Great Expectations

Posted June 6, 2017 by Brian Gottlob
Categories: Fiscal Policy, NH Economy, State budget, Tax Revenue, Uncategorized

Tags: , , , , , ,

“Take nothing on its looks; take everything on evidence. There’s no better rule.”        

    Mr. Jaggers to Pip,  in Charles Dickens’ “Great Expectations”

Optimism in the U.S. economy has been high for most of 2017.  Consumer and small business confidence are both higher than they have been in a decade  and according to the Business Roundtable the CEO’s of America’s largest corporations haven’t been this optimistic in eight years.

Sentiment

From survey data alone the U.S. economy appears to be booming.  But the hard, quantifiable data (1.2 percent GDP growth in the first quarter of 2017) tells a story of more tepid growth.  The degree of divergence between soft (survey and sentiment data) and hard economic data is striking and either consumer and business sentiment will lead to higher rates of growth or sentiment will begin to wane – something has to give and my money is on the latter.

The divergence between sentiment and actual economic performance can be especially problematic for lawmakers crafting state budgets.  With so much economic optimism it is easy for those urging caution in budgeting (based on expected revenue) to be the skunks at the garden party. I don’t know who has the best revenue estimates on which to base NH’s next budget but the trends I see (and present later in this post) urge caution in assuming current levels of consumer and business optimism will be matched by revenue growth.

Still, the economic recovery remains on track (albeit at a modest pace by historical standards) and it has a better than 50/50 chance of becoming the longest expansion in U.S. history by lasting into the middle of 2019.

Length of recovery

The current expansion is getting old but expansions don’t die of old age; something kills them (think the savings and loan crisis in the 1980s, the dot com bubble in the early 2000s, and the mortgage and financial crisis of the recent recession).  Right now, the economy does not seem to be harboring the kinds of excesses and imbalances or overindulgence that have presaged sharp slowdowns or recessions in the past. There are some areas of concern; at more than 20 times earnings, stock market valuations (depending on which index is used) are well above the 15-17 time earnings that is the historical average, but this is not at the “irrational exuberance” stage.  Economists tend to write-off or disbelieve negative economic data as statistical anomalies or due to temporary factors prior to slowdowns and lately a bit more of that has been occurring than I am comfortable with.  But even as there are some unflattering economic indicators that should be acknowledged they are still too new to be trends.  No one is saying the “r-word” and the best we can say today is that we are one day closer to the next recession.

There is no more important task for policymakers than estimating revenues. Underestimating state government revenues results in more needs being unmet than is desirable, while overestimating revenues can lead to difficult and painful spending cuts in later years. So why should NH lawmakers be cautious in their revenue estimates in a time of optimism and apparent abundance?   As Dickens (Mr. Jaggers) would say “take nothing on its looks; take everything on evidence.”   In the case of state government revenue the “looks” are reports of a booming economy and high confidence while the “evidence” is real trends in revenue growth.   Analysis and empirical evidence are not currently in favor as tools for governing, at least at the national level, but the great majority of lawmakers in NH value data and evidence and do their best to employ rigor in the budgeting process.  But a focus on monthly revenue reports and numbers can sometimes make it difficult to separate the signal from the noise in the revenue trends. In addition, while it is important to note how actual revenues compare to “planned” revenues on a monthly basis, revenues can meet “planned” expectations at the same time they are signaling a weakening trend.  Thus it is possible that lawmakers can be optimistic that revenues meet or exceed expectations in any month at the same time revenue growth is slowing.  Which is the more important trend?  When I look at the larger trends in state revenue collections from NH’s nine largest sources of own source, general revenue, I see a slowing growth trend even as revenues have generally met monthly expectations.  The chart below shows the year-over-year percentage change in annualized (sum of prior 12 months) state revenue collections.

Annualized NH revenues

Examining NH business tax collections reveals a similar trend of a declining rate of growth.   The chart below shows the rate of change in annualized (sum of the prior 12 months) business tax collections, along with the trend in rate-adjusted revenue to control for the impacts of rate changes on growth rates.

Annualiz NH Business Taxes

The growth rate of meals and rental tax collections in NH (more commonly called meals and rooms) has also slowed.  The chart below shows annualized growth in spending on meals and rooms in NH.  Because the data shows spending on meals and rooms rather than tax collections the data is free from any changes related to tax rates.

