Not With a Bang But With a Whimper

Posted July 26, 2016 by Brian Gottlob
Categories: Election, Employment Growth, Help Wanted, NH Economy, Recession, U,S, Economy

Tags: , , , , , ,

The U.S. economy is currently in its 86 month of an economic expansion that began in the summer of 2009 according to the National Bureau of Economic Research, the organization that officially dates U.S. business cycles. If the expansion lasts another seven months (as it will), it will be the third longest economic expansion in our nation’s history, trailing only the 120 month expansion from 1991 to 2001 and the 106 month expansion from  1961 to 1969.

The probability of recession in the next six months is low but the business cycle hasn’t been repealed, another recession will occur and almost certainly sometime before the end of 2019.  It’s just that none of the excesses – wage and price growth, high energy prices, inflationary pressures, inflated asset values, etc.- that have preceded past recession are much apparent in today’s economy and there aren’t signs that any are imminent.  What will make the next recession unique in the post WWII era is that it may very well occur before the nation has fully recovered from the previous recession, despite how long the current recovery has lasted.  “Fully recovered” here means that the actual output of the nation’s economy (GDP) reaches its potential output (for a brief explanation of actual and potential output of the economy see this Congressional Budget Office publication). This is somewhat akin to feeling the effects of a hangover in the morning despite not having enjoyed the celebration the night before.  Unlike the last recession, or most recessions, the next one may not begin with a bang but rather with a whimper.

No expansion can last forever; the U.S. and the NH economies are showing signs of slowing so it is difficult for me to believe that the nation can avoid slipping into recession sometime during the first term of our next president.  If that President is named Clinton it will most likely mean a one-term presidency as three consecutive terms for an incumbent party (relatively rare in itself) along with a recession in the third term (unless is happens very early in her term allowing sufficient time for growth prior to 2020) would almost certainly result in the nation looking for a change in the party controlling the White House.  If the President is named Trump he will no doubt blame the recession on the past administration and that may help give him a pass in 2020, but a recession will challenge his claim as someone who knows how to create jobs, while his penchant for populist and nationalistic themes aren’t generally viewed as monetary and fiscal policies effective in combating a recession.  His administration’s and his personal  response to the recession might determine his fate (does anyone else remember the images of the first, single-term, President Bush zooming around in his cigarette boat off the coast of Maine while the U.S. was in the middle of the 1990-91 recession?).

The past two months have been marked by one very bad and one very good month for job growth in the nation and in NH.  I  advocate looking at three months of job growth numbers in discerning employment growth trends and a prudent man would wait for the release of the nation’s July job growth numbers on August 5th before making any proclamations about the direction of the U.S. or NH economy.  But a prudent man doesn’t write this blog and I am comfortable knowing that when you right too early it often seems like you are wrong so here are a few of the more accessible  indicators that I believe suggest slower economic growth moving forward.  There are others but jobs and revenues are what interest policymakers most so they are highlighted here.

  • The rate of private sector job growth has slowed.
  • The number of industries that are adding jobs versus the number shedding jobs (the employment diffusion index) has declined.
  • Help wanted advertising is declining.
  • Nationally, state corporate income tax collections appear to have peaked.

Slowing Private Employment Growth

Recognizing that there is always some level of unemployment in the economy, the nation and NH are at or very near “full employment,” making  job gains harder to obtain.  Full employment in the latter stages of recovery is the most obvious rationale for slower job growth going forward.  As the chart below shows, growth in private sector employment nationally is still solid but has been trending downward for some time while growth in NH accelerated in 2015 but appears to have peaked in early 2016.

private sector job growth

The Breadth of Job Gains Narrows

I use a 13 industry private employment diffusion index to assess the breadth of job growth across the private sector economy.  When more industries are adding jobs than are shedding jobs, the index is below .50 and the greater the number of industries adding jobs compared to those shedding jobs the higher is the index number.  The chart below shows that both the national and NH diffusion index have dropped, with NH’s decline of particular concern as it now stands below .50 on a three month moving average basis. NH’s employment numbers are often substantially revised so this index value may not be as bad as it appears here but the U.S. number still points to a slowdown.

diffusion index

Historically, significant declines in NH’s employment diffusion index have signaled turning points in the state’s labor market. The relationship between NH’s diffusion index value and the rate of year-over-year private sector job growth four months later is strong (a correlation of .82).  A simple linear regression of the NH diffusion index on private sector employment growth suggests the last two quarters of 2016 will see private employment growth in NH of about 0.6% on an annualized basis compared to the current rate of growth of about 2.0%.  Clearly not in danger of recession but definitely a slowdown.

diffusion index and emp growth

Fewer Help Wanted Ads

Nationally and in NH the number of help wanted ads has declined in recent months.  In NH the relationship between the three month moving average of help wanted ads and job growth in the quarter that follows is strong (R= .80).

NH US Help Wanted

Growth in State Corporate Income Tax Collections Has Peaked

Nationally, the rate of growth in state corporate income taxes is declining (chart below).

corporate tax revenues

The chart shows that compared to all states combined, the growth in NH’s business tax revenues is increasing as the growth rate nationally declines.  This despite the fact that NH’s private sector employment growth has been at about the U.S. average over the past year.  What is different in NH is the inclusion of NH’s Business Enterprise Tax revenue along with NH’s tax on corporate profits in the chart above.  Both private employment and wage growth have accelerated in NH over the past year. Wages and salaries paid by a business are the largest portion of the Business Enterprise Tax base so even as business profits grow more slowly, business tax revenues can be buoyed by substantial increases in overall wages and salaries.  While not a measure of the payroll of NH businesses, wage and salary income increased in NH by 8.6 percent between QI 2015 and QI 2016 compared to 5.3 percent nationally.  That increase has helped boost Business Enterprise Tax revenue and overall business tax revenue in NH in a way that it cannot in other states (most other states would see the change in individual income tax revenue).  The trend is depicted in the chart below that shows the growth rate of the annualized business profits portion of NH’s business tax revenue has slipped while the growth rate of the portion more dependent on wages and salaries has seen accelerated growth.  A slowing growth rate in private employment in NH implies slower growth in wages and salaries and business tax revenues in the state growing more similarly to the pattern among states nationally.  This will occur just as a budget surplus and strong overall revenue growth have increased pressures for additional state spending that had been muted by several years of relatively weak business tax and overall revenue growth.

