September, 2012

Trend Lines

Highlights:

• Southern

(Dis)comfort : NH’s

Private Emp. Growth

Trends. (pg. 2)

• It Isn’t Over Until

Small Business

Sings. (pg 3)

• Exports Sped

Recovery But Have

Faded as a Source

of NH’s Growth. (pg

4)

NH Index of Leading

Indicators This Month:

What Improved (+) or

Declined (-)

New Claims for Unemp. Ins. + Manufacturing -

Production

Housing Permits +

Value of +

Construction NH On-line Help Wanted - Advertising Consumer + Confidence US Employment + Growth Capital Goods + Shipments (US) Yield Curve - (Interest Rates)

Economic, Fiscal, Demographic and Policy Insights for NH and The Nation Prepared By: Brian Gottlob, PolEcon Research (603) 988-9779

Hiring has slowed among

businesses of all sizes

and in most areas of the

country as many

businesses try to

anticipate policy changes

at the state and national

level. After the November

elections the so called

“fiscal cliff” approaches

with the Bush era and

payroll tax cuts set to

expire and budget cuts

agreed to last year

scheduled to take effect.

The U.S. Treasury debt

ceiling will also need to be

raised early in 2013.

Uncertainty surrounding

these events has likely

caused many firms to

postpone hiring. The

resulting tepid job growth

is constraining income

growth and consumer

spending affecting many

small businesses in the

Granite State. So many

legislative and regulatory

issues hanging in the

balance reinforces

businesses desire to do

as little as possible prior to

the election. In NH, private

sector job growth has

turned negative on an

annualized basis (page 2)

but after two months in

negative territory,

PolEcon’s NH Leading

Index increased to a value

of +7.4, indicating that job

growth should stabilize but

at less than robust levels.

Despite turning positive,

the Index still signals only

tepid job growth in NH into

2013. In this issue of

Trend Lines we take a

hard and uncomfortable

look at recent trends in

private sector job growth

in NH that may portend

longer-term changes in

the rate of NH’s job

growth and its growth in

relation to other states.

In addition we examine

indicators of the health of

small businesses in NH

and what the near-term

implications are for the

broader NH economy.

Finally, we briefly look at

trends in merchandise

exports from the Granite

State, how they have

contributed to growth and

what current trends imply

for their contributions to

NH’s near-term growth.

This Month: Southern (Dis)Comfort and Northern Exposure?

The NH Leading Index: Muddling Along Waiting for Clarity

T h e N H Le a d in g I n d e x D ip p ed F u r t h e r I n t o N e g a t iv e T er r it o ry

-40

-30

-20

-10

0

10

20

30

40

8 6 8 7 8 8 89 90 91 92 9 3 9 4 9 5 9 6 9 7 98 99 00 01 0 2 0 3 0 4 0 5 06 07 08 09 10 1 1 1 2

NH

In

dex V

alu

e

- 6 %

- 4 %

- 2 %

0 %

2 %

4 %

6 %

% C

han

ge in

Em

p. O

ver

12 M

os.

Pri

or

NH L e ad in g In d e x

NH E m p . G ro wt h R a te

Po lE c o n’ s L ea d ing In d ex T u rn s P o s i ti v e B u t S t i ll S ig n al s O n ly S lo w G r o wth

Index = +7.4, up from -2.3

Trend Lines

Southern (Dis)Comfort and Northern Exposure: NH’s New Growth Trends

Page 2 of 5

For many in the Granite State, above average economic growth relative to neighboring states is as much a part of NH’s identity as was the Old Man of the Mountain. Weaker relative growth both before and after the recent recession, however, hint at cracks and fissures in the NH economy that threaten to crumble another core element of NH’s identity. NH’s economy hasn’t collapsed into a mountain pass and changes in the relative economic performance of the state didn’t leave a visual mark on the landscape as a reminder of NH’s drop in job growth relative to that of other states. Rather, the trend has, at best, gone largely unnoticed or unacknowledged and at worst it has been disregarded. Over the past few decades NH’s strong economy has produced an expectation among residents and policymakers that the state will continue to outperform the national average on job and economic growth. When that expectation continues long in the face of contrary evidence it acquires an air of entitlement that can border on narcissism. Even now, as the August 2012 employment report shows that for the second consecutive month NH has fewer private sector jobs in the state than it did in the same month in 2011, many discussions of the NH economy are still prefaced with “NH is doing better than most states.” No it is not and it hasn’t been for

