Mississippi s Business Monitoring The State s Economy

Mississippi s Business September 2012 Monitoring The State s Economy ECONOMY AT A GLANCE Volume 70 - Number 8 A Publication of the University Research Center, Mississippi Institutions of Higher Learning The Mississippi Index of Coincident Indicators fell in July for the fourth consecutive month. The Mississippi Index of Leading Indicators fell for the fourth month as well. The State appears to have gone into a recession during the second quarter. Data are limited, but early signs are that the Mississippi economy has not significantly improved in the third quarter. For the first seven months of 2012, employment in the State was down 0.2 percent relative to the same period of 2011. As of July, Mississippi had the same number of people employed as in the depth of the recession. Several sectors experienced job gains for July, giving hope that growth could resume in the remainder of the year. The National economy has moderated as well and the outlook for the remainder of 2012 is for slow growth. The housing sector is showing signs of life and light vehicle sales continue at a relatively strong pace. IHS Global Insight has lowered their risk of recession, citing possible actions by the European Central Bank to deal with the sovereign debt problems plaguing Europe. This reduction in risk however, came before the recent violence overseas. Depending upon how long this violence continues, and the degree to which it expands to other areas, the risk to recession could be great. Oil prices have begun to rise which will lead to higher gasoline prices. An extended spike in gasoline prices could have a significant negative impact on the U.S. economy. This is especially true given the low level of income growth the Nation is experiencing. The Fed has announced another round of quantitative easing or QE3. It remains to be seen if this action will have any substantial impact on growth. Index of Leading Indicators Index of Coincident Indicators 106.0 95.0 105.0 104.0 90.0 103.0 102.0 85.0 80.0 MS LI US LI 101.0 99.0 MS LI US LI The Mississippi Coincident Index is constructed by the Federal Reserve Bank of Philadelphia and re-indexed to 2004. The Index is based on changes in nonfarm employment, the unemployment rate, average manufacturing workweek length and wage and salary disbursements. The Mississippi Leading Index is constructed by the Mississippi University Research Center. The U.S. Indices are both from the Conference Board. All series are indexed to a base year of 2004. IN THIS ISSUE: Economy at a Glance... 1 Index of Leading Indicators for July 2012... 2 Index of Coincident Indicators for July 2012... 4 National Trends... 7 Mississippi Employment Trends... 9 State Economist Darrin Webb 3825 Ridgewood Road, Jackson, MS 39211 dwebb@mississippi.edu www.mississippi.edu/urc/economics.html

2 Mississippi s Business September 2012 LEADING AND COINCIDENT INDICATORS, JULY 2012 The Mississippi Index of Leading Economic Indicators has fallen for four consecutive months. The July index of 96.4 was 1.0 percent below the June level. The July Index is the lowest since September 2011. For the first time since October 2011, the index has fallen relative to the level six months prior. Furthermore, the six-month diffusion index has fallen dramatically, indicating the weakness is widespread among the eight components. Six of the eight components deteriorated relative to the prior month. All of these trends point to a weakening economy. As reported last month, the Mississippi Coincident Index suggests the State has been in a recession since April. While the Coincident Index can be argued to be employment driven, the recent trends in the leading index reveals the weakness goes beyond employment. The evidence that the State is currently in recession is mounting. The components of the Leading Index will be discussed in order of their contributions to the July decline. The largest contributor to the July decline was the Mississippi Manufacturing Employment Intensity Index, which fell a steep 2.1 percent in July relative to June. The index is comprised of employment and hours worked. The July decline was driven by a slower workweek length. Manufacturing employment actually grew for the month. At just a little over 40 hours per week, workweek length was at the lowest level since January 2011. The Mississippi Diesel Fuel Consumption Index 1 dropped 5.6 percent in July relative to June. The three month moving average is at its lowest point since August 2009. The series has declined in five of the last six months with the July decline being the steepest by far. The U.S. Index of Consumer Expectations 1 fell 4.4 percent. This 8. 6. - - -6. -8. 98.0 96.0 94.0 92.0 90.0 88.0 Mississippi Index of Leading Indicators 4. 3. 3. 2. was the third consecutive decline. Rising fuel prices and an expectation of future inflation dampened optimism for the future. Inflation adjusted Mississippi income tax withholdings 1 fell 1.5 percent in July relative to June. This was the third decline in four months. As the figure below shows, growth in withholdings was improved in the first and second quarter, reaching the highest rate since before the recession. But growth has been much more subdued in the first two months of the third quarter. 1. Three Month Moving Average MS Real Withholdings Growth Over Prior Year, By Quarter Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-2012* Sep-2012* -- only July and August are included.

