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Wednesday, July 19, 2017

Uncertainty Holds Economy in Tight Grip

After two years of depression-level decline in economic activity here in Wyoming, we have reached a point of stabilization. This is a "new normal" where, if the economy if left alone by our legislature, we will be for the foreseeable future. (With the right kind of government spending reforms, though, we would see a substantial improvement in the economy.) There are, however, some peculiarities about this "new normal" that throws a veil of uncertainty over it. While we await the new state GDP data (published by the Bureau of Economic Analysis next week), here are some interesting numbers from our state's labor market.*

Let us start with the aggregated private sector of the Wyoming economy.
As Figure 1 reports, private-sector employment declined with the Great Recession, then recovered mildly through 2014 and then took another nosedive. In fact, the drop was so deep that it even bottomed out below the depth reached in 2009-2010.

What is particularly interesting is that weekly earnings in the private sector have taken off in a different direction than employment. The blue function represents the annual change in weekly earnings (reported monthly, to make the calendar complexity complete...) and for the most part in Figure 1, it behaves as basic economic theory says it should. Earnings weaken with the recession, then start growing again just ahead of employment. Then they weaken again just ahead of the 2014 downturn. Then something strange happens:

Figure 1

In the midst of the sharp decline in employment, weekly earnings take a turn upward. One could interpret the last "hook" in the green employment function as a sign of a substantial recovery in employment, but that is not the case. Private-sector employment moves in cycles - seasons - as Figure 1 shows; what really matters is the trend.  

The sharp turn for the better in earnings is not easy to explain, though there is one plausible candidate: uncertainty. The private sector is operating under such massive uncertainty that when they see a stabilization or even improvement in business, they prefer to take more hours out of the workers they have. If you can take your part-timers from 20 to 25 hours, you get 25 percent more work out of them, with a commitment on your end that is only as long as to the next paycheck. Likewise, if you already have full-time employees working 30 hours per week (the new definition of full time under Obamacare) you can let them go up to 40 hours and get substantially more work out of them, again with very little long-term commitment.

It is also possible that businesses that have fired a lot of people, when they now see a stabilization in sales, give their remaining workers a little bit of a compensation as reassurance that they can probably count on keeping their jobs.

If this is the explanation - and I do not see any other that makes more sense right now - then it means that we have transitioned from a devastating downturn to a state of frail stability. The absolute worst that can happen now is that businesses are once again hurled into a new period of declining business, or even kept in the dark as to what their operating costs are going to be. 

The threat of substantial tax increases is like a dark cloud lurking on the horizon, refusing to turn into a hail storm but also refusing to go away.  

A look at the minerals industry confirms this theory:

Figure 2


The private service sector - aggregating all service industries under one statistical umbrella - reports the same "gap" in recent data:

Figure 3

A small but important part of the private-service sector is "professional and business services". Here we have all kinds of professional consultants who work on contracts with businesses, While the "gap" is not as visible in 2017, there is nevertheless a similar anomaly in employment and earnings trends as the more aggregated data displayed:

Figure 4

Trade, Transportation and Utilities clearly show the same "new normal" situation, and this industry actually demonstrates the disparity vs. more regular wage and employment behavior. Prior to 2013 wages follow employment; from that year on they move in negative correlation with one another:

Figure 5

 There are, of course, exceptions to this trend. The most obvious one is Education and Health Services, which is dominated by health care professionals. Here, wages have increased continually (as the blue line has remained above $1) but the trend is stagnant and perhaps even slightly on the weakening side. At the same time, employment has been growing steadily (though as I reported in June, it seems like the health care sector in our state is reaching its employment peak):

Figure 6

If my analysis is correct - and we will get some idea of that from the first-quarter GDP numbers released next week - then the Revenue Committee, as they meet in Thermopolis on August 2-3, better be very, very careful with what they do to the cost of doing business in Wyoming. It would also be very helpful for our state's entrepreneurs if they could come out loud and clear with any of their proposals. Even if they are going to do the wrong thing and raise taxes, the sooner they let everyone know exactly what they are planning to do, the better.

The only thing that makes depressing tax hikes worse is the uncertainty of when they are going to happen.
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*) All numbers are from the Bureau of Labor Statistics state and local employment database.

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