Tuesday, May 16, 2017

From Decline to New Economic Normal

Last Friday the Bureau of Economic Analysis released the latest set of state-level GDP data. A first analysis told us that the Wyoming economy is weak but stabilizing. We also noted that the state GDP data now conveniently explains why our state government has such a deep, unrelenting problem with paying for its spending. Here is, again, Figure 1 from Friday's article:

Figure 1

During years of strong growth, (1), our legislators drastically expanded government. This government is now to be paid for by an economy in a completely different shape (2).

With this in mind, let us take a closer look at this "different shape". Figure 2 compares the private sector's inflation-adjusted GDP growth rate with changes in employment:

Figure 2

In the last dip in economic activity, in 2012, GDP fell while employment continued to grow and, at its worst point, stagnated (Q4 of 2012). Back then, businesses were in general in good enough a shape to hold on to employees when faced with a decline in sales. 

The brief recovery - to use the word generously - that followed in 2013 and 2014 was not enough to replenish margins and improve their overall outlook. Therefore, when the 2015 downturn in minerals came along, our private sector was ill prepared. This was the case for both minerals and non-minerals businesses. As Figure 2 explains, the decline in economic activity (grey) was closely associated with a decline in employment (blue). 

When an overall decline in business activity is coupled with an immediate reduction in employment, it is a sign of overall weakness in the industries affected. It is not good to see this strong correlation in the entire private sector. 

However, there is also a bit of a silver lining in this correlation: it likely means that an upturn will start producing jobs relatively soon. Businesses have not been able to afford keeping idle workforce capacity. Therefore, when we see a stabilization in overall business activity, we will also see a stabilization - maybe even a small improvement - in employment. Since employment in the private sector is still decreasing, but at shrinking rates (-3.6 percent in January, -2.7 percent in February, -2.2 percent in March), it is fair to assume that the GDP numbers for Q1 of 2017 will exhibit a similar change from decline to stabilization.

In other words, a new normal, but no recovery.

Let me reinforce my caution about the future with some numbers on changes in business activity in individual industries. Table 1 reports growth and decline, year to year reported quarterly, for six significant industries in the Wyoming economy:

Table 1

Mining Constr Manuf Wholesale Retail Transp
2012:Q1 -10.5% 6.8% 1.7% 14.7% 1.3% 9.6%
2012:Q2 -14.4% 18.2% -1.0% 14.4% 0.4% 8.8%
2012:Q3 -19.3% 6.9% -9.3% 15.0% 2.6% 5.7%
2012:Q4 -18.7% 0.6% -5.9% 9.6% 8.3% 0.7%
2013:Q1 -5.1% 4.5% -5.6% 2.5% 2.6% 4.1%
2013:Q2 -2.4% -7.3% -5.2% 1.5% 3.6% -2.0%
2013:Q3 6.5% -3.6% -2.2% 3.5% 1.7% -1.1%
2013:Q4 6.6% 4.7% -2.1% 4.4% -3.0% 1.9%
2014:Q1 -1.8% 1.1% -2.9% -1.5% -1.0% -5.4%
2014:Q2 -1.9% 6.5% -1.4% 1.4% 1.4% 1.8%
2014:Q3 -2.4% 5.4% 0.7% 2.7% 1.7% 10.6%
2014:Q4 2.0% -4.3% 4.6% 12.2% 0.1% 13.3%
2015:Q1 4.7% -4.0% 13.9% 5.5% 2.6% -5.4%
2015:Q2 0.9% -7.8% 13.8% 3.6% 2.4% -4.9%
2015:Q3 -0.3% -6.8% 19.6% 0.4% 1.7% -9.0%
2015:Q4 -5.7% -7.7% 16.6% -10.0% 1.6% -12.8%
2016:Q1 -6.6% -9.2% 11.4% -5.3% 2.6% -6.3%
2016:Q2 -8.1% -10.4% 9.2% -8.1% -0.5% -6.2%
2016:Q3 -9.3% -15.4% 2.8% -11.2% -3.4% -8.0%
2016:Q4 -8.2% -11.1% 0.7% -7.3% -1.9% -4.6%

The rebound in manufacturing in 2015 is a bit puzzling, though good news of course. It appears to consist entirely of a rise in the production of non-durables. More research is needed. 

Again, these are GDP numbers, representing changes in inflation-adjusted production in each industry. While these businesses do not represent all of the Wyoming economy - far from it - they are all important indicators of the business cycle in our state. While they overall exhibit negative growth numbers, the emerging stabilization noted earlier is visible here as well. A closer look at industry-specific employment will tell us more about exactly where our economy is, and is heading. 

For now, we can take comfort in that the serious downturn seems to be on its last leg. A state of frail stability will emerge, a state that we must not upset with misguided fiscal policies.

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