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The Best of Times, The Worst of Times

February 16, 2018
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”
– Charles Dickens, A Tale of Two Cities

The U.S. economy is currently in the third longest period of uninterrupted expansion in its history, soon to be the second longest, and there is a better than even chance it will become the longest in history 16 months from now.  Even without the recently enacted deficit-financed stimulus (tax cuts and expenditure increases) the U.S. economy was on solid ground, with growth forecast to be stronger in 2018 than it was in 2017. That is what makes lack of concern over the projected increase in the government’s annual deficit from about $700 billion to $1 trillion especially troubling.

Expansion

The current economic expansion is exceptional in duration and atypical in gaining strength late in the economic cycle.  But it is also about to become notorious for producing a burgeoning federal deficit during a period of solid economic growth (annual federal deficits are generally inversely related to economic conditions).  So the price of  stronger growth and a longer expansion is looking like higher annual budget deficits (forecast to grow from 3% of GDP to 5% just by 2019) and a national debt that will grow from about 76% of GDP to 97% over 10 years, risking longer-term economic growth.  It is a high price to pay for a small increase in economic growth and a fiscal policy gamble to add stimulus to an economy near full employment but it is  price that the administration and congress are willing to pay without hesitation.

Annual deficits declined between 2012 and 2016 as the economic recovery strengthened and costs associated with the “stimulus” eroded.  But since early 2016 deficits have been increasing.  The difference between monthly revenues and expenditures over the most recent 12 twelve months (between February 2017 and January 2018) shows that the annualized federal deficit stands at $682 billion compared to $585 billion for the February 2016 to January 2017 time period, a 17% increase over the year and up from a low of $405 billion early in 2016.

Deficit

The increase in the deficit results from both higher spending and a slowing rate of revenue growth (chart below), and it comes before the impacts of recently enacted tax cuts and the two-year spending agreement take effect that will both lower revenues by about $1 trillion over the next decade (even after accounting for growth effects) and increase spending by about $300 billion just over the next two years.

Spending and revenues

The U.S. has had higher annual deficits in the past, but always during a period of weak or negative economic growth.  Increasing deficits and greatly adding to the nation’s debt in the absence of an economic downturn should have been a giant caution sign for lawmakers.  If  $400 billion annual deficits were “crippling” our economy in 2016 (as some lawmakers suggested) how are $1 trillion deficits in a growing economy not of more concern?  Debt is often the match that lights the fire of economic crisis, whether the fault was with politicians, central bankers, overzealous consumers, businesses, developers, bankers, credit rating agencies, regulators, or any combination thereof, all true crises involve too much leverage.

With that admonition (screed?), reducing the corporate tax rate was still a good idea, the U.S. rate was too high. And yes, a lower corporate tax will raise wages eventually (lower taxes increase capital investment and improve productivity – raising wages), but only after years, and certainly not in the time frame suggested by the White House. But just as important (and largely a missed opportunity in the legislation) was the need to eliminate targeted and industry-specific preferences that direct too much investment to tax-favored activities rather than to their most productive uses.  Many of the agreed upon expenditure increases also have merit.  Overall, however, the combination of tax and spending policies recently enacted seems poorly structured and ill-timed.  If we enact a deficit funded stimulus when we are near full employment and when the economy is already poised to grow more rapidly, what will we be able to do when the next recession arrives?

Impact on State Finances

The New Hampshire economy is fundamentally strong, our industries are as vibrant and innovative as ever and the state’s economy would be growing and producing more if the supply of labor could accommodate more growth. It can’t, labor force growth is not keeping pace with labor demand and economic growth has been slowing in New Hampshire for at least two quarters. It will continue to do so in 2018. So too will state revenues.

Job and LF Growth

State-level GDP estimates produced by the U.S. Bureau of Economic Analysis are reported with a long lag and are not a very timely indicator of current state growth trends.  A useful proxy for assessing growth trends in state-level GDP is aggregate hours worked in the state (employment times the average number of hours worked) which correlates well with changes in the state’s total output of goods and services (GDP).  Adding current estimates of U.S. productivity growth (there is no similar state-level measure) provides a high-frequency estimate of the state’s GDP growth trend.  As the chart below shows, the growth rate of NH GDP is declining, again, primarily because the rate of employment growth is declining.  When you are adding fewer workers the output of the state’s economy will grow more slowly unless there is a significant increase in productivity (it has increased some but not significantly).