NH business tax revenue growth

It is impossible to predict monthly payroll employment growth for a small state like NH (or any state for that matter) but I predict employment growth of about 120,000 jobs nationally in July but anything between 100,000 and 150,000 would be in line with the indicators highlighted in this post and consistent with a gradual slowing of economic growth nationally and in NH. Not soon but at some point that slowing will become a recession and that will be the reward for winning the White House and for new and incumbent occupants of statehouses across the nation.

Economics Sees a Clearer Election Result

Posted July 14, 2016 by Brian Gottlob
Categories: Election, prediction, presidential election

Tags: , ,

In April I offered a presidential election prediction model based primarily, but not exclusively, on economic variables as an extension of the old “misery index” that was an overly simple calculation of the impact of economic conditions on presidential elections that nevertheless did a pretty good job of predicting election outcomes.  I presented two model scenarios depending on how the past voting patterns in each state were weighted (how large was their coefficient in the regression model).  The model does not consider any factors related to the candidates other than whether or not they represent the party currently occupying the White House.   The first scenario used my cross sectional estimate of the importance of prior voting patterns for predicting election results in each state; it indicated a fairly close election with a victory for the Democratic candidate. A second scenario weighted prior state voting patterns more heavily and predicted a larger margin of victory for the Democratic candidate.  As a reminder the results from one of the April model runs are shown in the chart below.

base scenario

It may be impossible to consider this election’s results outside the context of the characteristics of the candidates but whether it is New England’s first heat wave of the summer affecting my judgment or just a whiff of dementia surrounding the effort, I still think it important to find some predictable and rational pattern to this election that isn’t related to the outsized personalities of any of the candidates.  Since politics isn’t my expertise I look for that rationality in economic conditions and variables.   My model uses some high-frequency data (changes in gasoline prices, presidential approval, etc.) but also some data available on a quarterly basis (changes in real household personal income in each state, real house price appreciation in each state, etc.) so it can only be updated every few months.  It can now be updated (as promised) and it will be updated one more time prior to the election.  I will skip reiterating a description of the model so if you aren’t one of the 10 people that read that April post and want to know more about the model go back and read this post.

What has Changed Since April?

Almost all states have lower gasoline prices and the real household income in most states increased at rates faster over the past year than was the case in April, both have a demonstrated impact on the willingness of voters to vote for the incumbent party’s candidate and each of these variables are increasing the predicted vote totals for the party currently occupying the White House.  Real home price appreciation was more of a mixed bag among states, almost all had appreciation but several experienced slower appreciation than was used in the April model’s predictions so the impacts only slightly favored the Democratic candidate in most states.  The President’s approval rating has increased slightly since April, benefiting the candidate of the incumbent party (I use data from a Republican pollster and would use data from a Democratic pollster if a Republican were in office to counteract any bias in favor of the incumbent party). Voter fatigue with the incumbent party after two terms in office does not change over time in the model and continues to subtract several percentage points from the Democratic candidate’s vote totals.

Both model scenarios – smaller and larger weighting for each state’s past voting trends – suggest a growing margin of victory for the Democratic candidate.  The July model scenario, using a smaller weighting for each state’s past voting trends, shows that the Democratic candidate’s electoral college margin of victory increases to 317 to 221, up from 295 to 243 in the April model results (chart below).  All of the changes in party “wins” in individual states were in favor of the Democratic candidate.

July Base Map

The July results of this model scenario show Oregon and North Carolina switching to a Democratic victory, NH and Maine moving from a “most likely to switch” from Democratic to Republican victories to more certain Democratic victories and some states moving from more certain Republican victories to “most likely to switch” from Republican to Democratic victories (Arizona, Georgia, Missouri).

The “Official” Model Scenario

As I noted in my first election model post in April, because of the time and data involved, my estimate of the effect of prior voting patterns in each state was not calculated individually using a unique time series for every state.  It wasn’t the best solution and it suggested prior voting patterns will play a somewhat less important role in election results in each state than has been found in research by others.  Rather than continue to present two election result scenarios depending on the weighting of prior voting patterns I will take the middle or average of the two weightings to produce one “official” model prediction.  In my final model update (likely in October) this middle scenario will be the only result I report.

The July model results using this middle scenario show an even wider margin of victory for the Democratic candidate, 347 to 191 electoral college votes. In this scenario Pennsylvania narrowly becomes a Democratic win as does Minnesota and the margin of victory in several close races become more certain for the Democratic candidate.  More surprisingly and perhaps showing how naïve this prediction effort is, some Republican states (Mississippi,   Georgia, and South Carolina) become much less certain republican victories.

July official Map

What Happens If?

 The July model results show a number of states with close races as indicated in the “most likely to switch” columns of the chart above.  If all of the states in the Republican “most likely to switch” column became Democraqtic victories then the margin of victory for the Democratic candidate would be 399 to 139 electoral votes, a true “landslide’ election.  If all of the states in Democratic “most likely to switch” column change to Republican victories then the electoral college results would show a narrower but still strong 302 to 236 victory for the Democratic candidate.  Of course results are likely to contain a mix of both Republican and Democratic wins in the above chart “switching” to victories for the other party’s candidate.  In any combination, however, the results suggest a likely victory for the Democratic candidate and a very difficult electoral college road to victory for the Republican candidate.

EndNote:  I refer to candidates only by their party affiliation and not by name to reinforce the objective and empirical nature of this exercise and to, for a moment at least, consider the election outside of the role that candidate personalities play in the election, not out of any disrespect for the candidates – there has been more than enough of both of those things throughout this election cycle.