Meals and rooms trend

Many factors influence rooms and meals and hospitality expenditures in the short-term (weather, gasoline prices, etc.) but the most fundamental factor that determines longer-term (longer than month-to-month) trends in meals and rooms expenditures are employment and earnings trends in the state and New England region.  Employment continues to grow but at a somewhat slower rate as the nation and the region confront full-employment and labor shortages. Wage growth is occurring but prices are also rising and as the figure below shows, real (inflation adjusted) earnings growth has been trending downward in the U.S. and New England (the same is true for NH).  The result is that the rate of growth of consumer expenditures, in almost all expenditure categories, has slowed.  The chart below presents an estimate of trends in the growth of real earnings (employment times the average hourly wage times average number of hours worked and adjusted for inflation) in the U.S. and New England.  The earnings of New England residents and their ability and willingness to spend have a significant impact on several NH revenues.

Real Earnings Growth

The relationship between spending on meals and rooms in NH and real earnings in New England (lagged) is evidenced in the graph below.

M&R and NE Earnings

I don’t know who is more accurate in estimating revenues in the current debate over the state’s next budget.  There is a case to be made for different expectations.  As long as policy decisions are made based on some empirical interpretation of trends in the economy and revenues rather than an ideological push for more or less spending I think the state will be fine regardless of what lawmakers decide.  I am frequently in error but rarely in doubt and I’ve presented one of what are many interpretations of revenue trends in NH.  Despite what I see as a lot of unmet needs in the Granite State, the trends highlighted in this post urge caution in pillorying anyone who argues for fiscal restraint at a time of so much economic optimism.

Immigrants to New Hampshire: Enemies at the Gate?

Posted February 2, 2017 by Brian Gottlob
Categories: Educational Attainment, immigration, migration, Workforce

Tags: , , , , ,

America is pretty great most of the time but I understand why many in this country disagree with that perspective.  There are a lot of disaffected individuals across the country, in large part because of the differential impacts that changing economic, social and cultural forces have had on individuals, communities, and regions of the country.  There is also no shortage of individuals, causes and movements looking to channel that disaffection.  Populism and nationalism are catalysts that can coalesce the disaffected in this and other countries into powerful and sometimes malignant forces. It is easy to see how the real disaffection accompanying economic and social change in this country, combined with legitimate desires for national security could be stoked to the point where issues requiring thoughtful policies and actions morph into something less legitimate and more pernicious.  As my favorite self-educated, longshoreman, philosopher Eric Hoffer, wrote in “The True Believer: Thoughts on the Nature of Mass Movements”  back in 1951- “Mass movements can rise and spread without belief in a God, but never without belief in a devil.”  Today in America the devil is foreigners and  in particular – but not exclusively – foreign Muslims (along with other foreigners and immigrants the media is a distant but strong second devil), but you don’t have to look too deeply to see those sentiments extending to other faiths, races, and nationalities and others (e.g. “experts”, scientists, intellectuals, “elites”.)”  That is a big step backward for a great country (that can, in fact, be made GREATER) but one who’s greatness has not been predicated on diminishing other peoples or retreating from the rest of the world.

Years ago in this blog I wrote that NH’s most valuable import was the talented individuals that arrived here from other countries. I still believe that to be true and now seems like an appropriate time to revisit that issue with some fresh data and analysis.

Unquestionably New Hampshire and New England will be economically and demographically worse off if international migration is significantly restricted.  In fact, it is hard to see a region of the country that would be more negatively affected than New England by any large scale reduction in immigration.  International migration has provided a powerful boost to the economy of New England by adding individuals to our labor force and talent to fuel our region’s innovation-dependent economy.  Always important to the region but never more so than now,  a time when New England has been on the losing end of national demographic trends that have seen more individuals in this country moving to the south and to the west.  Looking at just the past several years we see that all of the New England states experienced more people moving out to other states than moved in.  New Hampshire is again starting to see net in-migration from other states but for more than a decade the state has experienced, on average, net international migration of about 2,000 individuals annually.