Aggregate Hours Worked

Slower employment and economic growth in NH (along with changes in revenue policies) have slowed the rate of revenue growth in the state since 2016.  There has been a bump in the past few months but how the recently enacted tax cuts at the national level will affect the trend is uncertain.  What is certain is that the growth constraints NH faces will make it difficult to accelerate economic growth in the state and thus state revenues.

Looking at annualized revenue growth (summing any 12 month period), the chart below shows that revenue from NH’s nine largest sources of general revenue (and the sources most affected by economic trends) hit a plateau in 2016, at a time when employment growth was at its post-recession peak.  Since that time, annualized growth in the revenue sources most affected by economic conditions has slowed.

Revenue

 Looking at the rate of change in annualized state revenues illustrates the longer-term slowing of the rate of annualized growth.   The chart below shows how significantly the growth rate in revenues has slowed since 2016.

Revenue Growth Rate

Expenditure Pressures Will Mount

The impact on state revenues of recent changes in federal policies may be uncertain but their impact on state and local government is likely to add to the state’s fiscal pressures.  A great deal of uncertainty exists over how funding for state-operated programs that share costs with the federal government will be affected but most signs point to less funding for programs like Medicaid and infrastructure.  The administration’s recently announced $1.5 trillion infrastructure proposal actually reduces funding for states while calling for greater state commitments.  Proposals to cap or block-grant Medicaid funding would significantly add to the fiscal pressures facing all states.  At the same time mandatory spending on things such as government pensions are poised to increase significantly in coming years.

Other recent federal policies will affect states and localities by increasing the cost of borrowing.  One change eliminated the tax-free status of “advance refunding bonds” that allow states and communities to refinance debt at lower interest rates well before their call date in order to free-up funds for other purposes.  The prospect of annual deficits of more than a trillion dollars (placing greater demands on credit markets) during a strong economy when deficits typically fall, has also increased expectations of higher interest rates, increasing the cost of borrowing by governments, households and businesses.  How fast and how much rates rise is not certain but they have already increased significantly this year (albeit from low levels.)

Less directly, federal tax law changes will affect the borrowing costs of state and local governments by making municipal bonds less attractive (relative to other loans and investments).  Banks and insurance companies are big buyers of municipal bonds – lending money to state and local governments.  The interest rate that governments have to pay on those bonds is lower than on other types of loans made by banks because banks and insurance companies do not have to pay taxes on the income they earn from loans to governments.   The drop in the corporate tax rate reduces some of the advantage of the tax- free bonds and makes other loans/investments made by banks and insurers more attractive relative to municipal bonds.  Interest rates on municipal bonds will have to rise to remain competitive with other loans.

Along with slower growth in state revenues there are enough spending pressures building along with potential impacts from recently enacted federal policies to suggest  lawmakers in the state would be wise to be cautious in the next budget cycle that begins in the fall of this year.

The divergence between economic and fiscal conditions doesn’t seem to be troubling to many policymakers at the federal or state level.  With apologies to Dickens, it does feel like “it was the best of times, it was the worst of times.” Let’s hope that it isn’t also becoming “the age of foolishness.”

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Business is Aging Faster Than the Population

August 24, 2017

The U.S. economy is in a constant state of churn. New businesses are being created while existing businesses quit or fail. This dynamic process can be disruptive as new technologies, firms, and industries replace older ones, but it is not destructive, it enables increases in productivity and spurs economic growth. In a dynamic economy with lots of churning more productive firms drive out less productive ones, new entrants disrupt incumbents, and workers are better matched with firms. A dynamic economy constantly forces labor and capital to be put to better, more productive uses. Historically the dynamism of the U.S. economy is an important ingredient that distinguished our country from many slower growth (or stagnating) industrial economies. New Hampshire and the New England region have been especially dependent on economic dynamism as the region typically loses industries to regions or nations that have lower business costs once industries mature and become more standardized. High rates of new business starts fuel dynamic economies. Unfortunately in NH and in all other states the rate of new business starts is in long-term decline.

For most of the past few decades far more businesses in NH and most states were started then either quit or failed. More recently, the gap between a large number of business starts and a smaller number of quits or failures has been narrowing. Briefly, during the great recession, more businesses quit or failed in NH and the U.S. than were started.