some time. What NH does have is a low unemployment rate that has become an inappropriate synonym for job growth in the state. NH’s low unemployment rate results, in part, from a low presence in the state of individuals who are typically hard to employ (minorities, especially minority teenagers, and those without a high school diploma) as well as slowing labor force growth. NH has also benefited from having a state to the south that has added 41,000 private sector jobs over the past 12 months compared to the approximately 2,000 private sector jobs lost in NH during that same time period. The unemployment rate is a residency based measure that is not concerned with the location of an individual’s job, only whether or not they are employed. It also depends as much on changes in the denominator (the size of the labor force) as it does on changes in the numerator (the number of employed persons). It is a reasonable indicator of the health of the labor market at the national level and the supply/demand ratio of labor, even at the regional level, but it is not the best indicator of job growth in NH. Figure 1 compares the rate of job growth in the private sector in the U.S., NH and two of its neighbors (MA and VT), before and after the recent recession. The chart shows that even prior to the recession, NH’s private sector job was trending lower than growth

in Massachusetts. Over the past year or more NH’s growth rate in private employment has been declining and is now well below the growth rate in both Massachusetts and Vermont. NH should be uncomfortable with the thought that two states often derided for their policies could be growing private employment faster than is NH. It is possible that this turn of the economic tables is just a temporary

aberration and annual revisions to the monthly job growth numbers can be large enough to erase much of the disparity between NH’s private employment growth and that of its neighbors. But looking at annual data on private sector job growth over the past 20 years or more suggests that there is more to it than just aberration. Figure 2 shows two troubling trends for NH: a generally declining level of job growth in NH and the U.S., and more troubling, Southern cont. on pg. 4

The NH Leading Index Dipped Further Into Negative Territory

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

07 08 0 9 10 11 12

U.S. Private Emp.

NH Private Emp.

MA Private Emp.

VT Private Emp.

3 month moving average

Figure 1

The Rate of Private Sector Job Growth in NH is Trailing the U.S.Rate as Well as Rates in Massachusetts and Vermont

The NH Lead ing Index Dipped Further Into Negative Territory

-6 .0%

-4 .0%

-2 .0%

0 .0%

2 .0%

4 .0%

6 .0%

92 93 94 95 96 9 7 98 9 9 00 01 02 03 04 05 06 07 08 0 9 10 11

US

NH

MA

Annual Private Sector Job Growth

Figure 2

The Rate of Private Sector Job Growth in NH is Lower and Looks Much Less Exceptional Over the Past Decade

Trend Lines Page 3 of 5

It Isn’t Over Until Small Business Sings

Large businesses dominate economic news but the reality is that robust economic growth does not occur unless small businesses are confident, healthy, and hiring. National data on job growth by size of business for the final quarter of 2011 (the most recent available) show that while businesses with less than 50 employees account for about 29% of all private sector employment in the U.S., they accounted for only about 2% of the net job growth in the country in 2011. The situation is not much better when businesses under 250 are the hiring metric. Accounting for 47% of private sector employment nationally, firms under 250 employees accounted for just 15% of net job growth in the country in 2011. Until small business begin hiring on a broader scale, the nation and the state of NH are likely to remain mired in sluggish growth. The prospect of a significant increase in hiring by small businesses is not supported by key small business indicators. Small business

confidence, as measured by the National Federation of Independent Business (NFIB) “Optimism Index,” demonstrated a roughly 70% correlation with growth in inflation-adjusted gross domestic product (GDP) over the past two decades (Figure 5). Because GDP is reported with a several month lag (and revised even later) the monthly NFIB Optimism Index can provide valuable, “real-time” insight into GDP growth trends. The recent slump in the NFIB Index suggests continued tepid GDP growth in late 2012 and early 2013. The NFIB index is also useful as an indicator of the near-term outlook for growth in income and private sector employment in NH. Changes in small business sentiment take some time to affect hiring and layoff decisions. When we correlate the NFIB Optimism Index with NH’s private sector employment growth rates 3 months later, the relationship is evident (correlation of .74, Figure 6). Again, the NFIB Optimism Index suggests continued

sluggish hiring by small businesses and slow private sector employment growth in NH. Finally, balance sheets of small businesses were badly hurt during the recent recession and while repair has taken place, it has been slowed by recent declines in the already slow pace of hiring, limiting income growth and restraining levels of consumer spending in NH. One measure of the financial health of businesses is the number of days “past term” that

they pay their bills. As Figure 7 shows, improvement in the finances of small business in NH has been mixed, with firms employing 100-249 showing significant improvement in the timeliness of their payments, while businesses with less than 20 employees have shown an increase in their average days past term. In combination, these and other indicators suggest that small businesses are unlikely to increase hiring over the next several months enough to move NH from a sluggish to more robust recovery.

Figure 5

Small Business Sentiment is a Good “Real-Time” Indicator of Trends in

GDP Growth )ationally - it Does )ot Indicate Stronger Growth is

Imminent

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

3 4 5 6 7 8 9 10 11 12

75

80

85

90

95

100

105

110

Re al G DP % C han ge Y r/Y r

N FIB Op timism In d ex

C orre la tion = .72

NFIB Optimism Index and NH Private Sector Job Growth (3 Mos. Moving Avg.)

