|WEI up 1.9% in Third Quarter
Modest growth expected to continue over next two quarters
|Third Quarter 2017
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Worcester Economic Index
During the third quarter of 2017 the Worcester Economic Index (WEI) increased at a 1.9% annualized rate, which is roughly the same pace as the revised 1.7% estimate from the second quarter. As figure 1 shows, the recent growth in the WEI follows a period in late-2016/early-2017 during which local economic activity was basically flat. The 1.9% third quarter growth rate of the WEI is below the 3.0% preliminary estimate of U.S. real GDP growth released by the Bureau of Economic Analysis on October 27th.[i] The Worcester Economic Index is estimated using Bureau of Labor Statistics (BLS) data on employment and unemployment in the greater Worcester metropolitan area (NECTA). According to the BLS payroll survey, employment in the Worcester area increased by 0.8% over the 12-month period ending in September 2017, while the BLS household survey showed an increase of 1.2% for the same period.[ii]
Table 1 presents the Worcester Economic Index over the last 13 months, its month-to-month change, and annualized quarterly growth rate. While WEI is calculated on a monthly basis it is best not to read too much into changes in any single month, but rather consider changes in the index over quarterly or longer periods. Table 1 shows the economy slowed down in late 2016 through early 2017. Since September 2016 the WEI has increased 1.1%.
Table 2 shows how the employment data on which the WEI is based has changed during the third quarter. The seasonally unadjusted data reported by the BLS showed substantial drops in both payroll and household employment over the June to September period.[iii] However, after adjusting for seasonal effects the decrease in household employment was less dramatic (-1,234), while the seasonally adjusted payroll employment showed a modest increase (+400). The drop in the seasonally adjusted unemployment rate from 4.1% in June to 3.7% in September is due to an unusually large drop in the labor force during that time. The labor force tends to decline at the end of the summer as some seasonal jobs end and many students return to school, however even after taking into account such seasonal changes the labor force fell by over 3,500 workers. The smaller labor force contributed to the drop in the unemployment rate. The 3.7% seasonally-adjusted unemployment rate for Worcester is slightly below the US unemployment rate (4.2%) and the Massachussetts rate (3.9%) for September.[iii]
Worcester Economic Outlook
The Worcester Economic Index is based on employment and unemployment data for the local economy. In order to provide some insight into the future direction of the economy each issue of Worcester Economic Indicators includes both a 6-month forecast of the WEI estimated using past values of the index and several national leading economic indicators, as well as a discussion of some local leading indicators.
Looking forward, the Worcester Economic Index is expected to grow at or slightly above its long-run trend over the coming six months. According to the September forecast, the WEI is expected to grow at a 1.3% annualized rate over the next two quarters. Since the most recent WEI estimates have the greatest potential error, it is also useful to consider the average of the forecasts for the three most recent months, which at this time is 1.6%. Table 3 shows both the September forecast and the average of the July, August, and September forecasts.
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 1.3% 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.
Currently, the four national leading indicators roughly offset one another with regards to their impact on the WEI forecast. For the September forecast, the recent performance of the S&P 500 and the Leading Credit IndexTM each provide a small positive bump in the forecast while consumer expectations and the interest rate spread are both pulling the forecast down causing the WEI forecast to be equal to its trend. The WEI itself did not have any impact on the September forecast. In contrast, the WEI provided a positive 0.2% increase to the third quarter average of forecasts. The fact that the WEI in September 2017 grew slightly less than the previous four months (see table 2) was enough keep it neutral with regard to the September forecast while WEI made a positive contribution to the quarterly average.
Currently, the estimate of consumer expectations derived from the University of Michigan Survey of Consumer Sentiments is making a small negative contribution to the September WEI forecast. This is due to the fact that the September Index of Consumer Expectations of 84.4 is down from 90.3 since the start of the year.[v]
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 October 27th the S&P 500 is up over 15% 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 contribution 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 providing a small negative contribution to both the September and the average 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 with another increase anticipated next month the spread has become a neutral or slightly negative contributor to WEI forecasts. This indicator will be closely watched in the coming days as President Trump is expected to announce his choice for Chair of the Federal Reserve. If a nominee is perceived as likely changing the direction of monetary policy the interest rate spread will adjust accordingly, altering its impact on WEI forecasts.
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.
Continuing the trend from throughout the past year, the number of new business incorporations in the Worcester area rose in the third quarter of 2017 compared to the same period in 2016. Compared to a year ago the number of incorporations has increased about 4.0%.[vi] 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 1.6% from the third 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[vii].
To sum up, the Worcester Economic Index (WEI) increased 1.9% in the third quarter of 2017. The WEI is expected to grow in the 1.3 – 1.6% range 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 February 2018. This report is available as a PDF.