Worcester Economic Indicators

Solid Growth in Second Quarter
Employment up in health services, construction sectors
Second Quarter 2016
This report can be accessed as a PDF
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Worcester Economic Index

Figure1 2016q2

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The Worcester economy continued its steady, if unspectacular, growth as the Worcester Economic Index (WEI) posted a 2.9% increase in the second quarter of 2016.  The WEI is estimated using employment and unemployment data for the greater Worcester economy released each month by the Bureau of Labor Statistics (BLS). Since March, all three data series used in the estimation of the WEI have moved in a positive manner.  Both payroll employment and household employment have increased while the local unemployment rate has fallen.  After adjusting for seasonal variation, payroll employment which is derived by the BLS using a survey of employers, has risen by over 1400 employees since March.  While household employment, measured derived from the BLS survey of households, has increased by about 800 workers.  In addition, the unemployment rate (also derived from the survey of households) has fallen to a seasonally-adjusted rate of 4.5% in June, down from 4.8% in March.[i]

Figure 1 shows the Worcester Economic Index over the past 10 years.  Following the recession of 2008-09 the WEI has shown a growing local economy in most months since that time.  Table 1 shows the Worcester Economic Index over the past 13 months, its month-to-month change, and quarterly growth rate.  As the table shows, following a relatively sluggish fourth quarter of 2015, the WEI has grown more quickly over the first two quarters of 2016.  Since June 2015, the WEI has increased 1.7% with positive growth in all but one month.

Click here for a discussion of local employment trends in different industry sectors.

Worcester Economic Outlook

Table1 2016q2

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Looking forward, the Worcester Economic Index is expected to continue the steady pattern of growth experienced over the past year.  Based on the recent performance of the WEI as well as four leading indicators of the national economy, the WEI is expected to grow by about 2% over the remainder of 2016.  As table 2 shows, the June six-month forecast is 2.0%, while the average of the April, May, and June forecasts is only slightly higher at 2.1%.

Table 2 also shows the growth forecasts broken down into its 6 components.  The first component is the long-run trend growth of the WEI which is estimated to be about 1.3% on an annualized basis.  The values shown for each of the other components listed in table 2 represent the amount that each component contributes to the WEI forecast being above or below trend.  The component which makes the largest contribution to the above trend forecast is the WEI itself.  Past values of the WEI are included in the forecast model because economies tend to exhibit momentum and therefore recent economic performance tends to be an indicator of future performance.

Focusing on the average forecast for quarter 2 we see that the four national leading indicators do not contribute substantially to the growth forecast.  The consumer expectations indicator currently shows no impact on the WEI quarter 2 forecast.  Over the past 12 months, this indicator which is based on the University of Michigan Survey of Consumer Sentiments has fluctuated between 77 and 85, with June posting an 82.4 value near the middle of this range.[ii]

Table2 2016q2

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Changes in the S&P 500 stock index are included in the forecast model as a measure of investor attitudes toward future business conditions.  In spite of a rough January and February, the S&P is now up over 6% since the start of the year, enough to contribute a 0.1% bump to the WEI forecast.

The interest rate spread, which is the difference between the yield on a 10-year Treasury bond and the federal funds rate, is included as a measure of monetary policy.  The larger the spread the more growth-oriented the policy.  While the Federal Reserve is maintaining a low federal funds rate target, recent declines in 10-year Treasury yields has brought the spread down to where it is only neutral with respect to the growth forecast.  Low Treasury rates are due in part to weak economic performance abroad, as investors choose to buy U.S. Treasuries which are still providing higher yields than the bonds of some other nations.

Conditions in the credit markets, as measured by the Leading Credit IndexTM, is currently providing a small positive impact to the WEI forecast.  The Leading Credit IndexTM is compiled by The Conference Board each month and is a composite of several financial sector variables that aims to capture credit market conditions in the US.

Local Leading Indicators

The above forecast of the Worcester Economic Index is based on four national leading indicators, recent WEI values, as well as its long-run trend.  To supplement this forecast each quarterly Worcester Economic Indicators report includes a discussion of three local leading indicators: online help-wanted advertisements, new business incorporations, and state-wide initial unemployment claims.  Table 4 shows how these three leading indicators have performed over the past year.  Currently, two of the three indicators are providing negative signals on the direction of the economy.

Online help-wanted advertisements have fallen substantially over the past year and therefore is offering a negative signal at this time.  The number of help-wanted advertisements is a measure of the demand for labor by employers.  It is considered a leading indicator of employment because advertisements usually precede hiring so an increase in help-wanted ads may signal additional employment down the road.  On a seasonally-adjusted basis the number of online job openings is down over 25% since the second quarter of 2015.[iv]  Online help-wanted advertisements have also fallen at the national level, down about 11% since June 2015.[v] Fewer job openings is a sign that firms are reluctant to hire and therefore is a pessimistic signal for the economy.

Table3 2016q2

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As in the first quarter, new business incorporations are providing a positive signal at this time.  Compared to a year ago the number of incorporations is up about 15%.[vi]  An increase in incorporations is considered a positive signal because new businesses may look to hire workers in the near future.

The final indicator is the number of initial unemployment claims in the Commonwealth of Massachusetts.  Since the first quarter of 2015 initial claims have increased over 7% statewide.  While this is sending a negative signal, it should be noted that initial claims for Massachusetts are still near 25-year lows.  So while initial claims are currently showing an uptick, it is not surprising since it is unlikely that the economy could sustain record lows indefinitely.  If claims continue to rise over the remainder of the year that would be a stronger signal of a weakening economy.[vii]

To sum up, the Worcester Economic Index (WEI) increased 2.9% in the second quarter of 2016.  The WEI is expected to grow at roughly 2% over the coming six months.  Both national and local leading indicators are providing mostly neutral signals at this time.

The next Worcester Economic Indicators report will be issued in early November 2016. This report can be accessed as a PDF.

Prepared by:
Thomas White, Ph.D.
Department of Economics & Global Studies
Assumption College
August 2, 2016


[i] Author’s calculations based on data from the Bureau of Labor Statistics. Payroll employment is obtained from the State and Area Employment Database (SAE) of the BLS. Household employment and the unemployment rate is obtained from the Local Area Unemployment Database (LAU) of the BLS. All employment data is for the Worcester NECTA which consists of the city of Worcester as well as 48 surrounding towns located in south central Massachusetts and northeastern Connecticut. The seasonally-unadjusted BLS data is adjusted for seasonal variation by the author using the X-12 ARIMA program developed by the U.S. Census Bureau.
[ii]University of Michigan, Survey of Consumers, http://www.sca.isr.umich.edu/
[iii]  The leading indicators used to forecast the WEI are: Consumer expectations: From the University of Michigan Survey of Consumer Sentiments. S&P 500: Monthly closing value of the index. Leading Credit IndexTM: The Conference Board’s index of credit market conditions. Interest rate spread: The yield on a 10-year Treasury bond less the federal funds rate.
[iv] The Conference Board Help Wanted Online® (HWOL).
[v] The Conference Board Help Wanted Online® (HWOL).
[vi] Secretary of the Commonwealth of Massachusetts.
[vii] Massachusetts Department of Employment and Training. Initial claims for the Worcester area were originally part of the index, but that data has not been available since June 2013. Since it is desirable to utilize information that is as local as possible, if initial claims for Worcester becomes available in the future the index will be revised to include that data.