September 2012 Edition of Trend Lines by PolEcon Research

Trend Lines Economic, Fiscal, Demographic and Policy Insights for NH and The Nation Prepared By: Brian Gottlob, PolEcon Research (603) 988-9779

This Month: Southern (Dis)Comfort and Northern Exposure? September, 2012

The NH Leading Index: Muddling Along Waiting for Clarity Highlights: •

Southern (Dis)comfort : NH’s Private Emp. Growth Trends. (pg. 2)

•

It Isn’t Over Until Small Business Sings. (pg 3)

•

Exports Sped Recovery But Have Faded as a Source of NH’s Growth. (pg 4)

NH Index of Leading Indicators This Month: What Improved (+) or Declined (-) +

Manufacturing Production

Housing Permits

Value of Construction

NH On-line Help Wanted Advertising

Trend Lines we take a hard and uncomfortable look at recent trends in private sector job growth in NH that may portend longer-term changes in the rate of NH’s job growth and its growth in relation to other states. In addition we examine indicators of the health of small businesses in NH and what the near-term implications are for the broader NH economy. Finally, we briefly look at trends in merchandise exports from the Granite State, how they have contributed to growth and what current trends imply for their contributions to NH’s near-term growth.

growth and consumer spending affecting many small businesses in the Granite State. So many legislative and regulatory issues hanging in the balance reinforces businesses desire to do as little as possible prior to the election. In NH, private sector job growth has turned negative on an annualized basis (page 2) but after two months in negative territory, PolEcon’s NH Leading Index increased to a value of +7.4, indicating that job growth should stabilize but at less than robust levels. Despite turning positive, the Index still signals only tepid job growth in NH into 2013. In this issue of

P o l E c o n’ s L ea d i ng In d ex T u rn s P o s i ti v e B u t S t i ll S i g n al s O n l y S lo w G r o wt h 40

6% T h e N H Le a d in g I n d e x D ip p ed F u r t h e r I n t o N e g a t iv e T er r it o r y

Index = +7.4, up from -2.3

20 2%

US Employment Growth

Capital Goods Shipments (US)

Yield Curve (Interest Rates)

NH Index Value

Consumer Confidence

0 86

- 10 -2 % - 20

N H L e ad in g In d e x

-4 %

- 30

N H E m p . G ro w t h R a te - 40

-6 %

% Change in Emp. O ver 12 Mos. Prior

New Claims for Unemp. Ins.

Hiring has slowed among businesses of all sizes and in most areas of the country as many businesses try to anticipate policy changes at the state and national level. After the November elections the so called “fiscal cliff” approaches with the Bush era and payroll tax cuts set to expire and budget cuts agreed to last year scheduled to take effect. The U.S. Treasury debt ceiling will also need to be raised early in 2013. Uncertainty surrounding these events has likely caused many firms to postpone hiring. The resulting tepid job growth is constraining income

Page 2 of 5

Trend Lines

Southern (Dis)Comfort and Northern Exposure: NH’s New Growth Trends For many in the Granite State, above average economic growth relative to neighboring states is as much a part of NH’s identity as was the Old Man of the Mountain. Weaker relative growth both before and after the recent recession, however, hint at cracks and fissures in the NH economy that threaten to crumble another core element of NH’s identity. NH’s economy hasn’t collapsed into a mountain pass and changes in the relative economic performance of the state didn’t leave a visual mark on the landscape as a reminder of NH’s drop in job growth relative to that of other states. Rather, the trend has, at best, gone largely unnoticed or unacknowledged and at worst it has been disregarded. Over the past few decades NH’s strong economy has produced an expectation among residents and policymakers that the state will continue to outperform the national average on job and economic growth. When that expectation continues long in the face of contrary evidence it acquires an air of entitlement that can border on narcissism. Even now, as the August 2012 employment report shows that for the second consecutive month NH has fewer private sector jobs in the state than it did in the same month in 2011, many discussions of the NH economy are still prefaced with “NH is doing better than most states.” No it is not and it hasn’t been for

some time. What NH does have is a low unemployment rate that has become an inappropriate synonym for job growth in the state. NH’s low unemployment rate results, in part, from a low presence in the state of individuals who are typically hard to employ (minorities, especially minority teenagers, and those without a high school diploma) as well as slowing labor force growth. NH has also benefited from having a state to the south that has added 41,000 private sector jobs over the past 12 months compared to the approximately 2,000 private sector jobs lost in NH during that same time period. The unemployment rate is a residency based measure that is not concerned with the location of an individual’s job, only whether or not they are employed. It also depends as much on changes in the denominator (the size of the labor force) as it does on changes in the numerator (the number of employed persons). It is a reasonable indicator of the health of the labor market at the national level and the supply/demand ratio of labor, even at the regional level, but it is not the best indicator of job growth in NH. Figure 1 compares the rate of job growth in the private sector in the U.S., NH and two of its neighbors (MA and VT), before and after the recent recession. The chart shows that even prior to the recession, NH’s private sector job was trending lower than growth

