Recent Trends in the Greater Philadelphia Leading Index

The chart below shows the most recent monthly values through January 2012 for the Greater Philadelphia Leading Index (GPLI), shown in the blue bars and the trend in 12-month moving average (orange line).

Greater Philadelphia Winter 2012 Leading Index

Most Recent Monthly
The January 2012 value of the GPLI was 98.8, up slightly from December 2011, but down from 98.9 in November. The GPLI suggests a slight moderation in the rate of growth in the GPR’s economy over the next six to nine months as the trends over the last six months as shown above are below those of the preceding six months. The GPLI rose gradually during the first half of 2011, before declining starting in July. The leveling off of the slope for the 12-month moving average that began in August 2011 is further confirmation that the region’s economy will be growing moderately over the near term.

Two of the variables that comprise the GPLI – Employment Services Index and the number of Outbound Vessel Trips - fell during the last three months, while the US Leading index remained steady and the Philadelphia Stock Index rose. According to IHS Global Insight, the sudden drop in the monthly values of the GPLI that started in August were due to a decline in Philadelphia Stock Index during the summer months; since then the Index has risen significantly, suggesting that the GPLI may turn upward in the next release.

It has now been more than two and a half years since the Great Recession ended in June 2009 and the US economy is finally starting to show signs of a sustainable, albeit gradual, recovery.  Real GDP has increased for 10 consecutive quarters through 2011q4, although the rate is still below average in historical terms. The annual growth rate in real GDP rose gradually during 2011, from 0.4% in the first quarter to 3% in the four quarter. Similarly, employment has been growing, with the US economy adding just over 2 million non-farm jobs (seasonally adjusted) between February 2011 and February 2012, an increase of 1.6%. Finally, the US unemployment rate has been gradually falling, dropping under 9% in October and reaching 8.3% in January and February of 2012. The historically high number of persons who are underemployed, or have been unemployed for an extended period, remains a concern. ousing prices continue to fall, although the rate of decline has slowed and prices appear to be bumping along the bottom, with the number of housing starts and sales of new homes rising above the historical lows of the last several years. Finally, the recent rise in gasoline prices as we head into the peak driving season when prices normally reach their highest levels, threatens to constrain consumer spending, especially if prices exceed and remain above $4 per gallon.

During the middle of 2011 the consensus was that the likelihood of a double-dip recession had risen; at that time IHS Global Insight increased its probability to about 40%, but since then it has lowered its estimate. The most recent Blue Chip forecast (February 2012) is calling for real US GDP to grow by 2.2% this year and 2.6% in 2013. The European debt situation remains a concern, although recent actions by the European Central Bank have lessened the likelihood of a default by Greece, although the weak balance sheets of the major European banks remains a concern. 

Trends During the Last 12 Months
In order to accurately interpret the recent monthly changes in the GPLI it is helpful to examine the trend over the last 12 months. An occasional m/m decrease in the GPLI does not necessarily signal that an expansion is ending; nor does an occasional m/m rise indicate that a decline is likely to end. A good way to measure sustained changes in the GPLI is to track the trends in its 12-month moving average as shown by the orange line in the chart above. When the GPLI has been consistently above its 12-month moving average, the region’s economy is likely to enter a period of expansion, and when the GPLI has been consistently below its 12-month moving average, the region’s economy is likely to enter a period of declining economic growth.

Until July, the current monthly values of the GPLI had been above the 12-month moving average as shown above, but in five of the last six months they were below it, indicating that the region’s rate of economic growth, while still positive, will remain moderate over the next several quarters. The monthly values of the US Leading Index have been above its 12-month moving average for the last year, confirming that the US economy continues to recover more quickly than the region’s and suggesting that the national recovery will eventually pull the regional economy along with it.

Between the start of the recession in December 2007 and February 2012, total private-sector employment in the Philadelphia and Trenton MSAs fell by 3.3%, compared to a 4.2% decline for the US economy. In contrast, over the last year, private-sector employment in the Philadelphia and Trenton MSAs rose by only 0.8% compared to a 2.1% for the US. The monthly y/y employment growth rate in the two MSAs fell below the US rate in September of 2010 and has remained there since. The Federal Housing Finance Agency’s Housing Price Index (HPI) for purchase-only mortgages shows that the average price of an existing single family home in the five counties of southeastern Pennsylvania in 2011q4 was down 14.3% since its peak in 2007q2, and 4.3% over the last year, while the US index was down 19.7% from its peak in 2007q1 and 2.4% over the last year.

Methodology
The GPLI was created by determining the statistical relationship between a set of potential leading indicators and economic activity six months hence. Potential leading indicators were chosen from a collection of local, state and national variables based on their economic significance, frequency, and timeliness, and whether they acted as leading indicators. Regression analysis was also used to determine the statistically significant weights for each variable that were used to create the composite index. The following four were determined to be the best predictors of the direction of future economic activity in the region six months ahead

• Temporary employment services
• The Philadelphia Stock Index
• The U.S. Leading Index
• Outbound export vessel trips

The equations used to generate the GPLI’s values were re-estimated by IHS Global Insight in March 2012, based on historical time series data available through December 2011, to take into account the recent volatility in the trends of the four variables.