New Firms and Exits

Except for an uptick during the “great recession,” business quits or failures have occurred at a pretty consistent rate over the past several decades. What has narrowed the gap between the number of new firms and the number of quits and failures has been a decline in the rate of new business starts in New Hampshire and the nation. The chart below shows that new firms (less than one-year old) accounted for less than 7 percent of all New Hampshire firms in 2014, down from 15 percent in 1988. A similar decline occurred in the country as a whole.

New Firms as a % of all Firms

The decline in economic dynamism implied by lower rates of business starts is contributing to our nation’s slower (by historical standards) productivity growth. Although labor force constraints are a primary culprit, lower rates of new business starts also contribute to slower employment growth, as fewer new business replace those business that quit or fail.

A recent study by Dun & Bradstreet American Express and recent data released by the U.S. Census Bureau show that larger businesses have been creating jobs at a faster rate than small businesses (less than 20 employees) in recent years, including in NH.  A very good business reporter in NH asked for my thoughts on these findings for an article he was writing.  In the article I note that the decline in entrepreneurial activity was a more important factor explaining slower job growth among smaller firms than was business size.  The age of businesses is an “intervening” variable between the apparent relationship between size of businesses and job growth, as new business typically start small. Simply comparing the percentage of jobs added by smaller and larger firms in NH would miss the job growth implications (among the small business category) of the declining rate of new business starts. New business starts account for a significant percentage of job creation in any year and a decline in business starts hurts job growth among  the category of small (under 20 employees) businesses.   The chart below shows that new firms less than one-year old accounted for about 8 percent of all private sector jobs in NH in 1984, by 2014 that percentage was down to 3 percent, a more than 60 percent decline.  From over 30,000 jobs at startups in the mid-1980s, the number of employees at startups averaged less than 18,000 between 2012 and 2014.

Jobs and % of Jobs

Today it is impossible to enter any analysis of the economy that isn’t interpreted through some ideological lens. Making it easier for entrepreneurs to start and operate a business without excessive regulatory burdens and allowing entrepreneurs to keep more of the rewards of their risk taking may seem like an ideological prescription but it just makes sense to incent more new business formations.  However, a bigger problem may be that too often regulations, laws and the political process favor older, more established technologies, businesses, and industries and look to protect and preserve the past rather than enable future technologies and industries.

Economic cycles produce temporary declines in entrepreneurial activity.  Recessions don’t make it easy to start a business but the nation’s longer-term decline in entrepreneurial activity spans economic cycles. One of the more troubling aspects of recessions is that by reducing startups and killing-off many younger firms they shrink the pool of new business from which the next generation of growth companies could emerge.  Younger firms that survive for a number of years tend to grow faster than older firms so a smaller number of new and surviving firms impede future job growth and make it harder to recover from recessions. By impeding business starts for several years (well after the recession ended) the less visible but longer-term impact of the “great recession” will be a smaller generation of the next growth companies.

Still, structural factors in the economy are more problematic for longer-term trends in business starts.  Primary among them is demographics.  There has been a lot of attention focused (often inaccurately) on the demographics of NH’s population but not enough on the demographics of its business population, even though the two are related.  Just as declining birth rates in NH’s population is the primary factor accounting for the aging of the state’s population (not the movement of young people out of the state), a decline in the rate of new business formations is rapidly aging the population of NH businesses.  In fact, the population of NH’s businesses is aging faster than is the state’s population, potentially reducing the economic dynamism that characterized the state’s vibrant economy during much of the 1980s and 1990s.  With an increasing percentage of the state’s workforce above age 50, entrepreneurial risk taking can be expected to slow and as the chart below shows, the percentage of businesses in NH that have been in business for more than 15 years rose rapidly between 2003 and 2014 (the most recent year for which data is available).

Aging of Business

Millenials are a generation that is larger than the baby boom generation and as they become established in the working world they could reverse the trend of declining entrepreneurism.  But today individuals are changing jobs at ever lower rates, suggesting a tendency to prefer security over opportunity and risk.  Millennials are also a generation that is burdened by higher debt levels when they enter the work world, that delays or eschews homebuying, marriage and having children, will they be a generation of risk takers that revive entrepreneurism in NH and the nation?  I hope so because a dynamic, high productivity U.S. and NH economy depend on it.

Great Expectations

June 6, 2017

“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.

“But NH Isn’t Dead”

November 17, 2016

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

November 4, 2016

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.

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

June 22, 2016

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

June 9, 2016

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.


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