Figure 1

The Rate of Private Sector Job Growth in NH is Trailing the U.S. Rate as Well as Rates in Massachusetts and Vermont 3.0%

The NH Leading Index Dipped Further Into Negative Territory

2.0% 1.0% 0.0% 07

-1.0% -2.0%

U.S. Private Emp .

-3.0%

NH Private Emp. -4.0% 3 m onth mo ving average

M A Private Emp .

-5.0%

VT Private Emp.

-6.0% -7.0%

in Massachusetts. Over the past year or more NH’s growth rate in private employment has been declining and is now well below the growth rate in both Massachusetts and Vermont. NH should be uncomfortable with the thought that two states often derided for their policies could be growing private employment faster than is NH. It is possible that this turn of the economic tables is just a temporary

aberration and annual revisions to the monthly job growth numbers can be large enough to erase much of the disparity between NH’s private employment growth and that of its neighbors. But looking at annual data on private sector job growth over the past 20 years or more suggests that there is more to it than just aberration. Figure 2 shows two troubling trends for NH: a generally declining level of job growth in NH and the U.S., and more troubling, Southern cont. on pg. 4 Figure 2

The Rate of Private Sector Job Growth in NH is Lower and Looks Much Less Exceptional Over the Past Decade 6 .0% The NH Lead ing IndexAnnual DippedPri Further Into Negative Territory vate Sector Job Growth

US 4 .0%

NH MA

2 .0%

0 .0% 92 93 94 95 -2 .0%

-4 .0%

-6 .0%

96 9 7 98 9 9 00 0 1 02 03 04

05 06

07 08 0 9 10 11

Trend Lines

Page 3 of 5

It Isn’t Over Until Small Business Sings Large businesses dominate economic news but the reality is that robust economic growth does not occur unless small businesses are confident, healthy, and hiring. National data on job growth by size of business for the final quarter of 2011 (the most recent available) show that while businesses with less than 50 employees account for about 29% of all private sector employment in the U.S., they accounted for only about 2% of the net job growth in the country in 2011. The situation is not much better when businesses under 250 are the hiring metric. Accounting for 47% of private sector employment nationally, firms under 250 employees accounted for just 15% of net job growth in the country in 2011. Until small business begin hiring on a broader scale, the nation and the state of NH are likely to remain mired in sluggish growth. The prospect of a significant increase in hiring by small businesses is not supported by key small business indicators. Small business

confidence, as measured by the National Federation of Independent Business (NFIB) “Optimism Index,” demonstrated a roughly 70% correlation with growth in inflation-adjusted gross domestic product (GDP) over the past two decades (Figure 5). Because GDP is reported with a several month lag (and revised even later) the monthly NFIB Optimism Index can provide valuable, “real-time” insight into GDP growth trends. The recent slump in the NFIB Index suggests continued tepid GDP growth in late 2012 and early 2013. The NFIB index is also useful as an indicator of the near-term outlook for growth in income and private sector employment in NH. Changes in small business sentiment take some time to affect hiring and layoff decisions. When we correlate the NFIB Optimism Index with NH’s private sector employment growth rates 3 months later, the relationship is evident (correlation of .74, Figure 6). Again, the NFIB Optimism Index suggests continued

Figure 5

Small B usine ss Se ntime nt is a Good “Real-T ime” Indicator of T rends in G DP Growth )ation ally - it Does )ot In dicat e Str onger Growth is Immine nt 6.0%

110 C orre la tion = .72 105

4.0%

100 2.0% 95 0.0% 3

90 -2.0%

-4.0%

Re al G DP % C han ge Y r/Y r

N FIB Op tim ism In d ex

-6.0%

they pay their bills. As Figure 7 shows, improvement in the finances of small business in NH has been mixed, with firms employing 100-249 showing significant improvement in the timeliness of their payments, while businesses with less than 20 employees have shown an increase in their average days past term. In combination, these and other indicators suggest that small businesses are unlikely to increase hiring over the next several months enough to move NH from a sluggish to more robust recovery.

