Most Recent Monthly Values

The chart below shows the most recent monthly values through April 2010 for the Greater Philadelphia Leading Index (GPLI; blue bars) and the 12-month moving average (orange line).

Trends in Leading Indices Since the Start of the Recession

The most recent monthly values for the GPLI through April continue to show, as did the Fall 2009 and Winter 2009/2010 releases, that evidence is growing that the GPR’s economy is already in a gradual recovery that began sometime during first quarter of 2010.   As the chart above shows, the GPLI has been gradually trending upward since April 2009, although the tentative nature of the recovery is shown by the declines that occurred in November 2009 and February 2010.  At the U.S. level, the longest recession in the post-World War II era may be over as real GDP has now increased for three consecutive quarters – 2009q3 through 2010q4; and because total non-farm payroll employment has risen for four consecutive months starting in January 201, with the March and April month-over-month increases exceeding 200,000 jobs.

The While some economists think that the recession is over, others are wary declaring it so for several reasons: 1) GDP growth during these two quarters was boosted by the various Federal stimulus programs such as the ARRA, Cash for Clunkers, and the tax credit for first time home buyers, along with a large inventory building effect that kicked in during 2009q4; 2) concerns that the recovery is not yet sustainable without continuing, significant Federal Government intervention and increased bank lending; and 3) the unemployment rate remains stubbornly high at 9.9%.  More recently the financial crisis in Europe has raised concerns about the strength of the US recovery, causing some observers to suggest an increased likelihood of double dip recession, although the consensus is that this will not occur.  IHS Global Insight forecasts that the GPR and U.S. economies will recover at about same time, with output recovering first, but with employment growth not resuming until well into 2010 at the earliest.

The April 2010 value of the GPLI was 98, up from the low values of 96.9 in March and April.  In the Fall 2009 release, there had been six consecutive months of a rising GPLI, but its volatility reflected in the two m/m declines that have occurred in the last six months shows the uncertainty that still exists in the US and regional economies. The two prior releases of the GPLI suggested that the GPR’s economy might reach a trough in early 2010; the current release of the Greater Philadelphia Coincident Index (GPCI) discussed below shows that the trough occurred in February 2010.  As we have noted previously, the true test of any leading economic index is how accurately it indicates the timing of the trough.

Trends During the Last 12 Months

In order to most accurately interpret the recent month-to-month changes in the GPLI; it is helpful to examine the change in the Index over the last 12 months.  An occasional month-to-month decrease in the GPLI does not necessarily signal that an expansion is ending; nor does an occasional month-to-month increase 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.

As shown above, the current monthly values of the GPLI first rose above its 12-month moving average in August, and have been higher for nine months in a row, providing additional evidence of a return to positive growth economy during the first half of 2010.  In contrast, the monthly values of the US leading index have been above its 12-month moving average since May 2009.  The major reason for this timing difference is that US economy began to decline sooner than the GPR economy, and fell further from its pre-recession peak.  Between the start of the recession in December 2007 and March 2010, total private-sector employment in the Philadelphia and Trenton MSAs fell by 5.8%, compared to a 7.2% decline for the US economy.  Employment in the GPR also started to decline four months after it did in the US.

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. The following four were found, using multiple regression analysis, to be the best predictors of the direction of future economic activity six months ahead

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

Regression analysis was also used to determine the statistically significant weights for each variable that were used to create the composite index. The values for three of the variables comprising the GPLI – US Leading Index, Philadelphia Stock Index, and the Index for Temporary Employment Services – have risen for at least the last five consecutive months, while the number of Outbound Vessel Trips has risen only in the last two months.