Natural Gas Prices Can’t Rise Soon Enough

Posted June 29, 2016 by Brian Gottlob
Categories: Energy, Natural Gas

Tags: , , , , ,

Natural gas prices have dropped sharply over the past two years and while the prospect of paying higher prices for energy is not appealing, unless prices rise soon, the prices we pay later are likely to be much higher and for much longer than currently forecast.  The chart below shows the decline in natural gas prices over the past two years.  In response,  a steady rise in production of U.S. natural gas stagnated and began declining over the past year.             1

One impact of very low energy prices is a U.S. energy industry that is in financial shambles, devastating industries that support oil and gas extraction and threatening the financial institutions that lend to energy-related industries along the way.    In the first quarter of 2016 the largest shale gas producer in the world had negative cash from operations.  Most other large producers similarly had revenues from the sale of oil and gas that didn’t cover operating costs much less capital expenditures like drilling and completion. Sympathy for energy companies isn’t expected and won’t be forthcoming but the result of consistently low energy prices is predictable, lower U.S. oil and gas production.  The longer prices for natural gas remain very low, and the smaller and financially weaker the industry gets, the less likely production will be able to ramp-up as prices rise (as they most surely will) and that means even higher prices in the future and for a longer period of time.

The Importance of Shale Gas

The U.S. is increasingly dependent on shale gas. Conventional natural gas production appears to be in terminal decline as fewer producers are drilling those wells.  Shale gas now represents more than half of all natural gas produced in the U.S. (and rising).  Production of shale gas will have to continue to increase just to compensate for the decline in the production of conventional natural gas but recently shale gas production has also begun to decline.  2

The Marcellus and Utica shale gas regions (closest to NH) are relatively new sources of shale gas (production began in the mid-2000s).  They, Marcellus in particular, are the  kings of shale gas in the U.S..  Not surprisingly they have, on average, the lowest cost-of- production of any shale gas region in the country.  As a result, production in those regions has been maximized and the percentage of U.S. shale gas that comes from the Marcellus and Utica shales is now almost 50 percent.  That percentage probably would be even higher except for pipeline capacity that limits movement of gas from the region.

3

But even in these lower cost-of-production regions the lowest cost producers have a breakeven price of about $3.50-$4.00/MMBTU (the average of all producers in the regions is higher).  Meanwhile natural gas prices in the U.S. have been below $3.00 since 2015 and below $2.00 in 2016.  The average production costs in shale regions that have been producing longer is considerably higher (from about $5.00/MMBTU to more than $6.50).  The impact of natural gas prices on the production of increasingly important shale gas is best understood by looking at the impact that prices have had on different shale gas producing regions across the country.  The chart below shows changes in production from each shale play’s peak production to May of 2016, when spot natural gas prices were at $1.92/MMBTU.  As economics would predict, the chart shows that production declines were greatest in the highest production cost regions and smallest in the lowest cost Marcellus and Utica Shale regions. On a percentage basis declines in production appear even more dramatic.  Production has declined 50 percent  in the Haynesville shale region of Louisiana and Texas since peak production occurred there in 2012.  The Barnett (Texas) and Fayetteville (Arkansas) shale regions experienced production declines of 39 and 26 percent respectively since 2012.  In contrast the lower cost Marcellus (0.4%) and Utica (2.0%) experienced minimal declines in production and only in 2016 when spot prices were under $2.00/MMBTU.

4

But here is the thing, like all gas and oil producing regions, the longer the Marcellus and Utica shales produce gas the more likely production cost will rise as increased withdrawals require production to move from core areas of the shale play to more marginal areas of production.

Prices and Costs Matter

Only in a fantasy world will U.S. production of natural gas continue to increase for decades with prices remaining near or below breakeven costs.  In the real world prices and costs matter.  I am a fan of natural gas and believe increasing availability in New England will benefit consumers and businesses but thinking that natural gas can be simultaneously cheap, abundant, and profitable defies the rules economics.

Unfortunately I think the U.S. Energy Information Agency is contributing to a fantasy by suggesting an almost unlimited supply of natural gas at low prices in their forecast of natural gas production and prices contained in the EIA’s  2016 Annual Energy Outlook (released in May).  I respect the work of the EIA and regularly rely on the data they produce but this forecast seems to lack a fundamental grounding in economics.

5

At $6.00/MMBTU (in 2015 dollars)the U.S. will have an ample supply of natural gas for decades.  At $5.00 (not reached until 2024 in the EIA forecast scenario) production is unlikely to increase by 50 percent as the EIA forecast suggest. At prices below $3.00 for long, as is the current case, production will decline significantly and supply shortfalls will require supplementing U.S. production with ever larger withdrawals from storage, increasing imports (questionable if that is possible) and/or  a reconsideration of the exporting of natural gas.  It is important to note that shortfalls in production don’t mean there won’t be enough natural gas, there is ample gas in storage to cover shortfalls for a while but prices will rise quickly as more gas is withdrawn from storage.  Rising prices should prompt increases in production but things may be different this time, depending on how soon prices rise.  The industry is smaller, financially weakened,  and unlike a few years ago capital, as well as workers who were forced to leave the industry as it shrank, may not be as readily available to ramp up production as prices rise.

As we know too well from experience, natural gas supply shortfalls have more dramatic and especially harmful impacts on New England.  New Hampshire and the rest of the country would be better off with a modest rise in natural gas prices now rather than face supply shortfalls and much higher prices in future years.

What the Unemployment Rate Doesn’t Tell Policymakers Can Hurt Us

Posted June 22, 2016 by Brian Gottlob
Categories: job growth, NH Economy, Uncategorized, Unemployment

Tags: , , , ,

Last week the NH Labor Market Information Bureau released the NH jobs report for May and as usual all of the attention focused on NH’s low (2.7 percent) unemployment rate.  The more significant story was the April to May decline of 4,000 payroll jobs in the state.