-7.0%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

04 05 06 07 08 09 10 11 12

75

80

85

90

95

100

105

110

Yr. to Yr. % Change in )H Priva te Emp.

)FIB Small Business Optimism Index (Lagg ed 3 Mos.)

Figure 6

The NFIB “Small Business Optimism Index” is a Good Predictor of the Direction of Job Growth in NH

Correlation = .74

A vg. D ays B eyond Term for )H B usine sse s b y S ize of B usine ss

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2 011

July

A ug Se p Oct )o v D ec 2012

Jan

Fe b Mar Apr M ay June

5-9 1 0-1 9

20-49 5 0-9 9

100-249

Figure 7

The Average Number of Days “Beyond Term” that NH Businesses Pay Their Bills Suggests that the Finances of Firms With Fewer Than 20 Employees Has

Weakened Slightly Over the Past Year

Exports Boost Recovery But Have Faded as a Source of NH’s Growth

? Exports have played an important role in the current economic cycle by contributing an outsized share to output, stimulating the manufacturing sector and other related industries and generating employment and income growth. Of last quarter’s +1.7% growth rate in the U.S. economy, +0.8% was attributable to exports. Since the end of the recession, U.S. GDP growth has averaged +2.2% with

growth in exports accounting for nearly half of that or +1.0%. However, the data show that the contribution to growth of exports in NH has diminished rapidly since the beginning of 2011. Stronger growth in NH’s exports than in the U.S. as a whole was especially important to growth in NH early in the state’s recovery from recession. NH’s initially faster emergence

Southern (Dis)comfort …cont. from pg. 2

from recession was, in part, a result of the state’s stronger growth in exports (chart below left). Real, inflation adjusted growth in personal income in NH since the recession has tracked changes in the real dollar value of merchandise exports. As the trend in strong export growth has reversed, NH has also seen slower growth in personal income (figure at bottom right). NH exports to both

Mexico and China have declined by 50% since peaking during the last quarter of 2010 and the first quarter of 2011. While it is unclear if exports will actually pose a drag on NH growth, it is likely that struggles and continued threats facing many economies throughout the world will mean that employment and income in NH will not receive the same boost from exports that they did in 2009 and 2010.

NH growth rates that have become less exceptional and more like the rest of the nation and the New England region. These two trends, especially the change in NH’s relative position among states, become clearer when we compare private sector job growth among the 50 states during two time periods over the past 20 years.

Figure 3 shows how exceptional NH (the red bar) was compared to other states in private sector job growth between the end of recession of the early 1990s (1992) and the end of the recession of the early 2000s (2002). The chart shows that NH’s rate of private employment growth far exceeded the rates of most other Northeastern states, with

NH experiencing the kind of growth more characteristic of the fast growing states of the south and west. The chart also shows, however, that both Vermont and Maine experienced strong private employment growth during that time period, suggesting the importance of the general Southern New

England to Northern New England migration that occurred during that time period played a significant role in private sector job growth in each state. In NH, the migration to the state of skilled individuals with higher levels of educational attainment fueled a boom in the state’s technology and high skill industries. Continued on page 5

Growth in Mercahndise Exports (Index 2007=100)

60

80

100

120

140

160

180

07 08 09 10 11 12

NH Exports

U.S. Exports

Plummeting Sales to Mexico and China and More Economic Troubles Worldwide Mean Less Export-Related Growth in NH in

the Near-Term

The NH Lead ing Index Dipped Further Into Negat ive Territory

$0

$1 00

$2 00

$3 00

$4 00

$5 00

$6 00

$7 00

08 0 9 10 11 12

-8 .0%

-6 .0%

-4 .0%

-2 .0%

0.0%

2.0%

4.0%

Real (Inflatio n Adjusted) NH Exports ($ Mil lions)

Annualized % Change in Real NH Personal Income

Exports Played an Important Role in NH’s Recovery. Income

Growth Has Tracked Export Growth Since the Recession

Trend Lines Page 4 of 5

Trend Lines Page 4 of 5

About PolEcon and the NH Leading Index

PolEcon Research 51 Atkinson St.