3 Mississippi s Business September 2012 LEADING ECONOMIC INDICATORS Bar Graph: # of Claims 14,000 13,500 13,000 12,500 12,000 11,500 11,000 10,500 10,000 MS Initial Unemployment Claims - -1-1 -2 Bar Graph: Millions of 2004 $ 106 104 102 100 98 96 MS Income Tax Withholdings Three Month Moving Average 6% 4% - -4% Source: Mississippi Department of Employment Security Bar Graph: Millions of 1982-1984 $ 60 55 50 45 40 35 30 MS Value Of Residential Building Permits Three Month Moving Average 5 4 3 2 1-1 -2-3 Source: Mississippi Department of Revenue 56 55 54 53 52 51 50 49 48 47 ISM Index of U.S. Manufacturing Activity 0-2 -4-6 -8-10 Source: Bureau of the Census Source: Institute For Supply Management 79.0 78.0 77.0 76.0 75.0 74.0 73.0 MS MFG Employment Intensity Index 6% 4% 3% 1% -1% - 1996=100 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 U.S. Consumer Expectations Index Three Month Moving Average 2 1-1 -2-3 Source: URC using data from Bureau of Labor Statistics Source: University Of Michigan 110.0 105.0 95.0 90.0 85.0 80.0 MS Diesel Fuel Consumption Index Three Month Moving Average 1 - -1 Line Graph:% Change Over Year Ago Bar Graph: Millions of $ 410,000 405,000 400,000 395,000 390,000 385,000 380,000 375,000 U.S. Retail Sales 1 8% 6% 4% Source: URC using Data from Mississippi Department of Revenue Source: Bureau of the Census

4 Mississippi s Business September 2012 Mississippi s initial unemployment claims rose 2.6 percent in July relative to June. This was the third gain in four months. The series is down relative to a year ago. The Institute for Supply Management Index of U.S. Manufacturing Activity fell slightly to 49.6 in August. The series remains below the threshold of 50 which signifies the industry is contracting. The ISM Nonmanufacturing Index rose and remains above 50. Two components contributed positively to the July Index: U.S. retail sales and the value of residential building permits. The U.S. Retail Sales rose 0.8 percent in July. This marked the first gain in four months as consumers had been curtailing spending. Retail sales were particularly weak in June and the July gain could be a payback for that weakness. Growth was fairly widespread among retail sales segments. Furniture sales were particularly strong with a 1.1 percent increase. Building material sales were up 1.6 percent. These gains could be fueled by the modestly improving housing market. In a separate but related report, light vehicle sales remained relatively strong in August with an annualized 14.5 million units sold. The value of Mississippi residential building permits 1 rose a strong 8.8 percent in July over June. The series has increased every month for the past six months, but the July increase was the strongest. The series remains well below historical highs but the growth over the past six to eight months have been a marked improvement over previous declining trends. Nationally permits are slowly improving as well. The Mississippi Index of Coincident Indicators was 101.9 in July, down 0.2 percent from an upwardly revised June index. The Index has declined for four consecutive months with a cumulative decline of 0.6 percent. Based on the definition used by researchers at the Federal Reserve Bank of Philadelphia, the Index shows the State to be in a recession. Critics will point out that the index is largely driven by the employment sector and that a jobless recovery is possible. This is a legitimate point. However the deeper and longer a jobs recession persists, the more it affects other segments of the economy. As evidenced by the Mississippi Index of Leading Indicators, other segments of the State s economy are being affected by this downturn. The figure to the right shows the history of the index since before the recession. Note the steep decline and the lackluster recovery. Recovery was strongest in the first half of 2010, but was relatively flat in the second half of 2010 and through the first half of 2011. Growth improved toward the end of last year. The index has fallen significantly since April. Much of the gain that took place in the latter half of 2011 has now been lost. The figure at the top of page 5 shows a comparison of the July index to the pre-recession peak for the 12 Southeastern States and the Nation. States that reach 100 percent of peak have fully recovered from the Great 102.6 102.4 102.2 102.0 101.8 101.6 101.4 101.2 101.0 108.0 106.0 104.0 102.0 98.0 96.0 Mississippi Index of Coincident Indicators MS Coincident Index 0.8% 0.6% 0.4% 0. -0. Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