net-migration

There are about 76,000 foreign born individuals living in New Hampshire.  Immigrants comprise over 6 percent of the state’s labor force (compared to 16.5 percent in the U.S. overall) but that 6 percent has an out sized importance to the state’s labor force in a number of ways.  On balance, immigrants increase the overall level of educational attainment of New Hampshire’s adult population.   Examining data from the U.S. Census Bureau’s “American Community Survey” 5 year estimates (2011-15), the chart below shows that 40 percent of the foreign born population age 25 and above in NH has a bachelor’s degree or higher, compared to 34 percent for U.S. born residents of the state.  A higher percentage of foreign born residents living in NH have not graduated from high school but overall the chart shows that  compared to the foreign born population across the U.S., immigrants in NH have significantly higher levels of educational attainment.

ed-attainment-of-immigrants

Immigrants represent a high percentage of individuals in New Hampshire with STEM (Science, Technology, Engineering, Math) degrees.  There is no single definition of what constitutes a STEM degree but examining Census data on the first college degree (bachelor’s) received by working individuals in NH, age 25 and above, it is not difficult to reasonably classify the 172 different degrees as STEM or not.

Among NH’s foreign born adult population that holds at least a bachelor’s degree, 46 percent hold a degree in a stem field, compared to just 24 percent for native born NH residents.

immigrant-pct-with-stem-degree

Despite comprising just over 6 percent of NH’s workforce, foreign born individuals account for 16.5 percent of all working NH residents with a STEM degree, a percentage nearly equal to that of NH born residents of the state.

immigrant-pct-of-stem

Finally, examining specific occupations shows just how important immigrants are to the supply of many occupations in the state..  Foreign born residents comprise 20 percent of the computer-related occupations held by NH residents.  Fully 20 percent of physicians, surgeons, and other high-level medical occupations are held by foreign born residents of New Hampshire. Foreign born residents also hold a relatively large percentage (11.5%) of production jobs in the state.  Among lower-skill occupations foreign born residents hold 21 percent of maid and housekeeping positions and 13 percent of janitorial occupations. The figure below highlights the impact of immigrants on the supply of occupations in NH for several of the more than 400 occupations examined.  Only occupations held by 1,000 or more NH residents are included.

immigrant-share-of-occupationsSupporters of migration bans and limits say that the limits on immigration would only apply to refugees (not comforting to me for a number of non-economic reasons), undocumented immigrants, or those with a criminal past.  But with the rhetoric and actions coming from Washington it is hard to see anti-immigration policies stopping there.

“But NH Isn’t Dead”

Posted November 17, 2016 by Brian Gottlob
Categories: Demographics, in-migration, migration, New Hampshire, Uncategorized, wages

Tags: , , ,

There is a scene from the movie “Monty Python and the Holy Grail” where a wagon stacked with bodies is being pulled through a plague infested medieval village while a crier calls out “bring out your dead.”  The comedy in that grim scene comes when a man tries to load a body slung over his shoulder onto the wagon and against the protests of the still quite alive “dead man” who says such things as “but I’m not dead,” I’m feeling better,” and “I think I will go for a walk.” I am reminded of that movie scene every time I hear proclamations about NH being the 1st or 2nd oldest state in the nation.

An excellent radio program in NH (especially  when I am guest – I wasn’t on this broadcast) recently spent an hour discussing the implications of NH being “the second oldest state in the nation.” The operational definition of “second oldest state” was never given but I assume it is based on the median age of the state’s population.  Using 5 year Census Bureau estimates (2010-14) NH has the third highest median age of any state in the nation (collective gasp here), behind only Maine and Vermont.

median-age

Before administering the sacrament of the anointing of the sick to New Hampshire, however, understand that a state’s median age says relatively little about the age distribution of a population and even less about the demographic and public policy challenges (and their severity) that a state will confront in the future.  Does NH’s high median age really mean our state is worse off demographically than 47 other states?

