|First Quarter Slowdown
WEI off 0.4% to start 2017
|First Quarter 2017
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Worcester Economic Index
Economic activity in the greater Worcester area slowed during the first quarter of 2017. Since December, the Worcester Economic Index (WEI) declined 0.4% on an annualized basis. This result is similar to the estimated 0.5% drop in the Massachusetts economy recently released by MassBenchmarks.[i] At the national level first quarter GDP grew at a 0.7% annualized rate, which while stronger than the local economic performance still represented a slowdown from the final months of 2016.[ii] The Worcester Economic Index is estimated using Bureau of Labor Statistics (BLS) data on employment and unemployment in the Worcester metropolitan area (NECTA). 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, the WEI grew consistently through much of 2016 before slowing in the final quarter. Since March 2016 the WEI is up 1.4% and during that time all three of the variables used to compute the WEI have moved in a positive direction. BLS estimates of payroll employment in the Worcester area increased in the Worcester area by about 3500 jobs over the past year, while the household employment figures increased by over 8000. The unemployment rate fell from 5.0% in March 2016 to 4.2% in March 2017.[iii]
However, more recent data on Worcester area employment and unemployment has been less encouraging. Table 2 shows how employment statistics have changed since December of last year. As discussed in past reports, there is a seasonal component to employment data. Typically there is a decrease in employment during the first few months of the year as seasonal hiring for the holiday season unwinds. As table 2 shows, payroll employment fell from December to March while household employment increased.[v] But month-to-month comparisons of not seasonally-adjusted data are problematic and therefore the employment and unemployment data is adjusted for seasonal variation before being used to estimate the WEI. The seasonally-adjusted employment estimates shown in table 2 indicate that both payroll and household employment were actually up in the first quarter of 2017. Therefore, the rise in the local unemployment rate over the last few months is the reason the WEI fell to start the year. On a seasonally-adjusted basis the Worcester unemployment rate increased to 4.0% in March, which is slightly above the Massachusetts unemployment rate of 3.6%, but still below the national rate of 4.5%. Furthermore, the rise in the unemployment rate is due to the increase in the size of the labor force which is also shown in table 2. Since December, on a seasonally-adjusted basis the number of people entering the labor force exceeded the number that found jobs which pushed up the unemployment rate even as the number of people working increased. The increase in the labor force may actually be an indication of labor market strength as people may be entering the labor force because they believe they will be successful at landing a job.
Worcester Economic Outlook
Looking forward, the Worcester Economic Index is expected to return to positive growth over the coming months. According to the forecast model which utilizes recent trends in the WEI as well as four leading indicators of the national economy, the WEI is expected to grow modestly over the next six months. Table 3 shows the March forecast is 0.6%, while the average of the January, February, and March forecasts is 0.4%.
Table 3 also shows the growth forecast broken down into its six 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. Each of the other components in the forecast are shown in table 3 as the amount that they push the WEI above or below trend. The recent weakness in the WEI is the only factor that is depressing the overall forecasts. Recent 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 providing a small boost to the WEI forecast. As figure 2 shows the Index of Consumer Expectations has been near its five-year high in recent months.
Other components of the WEI forecast are making relatively small contributions to the growth forecasts. The S&P 500 which as of April 28th was up almost 6.5% since the start of the year is adding 0.1% to the March forecast. While the Leading Credit IndexTM and the interest rate spread are currently neutral with regard to the March forecast. These two indicators were making consistently positive contributions to the growth forecasts during the 2013-2015 period when the Federal Reserve was maintaining an aggressive expansionary monetary policy stance but have become less of a factor after the Fed began to raise interest rates in December 2015.
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. The three local leading indicators which have been discussed in past reports are: state-wide initial unemployment claims, new business incorporations for the Worcester NECTA, and online help-wanted advertisements also for the Worcester NECTA. Local leading indicators are shown in table 4.
Following the pattern exhibited throughout the past year, the number of new business incorporations in the Worcester area rose in the first quarter of 2017 compared to the first quarter of 2016. Compared to a year ago the number of incorporations is up about 4.0%.[vii] 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 first quarter in the Commonwealth of Massachusetts fell 0.9% from the first 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. The modest fall in initial claims from 21,080 in March 2016 to 20,072 in March 2017, while a positive signal cannot be interpreted as particularly strong.[viii]
The third local leading indicator, online help-wanted advertisements again fell sharply during the first quarter of 2017.[ix] However, recent changes in the structure and pricing of online help-wanted ads has caused this series to become less reliable as an indicator of labor market conditions. The Conference Board, which releases the Help Wanted Online® (HWOL) Data Series, recently announced that it is currently reviewing its methodology for compiling the data series and will be making adjustments to improve the quality of the data.[x] Until the revision is complete, online help-wanted advertisements won’t be considered in Worcester Economic Indicator reports.
To sum up, the Worcester Economic Index (WEI) decreased 0.4% in the first quarter of 2017. The WEI is expected to grow at 0.4-0.6% over the coming six months. The slow growth forecast is due to the underperforming first quarter results as all of the national and local leading indicators followed for this report are providing neutral or positive signals at this time.
The next Worcester Economic Indicators report will be issued in early August 2017. This report is available as a PDF.