5 Mississippi s Business September 2012 Recession. Mississippi was at 95.1 percent of the peak. Arkansas, Kentucky, Louisiana, Oklahoma, Tennessee and Texas are ahead of Mississippi. Georgia is only slightly below Mississippi. Looking at the data through time shows growth in most southeastern states is beginning to slow and a few like Mississippi are experiencing a decline. These include Louisiana, South Carolina and Alabama. The declining trend among the states is evident in the graph below which shows the relative performance of the fifty states. The July index is compared to the level three months prior. This map is presented every month and the reader may note the growing num- 10 10 9 9 8 8 90.1% Coincident Index: July 2012 Percentage of Pre-recession Peak 95.3% 88.6% 94.9% 97. 99.8% 95.1% 94. 99. 92. 98. 103.3% 101.1% AL AR FL GA KY LA MS NC OK SC TN TX US ber of red states and diminishing number of dark blue states. That is, there are fewer states with relatively strong growth and more states actually in decline than in recent months. Interestingly, Alabama, Alaska, Michigan, South Carolina, and West Virginia all are declining at a faster rate than Mississippi. As in previous months, the fastest growing state was North Dakota. The U.S. average growth was a 0.6 percent. Three Month Growth in The Index of Coincident Economic Indicators, July 2012 0.56% WA -0.21% NH 1.1 CA 0.34% OR -1.47% AK -0.19% NV 0.56% ID 0.29% AZ 0.69% UT 0.38% MT 0.37% WY -0.18% NM 0.31% CO 1.6 ND 0.43% SD 0.81% TX 0.59% NE 0.37% KS 0.29% OK 0.63% MN 0.26% IA -0.04% MO 0.19% AR -0.13% LA -0.09% WI 0.09% IL -0.47% MS -1.21% MI 0.81% IN 0.1 TN -1.0 AL 1.46% OH -2.4 WV 0.5 KY 0.28% GA 0.23% VT 0.04% NC -0.5 SC 0.18% FL -0.31% PA 0.4 VA 0.39% NY DC -0.16% ME -0.0 NJ -0.01% MD 0.19% DE 0.36% MA 0.7 RI -0.3 CT 0.31% HI US 0.6% Less than - Between - to No change Between 0.1% to Greater than

6 Mississippi s Business September 2012 MISCELLANEOUS ECONOMIC INDICATORS Bar Graph: 150 140 130 120 110 100 90 80 MS Continued Unemployment Claims - -1-1 -2-2 -3 Bar Graph: Rate 12.0 10.0 8.0 6.0 4.0 2.0 0.0 MS Unemployment Rate 1 - -1-1 -2 Source: Mississippi Department of Employment Security; Seasonally Adjusted Source: U.S. Bureau of Labor Statistics; Seasonally Adjusted Bar Graph: 2004 Dollars 555.0 550.0 545.0 540.0 535.0 530.0 525.0 520.0 515.0 510.0 505.0 Real Average MFG Weekly Earnings in MS 1 1 8% 6% 4% Bar Graph: Millions of Dollars 250.0 200.0 150.0 50.0 0.0 MS Gaming Revenue 4 3 2 1-1 -2 Coast River Growth of Total Source: U.S. Bureau of Labor Statistics; Nonseasonally Adjusted Source: MS Department of Revenue; Nonseasonally Adjusted 4. 3. 3. 2. Inflation: Price Growth over Prior Year 3.6% 3.8% 3.9% 3. 3.4% 3. 2.9% 2.9% 2.7% 2.3% 1.7% 1.7% 1.4% Bar Graph: Rate 58.0 57.0 56.0 55.0 54.0 53.0 52.0 51.0 50.0 49.0 ISM Index of Nonmanufacturing Activity - -4% -6% -8% -1 Source: U.S. Bureau of Labor Statistics Source: Institute For Supply Management 96.0 94.0 92.0 90.0 88.0 86.0 84.0 U.S. Business Optimism Index 4% 3% 1% -1% - Bar Graph: Millions of Units 15.0 14.5 14.0 13.5 13.0 12.5 12.0 11.5 11.0 U.S. Light Vehicle Sales 14.4 14.3 14.5 14.1 14.1 13.9 14.0 13.9 13.1 13.3 13.5 13.6 12.4 12.4 2 2 1 1 Source: National Federation of Independent Businesses Source: Bureau of Economic Analysis; Seasonally Adjusted Annual Rate

