the Fed Funds range may have to rise as high as 7%.

Dave & Buster’s metric

Right now, with all the chatter about a recession around the corner, the economy is chugging along. There are some clouds. Target last week said it saw weakening consumer spending. But the Atlanta Fed Bank’s GDPNow model last week estimated that the economy is growing at a 4.2% annual rate in the current, 4th quarter of ‘22.

Recently, Ullrich took her middle son to a Dave & Buster’s, “which is just a big arcade, basically.”

“And it was packed. I mean, absolutely packed. And I was standing there thinking, you know, as an economist, I wouldn’t have predicted this to be this packed, as something [that] is clearly a luxury good, and inflation this high. And as much as people supposedly have fears of recession.  But it was packed.”