Private sector jobs in NH were lower by 3,400 in May, the largest one month decline since 2008 – with one exception – a month in 2014 when workers at the Market Basket grocery chain left their jobs in support of their ousted CEO.  May 2016 job losses were an out sized drop for any month of seasonally adjusted data (a decline of that size would more likely be seen in the not seasonally adjusted data where large changes in employment occur annually during certain months of the year).  I am inclined to attribute some, but not all, of the drop in NH’s May employment to problems with seasonal adjustments and other statistical issues.  Still, the May data marks the first time since 2011 that a three month moving average of private sector employment growth in NH has been negative.

3 mos avg change in private emp

For some added context on the NH payroll employment numbers I wait for a release from the U.S. Bureau of Labor Statistics, usually about one week after NH releases its state’s job numbers.  That monthly report provides employment, unemployment, labor force and other labor market data for all 50 states.  Here is a bit of the context provided in the June 20th release from the U.S. Bureau of Labor Statistics:

“In May 2016, four states had statistically significant over-the-month decreases in nonfarm payroll employment and three states and the District of Columbia had significant increases. The job losses were in Tennessee (-13,400), Michigan (-12,700), New Hampshire (-4,000), and Montana (-2,700). In percentage terms, Montana and New Hampshire had the largest declines (-0.6 percent each), followed by Tennessee (-0.5 percent) and Michigan (-0.3 percent).”

The term “statistically significant” decline in employment is important.  Twenty seven states experienced declines in nonfarm payroll employment in May but in only four of those states was the decline deemed “statistically significant,” meaning that the decline was large enough for the BLS to be at least 90% certain that the change in employment did not fall within the margin for error of the employer survey on which the employment estimates are based.

May emp change

It is not wise to be too concerned with one month’s job report.  Whether the  May job growth number is real or illusory and the product of statistical anomalies, the numbers for NH still should have attracted more attention (than a 0.1% uptick in the unemployment rate) from the media and especially from lawmakers and public officials.  The May job growth number is certainly more noteworthy than a slight uptick in the state’s unemployment rate that was the focus of most media reports.   As I noted in my previous post, employment growth nationally and in NH is going to slow and one bad month is not reason to panic.  But NH’s year-over-year percentage increase in private sector employment took a big hit with the May jobs report and the state’s ranking among states on private sector job growth did as well.  Private employment growth in NH has been on a solid pace for more than a year but with the May data NH moved from the top third to the bottom half among states on year-over-year private sector job growth.

Ranking Private Sector Job Growth

Public sector job cuts continue to be a drag on NH’s total nonfarm job growth, shedding about 2,500 jobs between May of 2015 and May of 2016, by far the largest percentage decline of any state in the nation.

Change in Govt Jobs May 15 to May 16

Still, while the May jobs report was troubling, initial unemployment claims are a very good leading indicator of economic activity and they remain subdued in NH and have yet to suggest a significant downtown in either the U.S. or NH economies.  The May jobs report also showed a continuation of the recent trend of solid labor force growth.

IUC

Implications for State Revenue

My primary concern about the May jobs report for NH, and with monthly jobs reports for NH in general, is how little attention payroll employment numbers get from policymakers and how much attention and importance is given to the state’s unemployment rate.  The state will begin crafting its two-year budget this fall and solid revenue gains over the past year and a budget surplus are building pressure for substantial increases in state spending.  This isn’t a commentary on the merits of specific spending proposals (I will save that for later posts) just a caution that the fiscal environment into which spending proposals will be entered can change and the need to recognize that change as far in advance as possible.  I would feel more comfortable about the upcoming budget process if NH’s weak May jobs number, and the possibility that weaker job growth will continue, were at least acknowledged by policymakers, state agencies, and the media.  I want to know that there is someone in NH’s wheelhouse focused on the horizon and not on our wake.   I understand the appeal of the unemployment rate as a single, intuitive metric that summarizes economic conditions but the unemployment rate is a lagging indicator of labor market and economic trends.  For policymakers and anyone who needs to assess the near-term economic outlook, using the unemployment rate as a guide is a bit like driving using the rear view mirror.   The unemployment rate is an important economic indicator that says a lot about current economic conditions, it is just not that useful for forecasting purposes. Moreover, NH’s demographics (fewer individuals in demographic groups that typically have high rates of unemployment) mean that the state will almost always have a relatively lower unemployment rate than the U.S..  Too frequently that leads lawmakers and others in NH to assume the state’s economy is performing better than it actually is and better than the U.S. economy.

Business taxes are a big reason that NH revenues have outperformed expectations this fiscal year, accounting for almost two-thirds (or $61.4 million) of the $99.4 increase in traditional taxes and fees over FY2015 during the first 11 months of fiscal year 2016.  Focusing on changes in private sector  payroll employment and wage growth is especially important for lawmakers in the Granite State and especially important as we head toward a budget making year.  As a lagging indicator of economic activity NH’s unemployment rate will remain low, even as the economy slows.

Emp Growth and Business Taxes

If lawmakers focus too much on NH’s unemployment rate in their assessment of state revenue trends they risk delaying recognition of turning points in the NH economy and thus changes in state revenue trends.  Private sector employment and payroll growth slow before significant changes occur in the state’s unemployment rate and private sector employment growth is a better indicator  of trends in NH business tax revenue than is the state’s unemployment rate.  So the next time a public official brags about NH’s unemployment rate, ask him or her how many jobs were added in the state during the last month.