7 Mississippi s Business September 2012 National Trends The U.S. Index of Leading and Coincident Indicators both increased in July relative to June. The Leading Index rose 0.4 percent while the Coincident Index saw a 0.3 percent gain. The Leading Index has been relatively flat since May. The Conference Board believes the economy will continue to expand in the coming months, but expects growth to be slow. While the economy appears to be expanding, it has lost momentum and is expected to slow in the second half of 2012. Manufacturing in particular has slowed as evidenced by the ISM Manufacturing Index. Real income continues to grow, but at an anemic rate. Job gains for August were very disappointing, after a relatively strong increase in July. There are a few bright spots. Light vehicle sales are continuing at a pace above 14 million units per month. Housing is finally showing signs of life. Inventories of unsold homes are falling and home prices are rising. Building permits and housing starts are rising. Much of the growth in housing starts is concentrated in multi-family units. Consumer spending improved in July. This is viewed more as an anomaly than as an harbinger of things to come. The U.S. consumer faces high debt, low income growth and high unemployment. Additionally, consumer sentiment remains at a low level historically. Exports and business fixed investments are not expected to fuel growth as they have in the past. A slowing global economy and uncertainty over the fiscal cliff are contributing to this pessimistic outlook. The fiscal cliff is the term given to the series of spending cuts and tax increases that are scheduled to begin in 2013. The expectation is that this double assault on the economy would send the U.S. economy off a cliff. Most economists expect the lame-duck congress to pass some temporary measure allowing the U.S. to avoid this outcome and pass the problem on to the next congress and the winner of the November presidential election. While this avoids the worst-case scenario, it continues the high degree of uncertainty that has pervaded the recovery. IHS Global Insight has reduced their risk of recession citing news of proposed European Central Bank support for sovereign debt. They remain concerned about conditions in Europe and recognized it as one of two major threats to the U.S. recovery. The other risk is a deteriorating Chinese economy. At this point they do not expect either to lead to a U.S. recession, but do expect U.S. growth to soften in the second half of 2012. Their current risk of recession is 20 percent, down from 25 percent the previous month. This reduction in risk came before the recent troubles in the Middle East and North Africa. The conflicts in that region will certainly raise oil prices, which will add to the risk of recession. Gasoline prices had already been rising. Rising fuel prices hits U.S. consumers hard, especially during a time of low income growth. It is too early to determine the impact the recent troubles will have on oil prices and the economy. It will depend on how long the violence continues and if it spreads throughout the region. The Fed has announced another round of quantitative easing (QE3). The Fed will begin purchasing mortgage backed securities at a rate of $40 billion per month. This effort, along with the continuation of Operation Twist means the Fed will be pumping $85 billion into the economy per month. The Fed believed this activity will give a boost to the fledgling recovery in the housing sector and ultimately raise employment. This round is open ended, meaning the process will continue until the Fed thinks the economy can stand on its own legs. While the markets seem to enjoy the Fed stimulus, it remains to be seen how effective QE3 will be on economic growth and unemployment. The impact of quantitative easing appears to have diminished with each successive round. One indirect effect will be a declining dollar which will in turn raise oil prices. The Fed hopes that by committing to an open ended stimulus, confidence will increase and lead to greater investment, hiring and spending. These gains presumably will offset the negative impact of rising fuel prices. We will see if this plan works.

8 Mississippi s Business September 2012 SELECTED ECONOMIC INDICATORS July June July Change from Indicator 2012 2012 2011 Last Month Last Year US Index of Coincident Indicators 105.1 104.8 101.9 0.3% 3.1% MS Index of Coincident Indicators 101.9 102.0 101.4 0.1% US Index of Leading Indicators 95.8 95.4 94.4 0.4% MS Index of Leading Indicators 96.4 97.4 92.6 4.1% MS Initial Unemployment Claims 12,163 11,855 13,184 2.6% 7.7% MS Value Of Res. Building Permits 55.3 50.8 38.5 8.8% 43. MS Income Tax Withholdings 103.18 104.72 100.47 2.7% MS MFG Emp. Intensity Index 75.5 77.1 75.8 2.1% 0.4% MS Diesel Fuel Consumption Index 92.8 98.3 101.3 5.6% 8. US Index of Consumer Expectations 66.2 69.2 56.1 4.4% 18. US ISM Index of MFG Activity 49.6 49.8 50.9 0.4% 2.6% US Retail Sales 403,929 400,682 387,932 0.8% 4.1% US Consumer Price Index 121.3 121.5 119.6 0. 1.4% MS Unemployment Rate 9.1% 8.8% 10.9% 0.3% 1.8% MS Continued Unemp. Claims 130,688 113,148 141,733 15. 7.8% US Mortgage Rates 3. 3.6% 4. 0.1% MS Avg. Hourly Wage for MFG 52.60 52.10 52.70 0. MS Avg. Wkly Earnings for MFG 529.7 540.2 526.6 1.9% 0.6% Gaming Revenue 203.6 186.9 210.7 8.9% 3.4% Coast Counties 104.5 89.9 99.5 16. 5.1% River Counties 99.1 97.0 111.2 2. 10.9% Business Optimism Index 91.2 91.4 89.9 0. 1.4% Components of the MS Index of Leading Indicators Economic Indices Miscellaneous Indicators

