This past week, I spoke on a “State of the Municipal Bond Market” panel at a conference hosted by the Bond Buyer. Given the numerous requests for a copy of the presentation (and at the risk of being a tad repetitive for those that attended), I am consolidating my notes and the presentation into this week’s commentary. I also provide you a link to access the latest release of the monthly Geo Score. This week’s commentary will print a bit long due to the number of maps and tables.
The presentation started off with a simple message — economics matter. They drive tax rolls, receipts and spending as well as policy decisions to avoid or recover from distress (that was the subject of the conference). For the municipal market, economic metrics at State and local level matter especially in an environment where we (the US) are experiencing an uneven recovery (a major part of what I focus on below).
Rest assured, I am not suggesting economic data is the only criteria to consider in your analysis. I recognize there are other factors contemplated from a research, trading and issuance perspective. But even where there are strong financials, limited debt and strong management (highly subjective) that has taken the right steps, economics are key to what is happening today in any municipality and will be a driver of what the annual financials say tomorrow. If the economic reality not what is hoped, planned or budgeted for, are policies in place to drive the economy (this last part way beyond the scope of my presentation and this commentary) in the right direction?
Resilient v. Lackluster v. Uneven
There are many who categorize the US recovery from the Great Recession as “Resilient.” The National Bureau of Economic Research tells us that the recovery, which is coming up on its fifth birthday, is longer (from a duration perspective) than the average since WWII. Others call the recovery one of the most “lackluster” in modern times. I call it painfully uneven. Politicians and Economists (Keynesian/Democrats and Marx/ Republicans) blame each other – this is nothing new. As the data below demonstrates, the US recovery has been and continues to be uneven and highly sensitive.
GDP and the Leading Index
I start with a broad-based economic data reality, GDP growth. Since 2009, GDP growth has averaged 1.8% (a pace that is half that of the prevision three expansions). Moreover, 1Q 2014 numbers, released a little over a week ago came in at .1%. That number, while partially blamed on the weather (funny, I never heard anyone attribute strong economic growth to the weather) was well below all forecasts – the Fed, economists and politicians, irrespective of their stripes – and well below the hoped for 2% what some call the “new normal” despite highly accommodative monetary policy.
GDP growth is a measure of what has happened. I want to take a look at what the Philly Fed projects will happen. Their Leading Index predicts the six month growth rate in their Coincident Index (a measure of four State level factors summarizing economic conditions. The map below is the visual depiction and shows a range of -2.03% to +4.22% with an average of = 1.02% — not the 2% folks hope for. One last factor, the average for the Leading Index is down by 50 bp since last month.
DIVER Analytics, Map Module; Federal Reserve Bank of Philadelphia
According to the Philly Fed, the “winners” include Maine, Rhode Island, South Carolina, Texas, North Dakota while the lower end includes West Virginia, Alaska, Mississippi and New Mexico.
When I think of housing prices I immediately turn to assessed values and property tax receipts. In this vein, it is important to remember that assessed values generally trail housing prices by 18-24 months (although I was recently reminded there are places that do not conduct reassessments for over 20 years). On this front, I have some decent news to report. For the period from the end of 2008 through the end of 2013, 32 States saw overall growth in their home price index while “only” 19 did not see growth.
DIVER Data Services; FHFA.
That said, the recent Case/Schiller numbers shows a slowing increase in housing prices across the 20 cities they track. Additionally, home ownership, at 64.8%, is the lowest since 1995 and mortgage lending is at its lowest level in 14 years. Incredibly, this last fact was blamed on rates being about 80 basis points higher than one year’s earlier but, by virtually all measures, amongst the lowest in history. Imagine how low mortgage lending would be if the Fed tightened?
Employment conditions are critical to income tax receipts, spending on unemployment benefits, and broader spending by consumers for the obvious reasons. The data I am about to present was somewhat startling to me as I pealed back the onion. All of the data below corresponds to the period end 2008 to the end of 2013.
As the table below demonstrates, the number of employed people has gone up in 26 States and down in 26 States (for this discussion ‘States’ includes DC and Puerto Rico) and, overall across the US, the number of employed people has gone up thereby giving folks on both sides of policy arguments good data. Additionally, Labor Underutilization (U-6) is around 12.7% and trending down. The Labor Force is up in 23 States and down in 29 but, again, up overall in the US for the period in question. Importantly and not surprisingly the US population is up overall as it is in 48 States.
DIVER Data Services; USCB, BLS.
Before you read on, please look at the bottom row of the above table, the one “Employed as a % of Population” – up in only three States while down in 49. That is troubling.
I took this exercise around employment data one step further. I wanted to see just how uneven the recovery really is and asked how many States suffer from a lower number of Employed people, a smaller Labor Force and a lower Employed as a % of Population? The answer is 26 and the tables below provide the detail.
DIVER Data Services; USCB, BLS.
One more point under the “Employment” category, the Labor Participation rate is hovering near all-time lows (but up off of the recent all-time low).
Wages or income drive income and sales tax receipts. The Median Household Income is up in 34 States and down in 17 States for the period end 2008 to end 2012 (latest data reported). However, early last week it was reported that inflation-adjusted wages are at levels seen in the mid-‘70s. I know the price of just about everything is nowhere near levels in the 1970s. Another economic data point worth watching.
I concluded my presentation with some discussion around the Geo Score – a monthly score of the relative economic well-being for all States, counties and about 350 cities. As the maps below demonstrate, the “current” and “trend” scores paint, in some respects, noteworthy distinctions. The “Current” score looks at a series of economic factors spanning housing, income and employment tell us how the geography is faring today while the “Trend” looks at the same factors over the course of one year to help us ascertain which geographies are trending better or worse than others. These visuals represent the March 2014 Geo Score, as presented last week. As noted in the introduction of this commentary, the April 2014 Geo Scores were released last Friday and are available by clicking here.
DIVER Analytics, Map Module.
This week Deb and Dalia will join me in Orlando for the NFMA Conference while Pete is in Chicago for the NSCP regional event. Mike and I round out the week in NYC on Friday.
Have a great week.
Gregg L. Bienstock, Esq. CEO & Co-Founder, Lumesis, Inc.