Presidential Campaign Impacts on U.S. Job Growth and Implications for NH

Posted June 9, 2016 by Brian Gottlob
Categories: job growth, Labor Force, NH Economy, presidential election, Uncategorized

Tags: , , , , ,

The May U.S. jobs report with downward revisions to the March and April job numbers was bad, not bad enough that you should start stocking canned goods and bottled water in your basement but bad nevertheless.  The impact of 35,000 striking Verizon Corp. workers on the May numbers is cited as one explanation for the weak report but there were 25,000 temporary workers hired by the company during the strike so the overall impact was actually fairly small.  Seasonal adjustment factors (the statistical procedure used to smooth regular annual fluctuations in employment data throughout the year– things like Christmas hiring, summer employment of youth etc.) seem to be more problematic in recent years and that may also be a contributor.   Of course it is possible that hiring was just weak, plain and simple.  Hiring will continue to weaken, I just don’t think job growth is really as weak, and the slowdown as rapid, as the May jobs report suggests.

Presidential Campaigns Appear to Impact Job Growth

The first rule of politics is to forget all of the rules of economics and that is more problematic now that the national political climate seems to increasingly influence real economic variables. Think of the impact that debt ceiling debates and government shutdown threats have had on economic activity recently.  With almost no focus in the current presidential election on sound economics and economic policies it is easy to see how politics could  contribute to a weak May jobs report (when the empirical evidence doesn’t provide a clear explanation for economic events it is hard to go wrong blaming politics and politicians).  But there is some evidence that presidential elections can temporarily depress job growth.  The uncertainty of a presidential election, especially in a year without an incumbent, and the people and policies that candidates may employ in their administration can give pause to businesses investment and hiring decisions. The uncertainty surrounding future economic and fiscal policies in a presidential election year should arguably be greater several months prior to the election rather than a month or two when the election outcome and policy directions become clearer.  I compared average private sector job growth (government employment should not be affected) in the U.S. during the months of June-August in presidential election years, to the average job growth from September (of the year prior to the election) to May (of the election year).   Since 2000, in each presidential election year the average private sector job growth from June-August significantly lagged average job growth over the prior nine month (Sept-May) period. The pattern held in 2008 but because the U.S. economy was in free fall for other reasons it is not included here.   In years with no presidential election this generally was not the case (years such as 2002, 2003 and 2007 when the U.S. was entering or exiting a recession are exceptions).

UncertaintyJob growth in NH is going to slow regardless of political uncertainties given existing labor force constraints.  NH is essentially at full employment and the nation is close. The longer a recovery lasts the greater are the chances that job growth will slow.  Still,  there are more uncertainties regarding the presidential candidates and the policies that could affect business and the economy in this election than is typical in a presidential year so it is not unrealistic to think that politics is already affecting hiring and investment decisions.

Will New Hampshire Follow the National Trend?

State level job growth numbers for May will be released June 17th.  In a small state like NH monthly job growth can be especially volatile. Up or down  conclusions about a state’s economy should not be drawn from a single month of employment data.  A three month trend in private sector employment is a better reflection of the direction of a state’s economy and by that metric NH has been on a roll.  The chart below shows that after several years of below national average private sector job growth, the pace of job growth in NH is now at a level equal to the U.S. average.  Moreover, the growth trend for NH has accelerated while the rate of private sector job growth in the U.S. has decelerated.  The rate of private sector job growth NH is going to slow nonetheless,  just as it has in the nation overall.

private sector job growthI don’t think the private sector job growth trend has gotten enough attention in NH.  Many (including me at times) focused on several years of NH’s subpar total non-farm (including government) employment growth.  But as I have noted in prior posts, the percentage drop in government jobs in NH is among the largest of any state in the nation, masking some of the strength of hiring trends in NH’s private sector.  The chart below shows how both private sector and state and local government employment in NH have grown since each sector’s pre-recession peak.  Private sector employment in NH peaked in February of 2008 and after shedding 6% of those jobs during the recession NH has regained that many plus an additional 3%.  State and local government employment in NH did not peak until April of 2010.  It takes a couple of years for property valuations to reflect economic conditions so the largest declines in property valuations – and thus local revenues and employment- occurred as the recession had ended.  State and local government employment in NH is about 8.5% lower than at its peak, with local government shedding about 6,800 jobs and state government about 1,000 jobs.

public vs private sector growth

Labor Market Response in NH May Be Too Late

For too long in NH private sector job growth remained consistent at a subpar rate despite a large increase in help wanted ads in the state.  A combination of slow or no labor force growth and a mismatch between job opportunities and the skills of job seekers were the causes and not a fundamental erosion of NH’s business climate as I argued in this post.

NH US Help Wanted

But now help wanted ads in NH and the nation are slipping (chart above) and while the recovery isn’t over we are getting better more slowly.  Unfortunately, that is occurring just as the labor market conditions –  low unemployment, rising wages, and signs that NH is once again seeing net in-migration from other states, are all resulting in a more rapid expansion of the NH labor force, the key ingredient wages

the state has lacked in recent years to achieve a faster pace of  job growth.

NH Labor force growth

A Bumpy Ride for the Remainder of 2016

I am frequently in error but rarely in doubt and in this post  last fall I was confident NH would again exceed the U.S. rate of employment growth (it is still possible but not likely) and that NH would see a 2.5% increase in total employment in 2016 (that is not going to happen). In fairness, private sector job growth has been on a more than 2% growth pace for the year and I did include two caveats in my forecast last fall: first that labor force growth in NH would have to accelerate (in part due to a resumption in net in-migration to the state) and while the labor force is once again growing in NH,  it is at a pace that may not sustain the 2% plus growth that NH’s private sector is currently on.  Second, the decline in government jobs would have to abate – it hasn’t.  A month ago at a presentation at a local community bank I downgraded my job growth forecast for NH in 2016 from 2.5% to 1.8%.  With more recent national economic data – including the May jobs data and March/April revisions, readings from my PolEcon NH Leading Economic Index, along with the uncertainties produced by the nation’s political climate, I now believe the rate of growth will be just 1.2 to1.4 percent.