sluggish hiring by small businesses and slow private sector employment growth in NH. Finally, balance sheets of small businesses were badly hurt during the recent recession and while repair has taken place, it has been slowed by recent declines in the already slow pace of hiring, limiting income growth and restraining levels of consumer spending in NH. One measure of the financial health of businesses is the number of days “past term” that

Figure 7

Figure 6

The NFIB “Small Business Optimism Index” is a Good Predictor of the Direction of Job Growth in NH

The Average Number of Days “Beyond Term” that NH Businesses Pay Their Bills Suggests that the Finances of Firms With Fewer Than 20 Employees Has Weakened Slightly Over the Past Year

NFIB Optimi sm Index and NH Pri vate Sector Job Growth (3 Mos. Moving Avg.) 5.0%

110

8.0

105

7.0

A vg. D ays B e yond Te rm f or )H B usine sse s b y S ize of B usine ss

Corr elation = .74

3.0%

5-9

1 0-1 9

20- 49

5 0-9 9

100- 249 100

6.0

5.0

4.0

3.0

1.0%

-1.0%

-3.0%

-5.0%

Yr. to Yr. % Change in )H Priva te Emp.

)FIB Small Business Optimism Index (Lagg ed 3 Mos.) -7.0%

2.0 2 011 July

A ug

Se p

Oct

)o v

Dec

2012 Jan

Fe b

Mar

Apr

M ay

June

Trend Lines

Page 4 of 5

Exports Boost Recovery But Have Faded as a Source of NH’s Growth ?Exports have played an growth in exports from recession was, in part, Mexico and China have important role in the current economic cycle by contributing an outsized share to output, stimulating the manufacturing sector and other related industries and generating employment and income growth. Of last quarter’s +1.7% growth rate in the U.S. economy, +0.8% was attributable to exports. Since the end of the recession, U.S. GDP growth has averaged +2.2% with

accounting for nearly half of that or +1.0%. However, the data show that the contribution to growth of exports in NH has diminished rapidly since the beginning of 2011. Stronger growth in NH’s exports than in the U.S. as a whole was especially important to growth in NH early in the state’s recovery from recession. NH’s initially faster emergence

a result of the state’s stronger growth in exports (chart below left). Real, inflation adjusted growth in personal income in NH since the recession has tracked changes in the real dollar value of merchandise exports. As the trend in strong export growth has reversed, NH has also seen slower growth in personal income (figure at bottom right). NH exports to both

Plummeting Sales to Mexico and China and More Economic Troubles Worldwide Mean Less Export-Related Growth in NH in the Near-Term

declined by 50% since peaking during the last quarter of 2010 and the first quarter of 2011. While it is unclear if exports will actually pose a drag on NH growth, it is likely that struggles and continued threats facing many economies throughout the world will mean that employment and income in NH will not receive the same boost from exports that they did in 2009 and 2010.

Exports Played an Important Role in NH’s Recovery. Income Growth Has Tracked Export Growth Since the Recession $7 00

4.0% The NH Lead ing Index Dipped F urther Into Negat ive Territory

Growth in Mercahndise Exports (Index 2007=100)

180

$6 00

2.0%

160

$5 00 0.0% 140

$4 00 -2 .0% 120

$3 00 -4 .0%

100

NH Exports

$2 00 R eal (Inflatio n Adj usted) NH Exports ($ Mil lions)

U.S. Exports

-6 .0%

$1 00 Annualized % Change i n R eal NH P ersonal Income $0

60 07

-8 .0% 08

Southern (Dis)comfort …cont. from pg. 2 NH growth rates that have become less exceptional and more like the rest of the nation and the New England region. These two trends, especially the change in NH’s relative position among states, become clearer when we compare private sector job growth among the 50 states during two time periods over the past 20 years.

Figure 3 shows how exceptional NH (the red bar) was compared to other states in private sector job growth between the end of recession of the early 1990s (1992) and the end of the recession of the early 2000s (2002). The chart shows that NH’s rate of private employment growth far exceeded the rates of most other Northeastern states, with

NH experiencing the kind of growth more characteristic of the fast growing states of the south and west. The chart also shows, however, that both Vermont and Maine experienced strong private employment growth during that time period, suggesting the importance of the general Southern New

England to Northern New England migration that occurred during that time period played a significant role in private sector job growth in each state. In NH, the migration to the state of skilled individuals with higher levels of educational attainment fueled a boom in the state’s technology and high skill industries. Continued on page 5

Trend Lines Trend Lines

Trend Lines

Southern (Dis)comfort cont. Looking at more recent trends in private sector job growth between 2003 and 2011 (Figure 4) shows just how much lower job growth has been across much of the country, with states that have seen a boom in energy and natural resource production such a North

