Recent Trends in the Greater Philadelphia Leading Index

The chart below shows the most recent monthly values through September 2011 for the Greater Philadelphia Leading Index (GPLI), shown in the blue bars and the trend in 12-month moving average (orange line).

Greater Philadelphia Leading Index

Most Recent Monthly

The September 2011 value of the GPLI was 98.7, the same as in August, but down from 99 and 99.1 respectively in June and July. Compared to our summer 2011 release, the GPLI suggests a slightly lower rate of growth in the GPR’s economy over the next six to nine months due to the declines in in the last two months. The GPLI rose gradually from the Fall of 2010 through July 2011 before declining. The slight downward turn in the slope of the line for 12-month moving average that began in July is further confirmation that the region’s economy will be growing more slowly for next 6 to 9 months.

Two of the variables that comprise the GPLI – the Philadelphia Stock Index and Outbound Vessel Trips - fell during the last two months, especially the former, which in turned pulled down the GPLI values for August and September. The two other variables – IHS Global Insight’s US Leading index and the Employment Services Index – rose slightly.

It has now been more than two years since the Great Recession ended in June 2009. Since then the US economy has grown slowly, the unemployment rate has remained above 9 percent in 22 of the last 24 months, large numbers of persons remain underemployed or have been unemployed for an extended period, and housing prices have continued to fall. While the recession has officially ended, it does not feel like it is over as shown the by the continuing low levels of consumer confidence.

The annual growth rate in real US GDP has now been positive for nine consecutive quarters – 2009q3 through 2011q3. It had been steadily declining through during 2011q2, but the most recent release in late October (after this version of the GPLI was completed) shows that the annual growth rate in real GDP in rose from 1.3% in 2011q2  to 2.5% in 2011q3, suggesting that some of the factors that had slowed the economy earlier in the year (e.g., rising oil and gasoline prices, the uncertainty over the debt ceiling negotiations and tax policy, after-effects of the Japanese earthquake on auto production and sales, and the European sovereign debt crisis) have abated. The upturn in the real GDP growth rate during 2011q3 will likely be reflected in higher levels of the GPLI in the next release.

The employment outlook remains weak. The monthly (m/m) increases in total US non-farm employment have fallen since reaching a peak of 235,000 in February 2011 (also the peak for the private sector employment increase at 261,000 jobs). The September m/m increase was 103,000 jobs (137,000 for the private sector), an improvement over the disappointing August rises of only 57,000 for total employment and 42,000 for private sector employment. For the year ending September 2011 the US economy added on average only 124,300 jobs each month, well below the number needed to bring down the unemployment rate. Finally, in September 2011 the US unemployment rate (seasonally adjusted) remained at 9.1%; 6.242 million workers had been unemployed for 27 weeks or longer, and 16.5% of the labor force was under-utilized (i.e., unemployed, marginally attached to the labor force, or working part-time for economic reasons).   

There is still a concern that the US recovery is not yet sustainable due to several factors: 1) the lack of a political consensus on the need for the Federal Government to continue fiscal and monetary policies to stimulate demand; 2) the depressed state of the housing market as prices are still declining and high rates of foreclosures and underwater mortgages are continuing; 3) the ongoing European debt crisis, 4) residual effects of the large increase in oil prices that occurred in early 2011 which acted as a tax on consumers and dampened their spending; 5) decreases in state and local employment and spending; and 6) continuing reluctance of US companies to hire new workers because of weak demand.

Earlier in the year the consensus was that the probability of a double-dip recession was about 20%, but in recent months IHS Global Insight has its estimate to 40%. However, forecasters have raised their outlook for the US economy for the remainder of this year and early 2012 following the GDP release for 2011q3 noted above, and because the recent discussions over European debt crisis (late October 2011) may lead to actions that reduce the risks sovereign defaults.

Trends During the Last 12 Months

In order to accurately interpret the recent monthly changes in the GPLI, it is helpful to also examine the changes 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 GPGILI has been consistently below its 12-month moving average, the region’s economy is likely to enter a period of declining economic growth.

Until recently, the current monthly values of the GPLI had been above its 12-month moving average as shown above, but in August and September they were equal, indicating that the region’s economic growth, while still remaining positive, will decline slightly over the next several quarters. The monthly values of the US Leading Index have been above its 12-month moving average for a slightly longer period, suggesting that US economy is recovering a bit more quickly, but is also climbing out of a deeper trough.

Between the start of the recession in December 2007 and August 2011, total private-sector employment in the Philadelphia and Trenton MSAs fell by 4.4%, compared to a 5.5% decline for the US economy. However, over the last year, private sector employment in the Philadelphia and Trenton MSAs has increased by only 0.2% compared to a 1.6% for the US. The monthly values show that the y/y employment growth rate in the Philadelphia and Trenton MSAs fell below the US rate in September of 2010 and has remained below it since that time.

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 5 counties of southeastern Pennsylvania in 2011q2 was down 10.3% since its peak in 2007q2, while the comparable US index is down 20% from its peak in 2007q1.

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