A Pyrrhic Victory for Pipeline Opponents

Posted June 2, 2016 by Brian Gottlob
Categories: Energy, Natural Gas, NH Economy, Uncategorized

Tags: , ,

Another energy project has been scuttled that could have provided some relief to New Hampshire and New England households and businesses who are paying among the highest prices for energy of any state in the nation. I believe the project would also have contributed to the important goal of reducing carbon emissions in NH and New England (more about my support for reducing carbon emissions and some controversial policies to accomplish that in a future post).  No doubt any proposed energy project is better when forged and tempered through a process of public review and debate.  But the withdrawal of proposed wind energy projects, and more recently the Northeast Energy Direct (NED) natural gas pipeline project, as well as the difficulties encountered by some solar projects in the state, question how committed many residents and some policymakers in NH are to finding solutions to an energy climate that is widely recognized as detrimental to households, businesses, and the NH economy.  As opponents of  pipeline, wind, and solar projects claim another “victory” in NH, an admonition given to Pyrrhus, a Greek general and ruler of Epirus comes to mind.  After a costly victory over his Roman enemies by Pyrrhus, the Greek philosopher Plutarch reportedly told Pyrrhus that another, similar “victory” would ruin him.  If the “ruin” that could occur only affected the combatants in NH’s  energy infrastructure battles, instead of the 1.4 million non-combatant “energy civilians” in the state, Plutarch’s warning might be useful.  But there are no “generals” and no real leaders or statesmen and stateswomen battling NH’s energy constraints and so the casualties of our state’s inability to take control and direct its energy future will be most broadly spread across the state’s population.

This post highlights some of my calculations of the costs to NH of the defeat (or victory as opponents would argue) over the Northeast Energy Direct natural gas pipeline proposal.  To begin, let’s reiterate the cost disadvantages faced by consumers of electricity in NH.  The chart below shows that through 2014, residential and commercial electricity customers paid, on average, about 35 percent higher rates than the national average, while industrial customers paid a whopping 70 percent higher rates than the national average.

energy prices

The NED Project’s Impact on Natural Gas and Electricity Prices

Natural gas prices have been lower in recent years as a result of increased U.S. production, largely from the Marcellus and Utica shale formations in  Ohio and Pennsylvania.  But as I noted in this post, a lack of pipeline capacity precludes NH and New England from realizing the full benefits from declining natural gas prices.  The increased supply of natural gas from nearby sources enabled by the Northeast Energy Direct project would impact natural gas prices in NH and New England.  Price reductions would result in direct savings to residential, commercial, and industrial consumers of natural gas and would also result in electricity prices that are lower in NH than without the Northeast Energy Direct project. New England’s wholesale power prices are closely related to natural gas prices because of the region’s dependence on gas-fired power generation capacity. By reducing spot prices for natural gas in New England, the NED Project will have a direct impact on New England’s wholesale power prices.

At least eight separate studies have forecast lower natural gas prices in New England resulting from an increase in pipeline capacity into the region.  Even one study from the Massachusetts Attorney General’s Office, while suggesting an increase in pipeline capacity to New England isn’t needed to assure reliability of electricity supplies in the region (inaccurately I believe and contrary to reports by others, including the operator of the New England Energy grid), recognizes that increased pipeline capacity would result in lower regional natural gas prices.

 There is a range of estimates of the price impacts from an increase in natural gas supply to the region. My estimates of energy cost savings in NH use one of the more conservative estimates of the price impacts of increased supplies to the region as documented in a study  by ICF International. I used historical data on both natural gas and electricity consumption by sector (residential, commercial, industrial)  in NH from the U.S. Energy Information Agency (EIA) as well as forecasts of future consumption based on the EIA’s regional forecast for growth in natural gas and electricity consumption and applied ICF natural gas and electricity price reduction estimates to consumption forecasts in NH to estimate savings to customers in the state that would result from the operation of the NED pipeline.  In the initial full-year of pipeline operation I estimated the savings to natural gas and electricity consumers in NH to be $165.5 million.  The breakdown of saving by source and sector is presented below.  Savings represent about 3.4 % of the 2014 energy expenditures of NH residential consumers, 6.5% of commercial sector energy expenditures, and 8.9% of the energy expenditures of industrial consumers.

savings by sector

 Using the same sources and methods, I estimate the 10 year energy cost savings to NH natural gas and electricity consumers  would be just under  $2.2 billion in nominal dollars as a result of the Northeast Energy Direct project.

10 years savings

Additional Benefits of Increased Regional Access to Natural Gas

There are other potential benefits from NED that have been less talked about.  Much of NH has limited or no access to pipeline natural gas from local distribution companies.  The lack of access to natural gas increases energy costs for households and businesses in many regions the state.  In particular, lack of access increases the economic disadvantages currently faced by most rural regions in the state.   Natural gas is most available in the populated regions of Southern NH closest to regional pipelines and the lateral pipelines operated by local utilities who purchase natural gas from the regional pipeline operators.  The proposed NED pipeline would have passed through a portion of the state where the economy has lagged for some time and regions that could most benefit from access to pipeline natural gas.  The NED would increase capacity but local utilities would have to add lateral pipelines to serve communities, households and business in places like Keene, Claremont, Cheshire, Sullivan and Grafton Counties.

Along with extremely high electricity prices for industrial consumers relative to the U.S. average, the lack of access to natural gas is a significant disincentive to operating a manufacturing facility in much of New Hampshire, as nationally, natural gas accounts for 40 percent of the purchased energy of manufacturers on a BTU basis.  There is anecdotal evidence that manufacturers nationally are starting to react to lower natural gas prices by planning to open new facilities in the United States. There are other influential factors, including rising employment costs overseas, but those industries for which natural gas is an important input are anticipating an advantage of locating their operations in the U.S..  Cheshire and Sullivan Counties are among the most manufacturing dependent regions in the state and access to utility natural gas would especially benefit communities in those regions.  The chart below presents location quotients which represent the concentration of manufacturing employment in each NH county relative to the concentration of manufacturing employment in the U.S. overall. A location quotient of 1.00 indicates a region where the concentration of manufacturing employment is identical to the concentration of manufacturing in the the U.S. economy overall.  Location quotients above about 1.20 suggest counties where manufacturing is especially important to the regional economy.  Shaded bars represent counties through which the NED project would pass. The NED would not pass through Sullivan County but its proximity would make lateral access to gas from the pipeline feasible.