First, a high median age doesn’t mean NH has a disproportionate number of elderly residents.  It does mean, and has for some time, that NH has a high percentage of residents in the middle of the age distribution and fewer at early ages. As the chart below shows, on the percentage of the population age 65+, NH ranks 15th among all states and below many states with a lower median age.

age-65

Second as I argued here, if you want to understand the strains that an older demographic may place on the fiscal system of a state or a nation you need to look at the “old age dependency ratio,” or the number of older residents in relation to the number of working-age residents because that is a measure of the population that will largely be paying for or supporting the services for the older population.  There will be more elderly in NH and that will increase service needs but the fiscal pressures those needs place on the state is a function of both the number in need of services and the number of working age individuals supporting the services (that is why China’s “one-child” policy that results in  four grandparents, two parents, and one child was always a demographic ponzi scheme).   The old-age dependency ratio is rising in NH but again, on that metric, NH hardly looks  that much worse off than most states as it is firmly in the middle of all states on the ratio of residents age 65+ to working age residents.  In addition, because NH has relatively healthier and more well-off older residents compared to many states, our dependency ratio probably slightly overstates the challenge the old-age dependency ratio presents to the state. With NH’s lowest in the nation birth rates the old-age dependency ratio could rise rapidly depending on migration trends (as has been the case in recent years) and is one more reason to want to make our state broadly appealing to demographic groups.

dependency-ratio

NH does face significant demographic challenges and if overstating their magnitude is necessary for action to address them then I guess I can live with that.  But too often the discussions of the demographic challenges facing NH are laced with agenda driven diagnoses and  prescriptions that make for great headlines but ineffective policies.

Low birth rates (NH now has the lowest in the nation) resulting from high labor force participation and levels of educational attainment among women in NH (a sign of our state’s successes not our failures) along with low mortality rates among an older population that is both healthier and wealthier (on average) than in most states, is a recipe for a higher median age in a state.  That is unless median age can be made more stationary through the in-migration of younger residents, or as NH has traditionally done, in-migration of residents more in the middle of the age distribution along with their children.  That was exactly NH’s recipe for success for decades even as young people have left the state (a decades long trend in NH), at least until net state-to-state migration slowed in NH, just as it has been slowing nationally for some time.   Between 2010 and 2015, the Census Bureau estimates that about 5,500 more NH residents moved out-of-state than residents of other states moved in, with about 6,700 more moving out of Hillsborough County than moved in, while about 4,500 more residents moved into Rockingham and Strafford Counties than moved out during that time.  The graphic below disputes the notion that NH is no longer a place that people want to locate, they are just being more selective in where they choose to locate in the state.  Examining the differences in population growth and demographic changes among individual communities within these counties  further suggests some of the factors that can contribute to in-migration and inform public policies that seek to address NH’s demographic challenges.  Not all communities experienced the growth or decline in migration characteristic of their counties.  Understanding why  is important to the future of our state and its communities.  It is more than just nearby job opportunities or Hillsborough County would not have seen so much out-migration.  I have written about some of the factors in prior blog posts.

county-migration

Many communities are aging more slowly than the state as a whole and their experiences are illustrative of some of the factors and actions that can influence the age structure of a state or a community. Yet policy discussions about demographics at the state level typically overlook positive demographic trends in many communities in the state.  Below is a chart that highlights how the median age has changed over two decades in just a few NH communities.  The chart shows the median age of each community in 1990, and then incrementally adds how much the median age has changed in each of the following two decades.  There was relatively little difference in the median age of each community’s population in 1990, but especially in the 2000 to 2010 decade, the rate of change in median age varied significantly among the communities.  Communities such as Portsmouth, which had a relatively high median age until 2000, slowed its rate of “aging” dramatically in the 2000s, as did Dover and Manchester, albeit for different reasons and with different demographics.

community-median-age

The point is that if some regions and some communities in NH can rage against the dying of the light, others and maybe even the state as a whole, can as well.  So, while many want to heap NH onto a metaphorical “death wagon,” let me say “but NH is not dead, I think we should go for a walk today”.

“Tomorrow Will Still be Wednesday” – Our Final Presidential Election Model

Posted November 4, 2016 by Brian Gottlob
Categories: Election, presidential election, Uncategorized