Dover, NH 03820

PHONE: (603) 749-4677

AUTHOR’S E-MAIL:

bgottlob@poleconresearch.com

PolEcon specializes in identifying, understanding and communicating emerging economic, fiscal, demographic, labor market, and public policy trends. PolEcon clients include for-profit firms in the energy, financial, information, real estate, and legal/lobbying industries, not-for-profits, regional development organizations, charitable and government agencies, as well as trade associations, chambers of commerce, educational

institutions and “think tanks.” PolEcon’s services include, economic and fiscal impact analysis and forecasting, demographic and labor market analysis, cost/benefit analysis, market analysis, and strategic economic development. PolEcon’s NH Index of Leading Indicators is a diffusion index consisting of nine state and national indicators of economic activity designed to predict changes in the

Dakota and Texas among the exceptions. More astonishingly is the fact that almost one-half of the states had fewer private sector jobs at the end of 2011 as they had in 2003. NH, again in red, has had only a minimal gain in private employment, with growth that looks much more pedestrian than it did during prior time periods. The national and many

Southern (Dis)comfort cont. Looking at more recent trends in private sector job growth between 2003 and 2011 (Figure 4) shows just how much lower job growth has been across much of the country, with states that have seen a boom in energy and natural resource production such a North

rate of employment growth in NH. When index scores are above zero, more of the leading indicators are moving in a positive direction and the NH economy is expanding. The Index has a strong statistical relationship with changes in NH employment, Index scores lead changes in the rate of NH employment growth by 3-6 months. Using statistical techniques, Index scores can be

Trend Lines Page 5 of 5 Trend Lines Page 5 of 5

Figure 3

During the 1990’s NH’s Private Sector Job Growth Looked More Like a Fast

Growing State in the South or West than that of a Northeastern State

% Change in Private Sector Jobs 1992-2002

0%

10%

20%

30%

40%

50%

60%

70%

80%

Haw

aii

Co

nn

ect

icu

t

New

Yo

rk

DC

Pe

nn

sylv

an

ia

Illi

no

is

Oh

io

Rh

od

e Is

lan

d

Ala

ba

ma

Ind

ian

a

Mis

so

uri

Mic

hig

an

Wes

t V

irg

inia

Iow

a

Ne

w J

ers

ey

Mas

sach

us

etts

Mis

sis

sip

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Wis

con

sin

Lo

uis

ian

a

Was

hin

gto

nT

en

nes

see

Ke

ntu

ck

y

Ca

lifo

rnia

Ark

an

sas

Ve

rmo

nt

So

uth

Car

oli

na

Ma

ine

Ma

ryla

nd

No

rth

Car

oli

na

Ka

nsa

s

De

law

are

Min

ne

sota

No

rth

Dak

ota

Ala

ska

Ne

bra

ska

Wy

om

ing

Ok

lah

om

a

Ore

go

n

So

uth

Da

ko

ta

Vir

gin

iaN

ew H

am

psh

ire

Mo

nta

na

New

Me

xic

o

Te

xas

Ge

org

ia

Flo

rid

a

Ida

ho

Co

lora

do

Uta

h

Ari

zon

a

Ne

vad

a

Source: U.S. Bureau of Labor Statistics, PolEcon ca lculations

&H

VT ME

state economies face substantial challenges in the coming years. NH will be better able to confront those challenges if it recognizes that the recent slow pace of job growth in the state is the result of much more than just a national recession. NH is better positioned to meet those challenges. It has a healthy respect for business, a solid reputation for economic growth, and it does not have

decades of public policies that thwart job growth to unwind. But decades of above average growth may have also given it an unrealistic sense of well- being that makes acknowledging the state’s challenges difficult and risks delaying actions that could help it regain its prominence in job creation in the region and the nation.

Figure 4

But Since the Recession of the Early 2000s, NH and Almost Half the States

Have Seen Little or No “Net” Private Sector Job Growth

% Change in Private Sector Jobs 2003-2011

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Mic

hig

an

Oh

io

Rh

od

e I

sla

nd

New

Jer

sey

Mis

siss

ipp

i

Ind

ian

a

Illi

no

is

Ca

lifo

rnia

Ma

ine

Ala

ba

ma

Mis

sou

ri

Del

aw

are

Wis

co

nsi

n

Te

nn

esse

e

Co

nn

ect

icu

t

Ken

tuc

ky

Ark

an

sas

Flo

rid

a

Ve

rmo

nt

Ge

org

ia

Mas

sach

us

etts

So

uth

Ca

roli

na

Mar

yla

nd

Min

nes

ota

Ne

w H

am

psh

ire

Lo

uis

ian

a

Kan

sas

Pe

nn

sylv

an

ia

No

rth

Car

oli

na

Ore

go

n

Nev

ada

Iow

a

We

st V

irg

inia

Ne

bra

sk

a

Co

lora

do

Vir

gin

ia

Ne

w Y

ork

Ha

wai

i

Ari

zon

a

Ne

w M

ex

ico

Ok

lah

om

a

Wa

shin

gto

n

Ida

ho

Mo

nta

na

So

uth

Dak

ota

Ala

ska

Uta

h

Te

xas

Wy

om

ing

No

rth

Da

ko

ta

Source: U.S. Bure au of Labor Statistics, PolEcon ca lculations

&H

converted into a probability that NH will be in a recession sometime within

the subsequent six months.