manufacturing LQ

Increased natural gas supplies and lower prices will be especially helpful to smaller manufacturing firms which face higher prices in New England but also face larger natural gas price differentials relative to larger manufacturers than anywhere in the country.  High prices and larger price differentials create a strong disincentive for new and emerging manufacturing firms to operate in New Hampshire and may be contributing to an “aging” in the manufacturing sector in the state.

gas prices to manufactures

Access to natural gas would also benefit households. Just under 20 percent of households in New Hampshire use pipeline natural gas for heating and another 13 percent use bottled gas but there are large regional variations in the availability of natural gas for heating.  Again, regions of the state that are considered economically disadvantaged, in most cases, have the least access to pipeline natural gas.  Access to pipeline gas won’t guarantee a reduction in disparities in the economic performance of various regions of NH but it would help households and manufacturers in regions where the economic performance has lagged.

home heating in NH by source

The savings for households heating with pipeline natural gas is substantial. The table below shows the average cost differential in annual heating costs between housing units heated with pipeline natural gas and other sources.  The difference between pipeline natural gas heating and fuel oil – the largest source of home heating fuel in NH – averaged over $890 annually between 2010 and 2014. By lowering natural gas prices the differential between homes heated with natural gas and other sources (other than solar) are likely to widen.  The NED would  increase opportunities for more communities, regions and more homes to be heated with natural gas in New Hampshire, amplifying the potential savings estimated here for NH households and the NH economy associated with lower natural gas prices.

Table copy

Factoring the impacts of the NED project on natural gas prices and disposable income for  residential consumers (and not including the impacts on commercial and industrial consumers)  I estimate that an additional 5,300 jobs would have been created in the first 10 years in response to the energy cost savings to households from the NED project.  When the impacts on industrial and commercial consumers are considered the potential benefits of the project become even clearer.

Disclosure

I originally prepared more detailed estimates (than in this post) in a report I did for the proposed NED project.  I write this blog (when I have time) because I enjoy researching and writing about topics that interest me, not to advance client interests. I think the report contained some good analyses and now that the NED proposal has been withdrawn and the company is no longer a client, I don’t feel conflicted writing about it here.  The success or failure of the NED project had no impact on the compensation I received. The report addresses energy issues in NH that I have been writing about since long before my work for the NED project. It examines the usual economic impacts from the construction phase of the project but more importantly potential longer-term impacts of the project.  The report also examines controversial topics such as potential impacts on tourism activities as well as fiscal impacts of the project.  The report can be viewed here. Because the report was paid for by the NED project owners, critics will dismiss some or all of the findings.  But a report that is paid for only means that its author(s) has some “skin in the game.” In a small state, and especially in NH, anyone who produces work that distorts findings or misleads policymakers won’t be offering services of  value and won’t be working in the state for long.  On the other hand, anyone without “skin in the game” or some compensated interest is pretty much free to make any claim without evidence, present any data, or any “analysis” regardless of its accuracy, without concern for the impact that it has on their business or professional reputation. I am not arguing that any information brought to policy debates that isn’t paid for has no value or is necessarily inaccurate or misleading, just that information that is not paid for by some interests is not is inherently or by definition more accurate or relevant than work that is paid for – there should be no “halo effect” for information entered into important policy debates simply on the basis of whether or not compensation was involved – compensated or not, information entered into the debate is provided by a party with a particular interest in the issue.  The quality and accuracy of the analysis should determine its merits.  I like to think that the ultimate test of the quality of an analysis is whether those who produced it will be around and willing to answer for its accuracy or inaccuracy when the time comes when that can be determined.  I don’t think my analyses (or forecasts) are wrong that often but when they are I am available to answer to policymakers and others for it.  I don’t think I would have had to answer for my my analysis of the impacts of the NED.

A Perfect Labor Force Storm

Posted May 24, 2016 by Brian Gottlob
Categories: Demographics, Labor Force, New Hampshire, Uncategorized, Workforce

Tags: , ,

A perfect storm is brewing for the economy and individual businesses in NH and across the country.  Slow labor force growth, the retirement of baby boomers, and weak growth in labor productivity are severely limiting the productive capacity of the nation’s economy.  Between 2010 to 2015 labor productivity in the U.S. increased by just 0.5 percent on average annually, and the labor force by an average of just 0.4 percent.  Since the end of World War II, the combined, labor productivity and labor force growth in the U.S. had never fallen below 1 percent – until 2015 when it was just 0.9 percent. I have written about the the limits labor force growth place on the U.S. and NH economies here and here (and others).  Factors such as the flow of population (state-to-state migration and  international migration), and changes in labor force participation rates will play a large role in determining which states and regions are most affected, but a real possibility exists that the economies of some  states and regions could shrink over time.

Figure 1

A quick assessment of the potential impact of baby boom retirements across the country is illustrated in Figure 1 which shows the ratio of the population in each state that will (or could) be entering the labor force approximately over the next decade – that is individuals currently ages 5-19 –  to those who will (or could) be exiting the labor force – individuals currently ages 50 to 64.   The bars in the graphic that fall below zero indicate states that face more retirements from their labor force than new entrants over the next decade or more.  As the chart shows, the labor force in New England and much of the Northeast will be especially challenged by baby boom retirements as far more individuals will leave than enter the workforce.

In NH, the impact of baby boom retirements will vary greatly by industry.  The Millennial generation will soon be the largest segment of the labor force but their distribution across industries varies greatly.  For this analysis I examined the demographic characteristics of each industry’s workforce in NH.  Figure 2 presents the ratio of early career (age 25-34) to older workers (age 55-64) in major industry groupings in NH.  The graph suggests industries that will be more and less challenged by retirements of the baby boom generation.  Industries that have higher ratios employ more individuals early in their working lives than individuals nearing retirement age.  Several industries stand out for the high percentage of older individuals in their workforce.  Manufacturing is one industry that has had difficulty attracting younger workers and I have written about that issue long ago in this blog, Educational services is another.  Professional, scientific, and technical industries have a surprisingly low percentage of younger workers but an examination of this industry grouping at a more detailed level shows that the legal profession has among the oldest demographics of any industry in the state.