Tags: , , ,

November 8th can’t come soon enough.  When it does, take a deep breath and remember this: “tomorrow will still be Wednesday.”  Whoever manages to win the unpopularity contest that is the 2016 presidential election, the earth will remain on its axis, the sun will  rise again on November 9th, you can still hug your children (if they live away from home they still won’t return your call but they will respond to your texts), and no doubt your dog will love you unconditionally no matter who wins.  You wouldn’t know it from the hyperbole on both sides but on November 9th know this: the republic will remain standing.  That is my mantra at the end of an awful campaign that has cheapened and debased our electoral system in a way that won’t be easily repaired.  You don’t have to like the politics of past presidents to appreciate that, for the most part, they led our country with dignity, honor, and respect, things that are just as important to maintaining our democracy and our position in the world as are any shows of military or economic strength. Nobody gets to be president of the United States without a healthy ego and sharp elbows but today, with an election that shows how easy it is for many to excuse rudeness, sexism, racism, nativism and just about every other “ism” as a justifiable response to political correctness or as a sign of “strength,” I can’t help but think of past presidents who led our nation through difficult times knowing that they could not do so alone and with with a decency and a humility characteristic of genuine strength and leadership.

I definitely picked a bad year to try to make political predictions based primarily on economic conditions and without regard to the particular candidates running.  As a lover of statistics and statistical models I like reading Nate Silver’s FiveThirtyEight blog for its election predictions but when he said:  “Still, you should be wary of economic determinism. “Fundamentals”-based models that don’t look at polls have a fairly bad track record, even in years that aren’t as crazy as this one.” I couldn’t resist the effort to predict presidential election results with a regression model that used primarily economic data and that didn’t require the complexity and volume of polling data that FiveThirtyEight uses. In fairness, Mr. Silver did also say “I do not mean to suggest that the economy does not matter to elections, or that there is no predictive content in looking at economic variables. As this experiment should show you, the economy assuredly does not account for 90 percent of voting results. But it may well account for half of them.” I would argue more than half.   I won’t say, but I have heard others say, that Mr. Silver would have better luck with “economic determinism” if his model used individual state-level economic data and conditions rather than national data  because economic conditions vary greatly across states (note here that I am doing my best Donald Trump imitation by saying something without taking responsibility for it).   I also won’t say Mr. Silver would have better luck using economic variables that aren’t endogenously determined (i.e. some of the explanatory economic variables he uses are almost completely determined by other economic variables in the model).  That is a pretty big no-no for a stats maven to make but only if he knows something about economics.

I first posted in April and updated in July, a presidential election prediction model.  I failed to note in prior posts that I consider only the two candidates from the major political parties in the model so the winner of each state is the one that gets more than 50 percent of a state’s vote and the predicted vote percentages will not be similar to actual results that include third party candidates.  In July I also promised to post one more iteration of the election model after the latest state-level personal income data was released prior to the election because personal income growth trends are so important to the model’s predictions.

In the November election model the Democratic candidate still has a large advantage in the electoral college but as the chart below shows, there are more states currently predicted as Democratic victories that could switch to a Republican victory than vice versa.  In the unlikely event that all predicted narrow Democratic victories changed to Republican victories and all narrow Republican victories remained Republican wins, then the Republican candidate would be awarded 294 electoral votes and win the presidency.  On the other hand, in the unlikely event that all predicted narrow victories for the Republican candidate changed to Democratic victories and all predicted Democratic victories remained Democratic wins, the electoral college vote total tally would be 384 to 154 in favor of the Democratic candidate.  These are the extremes of potential outcomes but while the July model suggested an almost impossible path to electoral college victory for the Republican candidate, the November model shows an improbable but not impossible path.

november-map

To the Victor Goes the ?

President Obama’s reward for winning the presidency was inheriting an economy in a severe recession but at least one where the most controversial policies adopted to combat it were already largely in place.  The next president will begin seeking reelection fully 10 years since the end of the “great recession” making it the longest period of economic expansion in U.S. history and suggesting the possibility that U.S. will once again be in, near, or ending a recession. I believe Mrs. Clinton will win the White House and a recession in her first term and voter fatigue after three terms of a Democratic presidency will give the 2020 election to the Republican Party.  Of course that assumes a disarming of the circular firing squad that is the current Republican Party and if there is one thing the Republican Party probably doesn’t want to do it is disarm. Republicans may be able to capture the White House in 2020 with a better salesman at the top of the ticket but demographic trends suggest it will need more.  To me, the most interesting aspect of the 2016 election is that it hints at a future realignment of political parties, with the Republican party becoming the party of the working class and the Democratic party becoming the free trading, immigration supporting, party favored by business.

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.

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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.

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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.

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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.


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