Dakota and Texas among the exceptions. More astonishingly is the fact that almost one-half of the states had fewer private sector jobs at the end of 2011 as they had in 2003. NH, again in red, has had only a minimal gain in private employment, with growth that looks much more pedestrian than it did during prior time periods. The national and many

Page 5 of 5 Page 5 of 5 state economies face substantial challenges in the coming years. NH will be better able to confront those challenges if it recognizes that the recent slow pace of job growth in the state is the result of much more than just a national recession. NH is better positioned to meet those challenges. It has a healthy respect for business, a solid reputation for economic growth, and it does not have

decades of public policies that thwart job growth to unwind. But decades of above average growth may have also given it an unrealistic sense of wellbeing that makes acknowledging the state’s challenges difficult and risks delaying actions that could help it regain its prominence in job creation in the region and the nation. Figure 4

Figure 3

But Since the Recession of the Early 2000s, NH and Almost Half the States Have Seen Little or No “Net” Private Sector Job Growth

During the 1990’s NH’s Private Sector Job Growth Looked More Like a Fast Growing State in the South or West than that of a Northeastern State 80%

Page 4 of 5

25%

% Change in Private Sector Jobs 1992-2002

70%

% Change in Private Sector Jobs 2003-2011

20%

60%

15%

50% 10%

40%

30%

10%

-5%

Mi chi g a n Ohio R h o de Is la nd New J erse y M i ssi ssi p p i In dia n a Il li no is Ca l ifo rn i a M a in e Ala b a ma Mi ssou ri Del a wa re Wi sc o nsi n Te n n es se e C o n ne ct ic ut Ken t u c k y Ark a nsa s Fl o rid a Ve rm o n t Ge o rg i a M as sa ch u s et ts So ut h C a roli n a M ary l an d M i n n es o ta N e w Ha m psh i re L o u isi a n a Kan sa s Pe n n sy l va n ia No rth C arol in a Ore go n Nev ad a Iow a We st Vi rgin i a Ne b ras k a C ol orad o Virg i n i a Ne w Yo rk Ha wai i Ari zo n a Ne w M e x i co O kl a h oma Wa sh i n gto n Id a h o M o nta n a So u t h D ako t a A la sk a Ut a h Te xas Wy o mi n g No rth D a k o ta

H aw ai i C o n n e ct ic u t N ew Yo rk DC Pe n n sy l v a n ia Il l in o i s Oh i o Rh o d e Isla n d Ala b a ma In di an a M iss o u ri M i chi g a n W es t Virg i n ia Io wa Ne w Je rse y M as sa ch u s et ts M is sis si p p i W is co n s in Lo u i si an a W as h in g t o n T e n n es se e Ke n tu c k y C a li fo rn ia Ark a n sa s Ve rmo n t Sou th C arol in a M a in e M a ryla n d No rth C aro l in a Ka n sa s De la wa re M in n e so t a No rt h Dak o ta Ala sk a Ne b ra sk a W y o mi n g Ok l aho m a O re g o n So u t h Da k o t a Vi rg in i a N ew Ha m p sh ire M o nt an a N ew M e x ic o Te x as Ge o rg ia Flo ri d a Id a h o C o l orad o Uta h Ari zo n a Ne v ad a

20%

VT ME

-10% -15%

Source: U.S. Bure au of Labor Statistics, PolEcon ca lc ulations

About PolEcon and the NH Leading Index PolEcon specializes in identifying, understanding and communicating emerging economic, fiscal, demographic, labor market, and public policy trends. PolEcon clients include for-profit firms in the energy, financial, information, real estate, and legal/lobbying industries, not-for-profits, regional development organizations, charitable and government agencies, as well as trade associations, chambers of commerce, educational

institutions and “think rate of employment tanks.” PolEcon’s growth in NH. When services include, index scores are above economic and fiscal zero, more of the leading impact analysis and indicators are moving in forecasting, demographic a positive direction and and labor market analysis,the NH economy is cost/benefit analysis, expanding. The Index market analysis, and has a strong statistical strategic economic relationship with development. PolEcon’s changes in NH NH Index of Leading employment, Index Indicators is a diffusion scores lead changes in index consisting of nine the rate of NH state and national employment growth by indicators of economic 3-6 months. Using activity designed to statistical techniques, predict changes in the Index scores can be

PolEcon Research 51 Atkinson St. Dover, NH 03820 PHONE: (603) 749-4677 AUTHOR’S E-MAIL: bgottlob@poleconresearch.com

converted into a probability that NH will be in a recession sometime within the subsequent six months.