Archive for July 2016

Not With a Bang But With a Whimper

July 26, 2016

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The probability of recession in the next six months is low but the business cycle hasn’t been repealed, another recession will occur and almost certainly sometime before the end of 2019.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

July 14, 2016

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.

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