9 Mississippi s Business September 2012 Sector MISSISSIPPI EMPLOYMENT BY SECTOR Relative Share of July June July Change from Prior Month Change from Prior Year Total* 2012 2012 2011 Level % Level % Total Nonfarm % 1,083,800 1,085,900 1,088,400 (2,100) 0. (4,600) 0.4% Mining and Logging 0.8% 9,200 9,200 9,100 100 1.1% Construction 4.3% 43,600 43,700 48,900 (100) 0. (5,300) 10.8% Manufacturing 12.4% 136,100 135,700 133,100 400 0.3% 3,000 2.3% Trade, Transportation & Utlities 19.6% 213,600 212,700 214,300 900 0.4% (700) 0.3% Retail Trade 12.1% 130,700 130,700 132,800 (2,100) 1.6% Information 1.1% 11,884 11,861 11,889 24 0. (5) Financial Activities 4.1% 44,063 44,291 44,874 (228) (811) 1.8% Services 35. 382,600 381,900 381,200 700 0. 1,400 0.4% Professional and Business Services 8.6% 92,300 91,400 93,000 900 (700) 0.8% Education and Health Services 12.6% 137,000 135,600 134,800 1,400 2,200 1.6% Leisure and Hospitality 10.7% 118,500 119,800 119,100 (1,300) 1.1% (600) Other Services 3. 34,800 35,100 34,300 (300) 0.9% 500 Government 22.6% 242,900 246,700 245,200 (3,800) (2,300) 0.9% Source: U.S. Bureau of Labor Statitiscs Mississippi Employment Trends Mississippi lost 2,100 jobs in July relative to June. Monthly declines have occurred in seven of the last twelve months. The series has been below the year ago level for twelve of the last fifteen months. For calendar year 2012, through July, Mississippi s employment is down 0.2 percent from the same period of 2011. The State experienced a 0.1 percent decline for calendar year 2011. If this declining trend continues through the remainder of 2012, the State will have declined for five consecutive years. With these declines, employment in Mississippi is now equal to the level observed in the depth of the recession (see figure to the right). The modest gains that have taken place over the past three years have all disappeared. With the current forecast, it will be 2018 at the earliest before Mississippi has the number of people employed as it did prior to the recession. The largest declines for July were in government, leisure and hospitality. Not all of the news was negative. Several sectors gained in employment. Education and health services saw a strong gain for the month. Professional and business services and the trade, transportation and public utilities sector also saw gains. The sub-sector of retail trade was flat for the month. Manufacturing and information also added jobs for the month. While construction employment declined, the decline was much less than what the State has experienced the past several months. MS Nonfarm Employment 1,180 1,160 1,140 1,120 1,100 1,080 1,060 1,040 1,020 1,000 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

10 Mississippi s Business September 2012 - - 1,078 1,080 1,082 1,084 1,086 1,088 1,090 1,092 1,094 1,096 Nonfarm Employment - -3. - - 3. 130 131 132 133 134 135 136 137 Manufacturing - - - - 43.4 43.6 43.8 44.0 44.2 44.4 44.6 44.8 45.0 45.2 45.4 45.6 Financial Activities -3. -2. - - - - 113 114 115 116 117 118 119 120 121 Leisure and Hospitality Services 6. 8. 1 1 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 Natural Resources - - - - 210 211 212 213 214 215 216 Trade, Transportation and Utilities - - 6. 8. 1 1 1 89 90 91 92 93 94 95 96 Professional and Business Services - -3. - - 3. 33.0 33.5 34.0 34.5 35.0 35.5 Other Services -1-1 -8. -6. - - 6. 30 35 40 45 50 55 Construction -8. -6. - - 10.8 11.0 11.2 11.4 11.6 11.8 12.0 12.2 12.4 12.6 12.8 13.0 Information 2. 3. 3. 129 130 131 132 133 134 135 136 137 138 139 Education and Health Services -3. -3. -2. - - - - 239 240 241 242 243 244 245 246 247 248 249 250 Government MISSISSIPPI EMPLOYMENT TRENDS Left Axis: Bar Graphs - Employment Levels. Right Axis: Line graphs - Annual Growth. Source: U.S. Bureau of Labor Statistics.