Figure 2

Looking at the age composition of workers in broad occupational groups in NH (Figure 3)  shows how much difference there is across different occupations employed in professional, scientific, and technical industries. The ratio of younger to older workers in the legal profession is just 46 percent, while in computer and mathematical occupations there are many more younger workers and the ratio is 127 percent.

Figure 3

Health care is also a field with a larger percentage of older individuals in the workforce but when the demographics are examined at a more detailed industry level or by specific occupations, it is clear that the industry is bifurcated – with physicians and other health care practitioners having an older demographic while many of the support occupations in the industry that have emerged as health care has become a much larger portion of the economy, have a much younger demographic.

Industry Growth is as Important as Industry Demographics

 The retirement of baby boomers only hints at the industries that could face the most significant labor shortages over the next decade.  Retiring workers may need to be replaced but they may not.  If employment in an industry shrinks or if it grows slowly over the next decade, then labor shortages are likely to be less severe than baby boomer retirements would suggest, even in industries with a higher percentage or older and retiring workers.

 To capture the impact of industry trends on potential labor shortages related to baby boom retirements I combined projected industry growth in NH over the next decade with the ratio of younger to older workers in each industry to produce a supply/demand balance metric.  For illustrative purposes I present the supply/demand calculations for broad industry groupings in Figure 4.  I did the same calculations at a more detailed (50+ industry) level but that level of detail is not amenable to presentation in a single graphic.  It is not possible to know what industries workers entering the labor force over the next decade will work in so these calculations are only rough estimates of potential supply/demand imbalances. As the chart shows,  industries with a relatively older workforce, such as manufacturing, public administration, and utilities, will nevertheless likely confront fewer labor shortages because of slower employment growth in those industries.  Unfortunately, all industries are likely to face shortages in some occupations that are employed and in demand across many industries.

Figure 4

What Can States and Business Do?

The primary shortcoming of Figure 1 is that it is a static representation of the demographics each state’s workforce.  The population and demographic composition of states are not static however.  People move from place-to-place, state-to-state, county-to-county, and country-to- country.  A state or region with substantial labor shortages that is also viewed as an attractive location can see increases in labor supply in response to labor shortages and wages that are rising in response to shortages.   For more than two decades attracting skilled individuals with higher levels of educational attainment has been a key to NH’s economic success, since the mid 2000s however, NH has seen fewer individuals moving into the state from other states.

A popular meme in NH (and in many rural states) is that the state’s labor force challenges are largely the result of young people leaving the state.  But that is a phenomenon that has been occurring for decades in NH as it has in other rural states.   While it plays some role in the state’s labor force challenges, it has not been a key factor contributing to or detracting from NH’s economic performance – either NH’s strong successes of the 1980s and 1990s  or its subpar job growth of recent years. I wrote about who is moving to NH here, the chart below adds who (from an age perspective) left NH during the same recent 5 year time period.

Figure 5

I am not arguing that we ignore the issue of out-migration of youth, but a state budget in surplus along with the “migrating youth” meme is likely to produce proposals for labor supply policies that are likely to be as costly as they are ineffective.  In future posts I will examine the costs and benefits of several labor supply policies directed at increasing the percentage of young people in NH as well as the percentage attending college and remaining in NH after graduation.   NH is not monolithic, some communities and regions have been attracting younger workers and the age structure of their labor forces has not been increasing as rapidly as NH overall.  If policymakers want to attempt to change decades of youth migration trends then these communities are instructive of the types of actions that may or may not help NH capture higher numbers of workers early in their working lives.

Still, migration along with changes in the labor force participation rate among different demographic groups are going to be the primary determinants of the magnitude of NH’s labor force growth in the coming decades. As Figure 6 below shows, net migration from other states (the # moving in versus the # moving out) has been negative in recent years. That is largely the result of a slowdown in people moving to NH rather than a substantial increase in those leaving the state. The chart also shows that net international migration has offset much of the recent loss from state-to-state migration.

Figure 6

International migration of foreign workers into NH has played a critical role in meeting the demand for many occupations in NH.  Overall just under 8 percent of the labor force in NH is foreign born but in some occupations such as computer and mathematical occupations and life and physical sciences occupations, the percentage of foreign born workers in the NH labor force is over 20 percent (Figure 7).

Figure 7

The projections of labor supply/demand imbalances in this post don’t account for  potential increases in domestic or foreign migration but each of these will  play an important role in meeting the demand for labor in the Granite State.  Businesses have little control over net migration to NH so what can businesses do in the face of impeding labor shortages?  Here are some possible strategies to help businesses  meet their labor needs in an era of slow labor force growth:

  • Increase Wages and Pass Costs on to Consumers
  • Expand Automation and Increase Productivity
  • Move to Areas with More Labor
  • Increase Teleworking to Expand Potential Labor Pool
  • Tap the Untapped Labor Pools
  • Provide Incentives to Delay Retirement
  • Rely More on Contingent Workers
  • Recruit (and Train) Discouraged Workers.

These strategies are not available to all businesses or all industries.  Of all, I like providing incentives to delay retirement the best – it is the “revenge of the baby boomers”. More occupations today are less physically demanding and older citizens are healthier than any time in our nation’s history.  Combined, this should allow individuals to work (if they so chose) well beyond traditional retirement years.  For a long while now younger workers have been all the rage.  It is fitting that baby boomers who entered the workforce in numbers large enough to depress wages, and who have seen workplace cultures that increasingly look to appeal to the youngest workers, could see increasing demand for their services at the end of their working lives.

 


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