Worcester Economic Indicators

WEI up 1.1% in Second Quarter
Health Care, Leisure & Hospitality Industries Lead Hiring
Second Quarter 2017
This report can be accessed as a PDF
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Worcester Economic Index

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Following a slow start to the year, the greater Worcester economy grew at a modest clip during the second quarter of 2017.  Since March, the Worcester Economic Index (WEI) is up 1.1% on an annualized basis.  This result follows the revised 0.3% drop during the first quarter. The 1.1% growth rate of the WEI falls short of the 2.6% second quarter growth rate of real GDP turned in by the national economy.[i]  Figure 1 shows the WEI over the past 10 years.

Table 1 presents the Worcester Economic Index over the past 13 months, its month-to-month change, and annualized quarterly growth rate.  As the table shows, after growing at over 2% during the second and third quarters of 2016, the economy slowed down in late 2016 through early 2017.  The 1.1% growth rate for the second quarter matches the 12-month growth rate of the WEI from June 2016 through June 2017.  The Worcester Economic Index  is estimated using Bureau of Labor Statistics (BLS) data on employment and unemployment in the Worcester metropolitan area (NECTA).  According to the BLS survey of households, the unemployment rate has increased from 4.4% in June 2016 to 4.6% in June 2017, while household employment has gone up by 6400.  The BLS payroll survey also showed an increase in the number of jobs, rising by about 4200 since last June.[ii]

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Click here for a breakdown of job growth by industry sector using data from the BLS payroll survey.

A look at the second quarter 2017 employment data shows a labor market that is not exhibiting substantial job growth.  As table 2 shows, both payroll employment and household employment rose during the March to June period.[iii]  However, month-to-month comparisons of not seasonally-adjusted data can provide misleading information.  After correcting for seasonal variation, we see that the change in employment from both the payroll and household surveys were lower than the not seasonally-adjusted estimates, with household employment actually showing a decrease during the second quarter.  The seasonally-adjusted unemployment rate for Worcester was up just slightly since the end of the first quarter but at 4.1% is slightly less than both the national rate (4.4%) and the Massachussetts rate (4.3%) for June.[v]  Taken together, the data shows a labor market that is steady but without much growth, which is the reason the WEI grew at a modest 1.1% rate during the second quarter.

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Worcester Economic Outlook

Over the coming six months, the Worcester Economic Index is expected to continue the slow growth experienced during the past quarter.  According to the forecast model which utilizes recent movements in the WEI as well as four leading indicators of the national economy, the WEI is expected to grow at just above 1.0% during the third quarter.  Table 3 shows the June forecast is 1.3%, while the average of the April, May, and June forecasts is 1.0%.

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Table 3 also shows the growth forecast broken down into its 6 components.  The first component is the long-run trend growth of the WEI which is estimated to be about 1.2% on an annualized basis.  The values shown for each of the other components listed in table 3 represent the amount that each component contributes to the WEI forecast being above or below trend.  The recent slow growth of the WEI is acting as a drag on the forecasts.  Past values of the WEI are included in the forecast model in order to capture short-term trends in the local economy which help improve economic projections.

Currently, the estimate of consumer expectations derived from the University of Michigan Survey of Consumer Sentiments is making a small negative contribution to the WEI forecast. This is due to the fact that the June Index of Consumer Expectations of 83.9 is down from 90.3 since the start of the year.[vi]

Changes in the S&P 500 stock index are included in the forecast model as a measure of investor attitudes toward expected future business conditions.  As of July 28th the S&P 500 is up over 10% since the start of the year, which contributes a 0.1% boost to the WEI forecast.

Conditions in the credit markets, as measured by the Leading Credit IndexTM, are currently providing a positive bump 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 United States.

The final component, interest rate spread, is neutral with respect to the WEI forecast.  The spread, which is the difference between the yield on a 10-year Treasury bond and the federal funds rate, is a commonly used indicator of the direction of monetary policy.  During much of the post-recession period the interest rate spread was pushing up the WEI forecast.  As the Federal Reserve has increased the federal funds rate four times since December 2015, the spread has become a neutral or slightly negative contributor to WEI forecasts, which is consistent with the Fed’s goal of restraining economic growth in order to prevent an increase in inflation.

Local Economic Indicators

The forecast of the Worcester Economic Index presented above is based on four national leading indicators, recent WEI estimates, as well as its long-run trend.  To supplement this forecast, each quarterly issue of Worcester Economic Indicators includes a discussion of several leading indicators that are more closely tied to the local economy.  Local data can be more volatile than national data and therefore quarterly averages are compared on a year-over-year basis to avoid problems arising from month-to-month variation.  Recent performance of two local leading indicators, new business incorporations for the Worcester NECTA, and initial unemployment claims for Massachusetts are shown in table 4.

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Continuing the trend from throughout the past year, the number of new business incorporations in the Worcester area rose in the second quarter of 2017 compared to the second quarter of 2016. Compared to a year ago the number of incorporations has increased almost 16.0%.[viii]  An increase in incorporations is considered a positive signal because new businesses may look to hire workers in the near future.

The number of initial unemployment claims filed during the second quarter in the Commonwealth of Massachusetts fell 6.7% from the second quarter of 2016.  This is considered a positive signal because it suggests that fewer people were let go from their jobs and forced to apply for unemployment compensation[ix].

To sum up, the Worcester Economic Index (WEI) increased 1.1% in the second quarter of 2017.  The WEI is expected to grow at roughly that pace over the coming six months.  Both new business incorporations and initial unemployment claims are providing positive signals at this time.

The next Worcester Economic Indicators report will be issued in early November 2017. This report is available as a PDF.

Prepared by:
Thomas White, Ph.D.
Department of Economics & Global Studies
Assumption College
508-767-7556
August 1, 2017

[i]US Department of Commerce, Bureau of Economic Analysis, https://www.bea.gov/newsreleases/national/gdp/2017/gdp1q17_adv.htm, accessed 4/28/17.
[ii]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.
[iii]Data obtained from the Bureau of Labor Statistics SAE and LAU databases.
[iv] The BLS data is seasonally adjusted by the author using the X-12 ARIMA program developed by the U.S. Census Bureau.
[v] Data obtained from the Bureau of Labor Statistics SAE and CPS databases.
[vi] 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.
[viii] Secretary of the Commonwealth of Massachusetts.
[ix] 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.