How Valuable Are Private Sector Economic Projections? NY Counties Fiscal Health

Categories: Commentary |

May 26, 2015

This week we examine whether private sector amateur economists are any better at predictions than the professionals and revisit a comparison of fiscal and economic health in New York State.

“Don’t Quit Your Day Job”

In the wake of the recession and the subsequent anemic recovery, the economist community has been criticized for its inability to predict the future path of the economy.

The New York Fed conducts several surveys which ask private sector business managers and leaders to assess not only the current economic conditions, but also to predict future economic conditions.

We were curious to see if the predictions of these private sector amateur economists could yield better insights than those made by the professional economist community.

The NY Fed conducts two separate monthly surveys:

The Empire Manufacturing Survey polls “about 200 manufacturing executives in New York State”.  Roughly half respond.  The Survey asks respondents to “report the change in a variety of indicators from previous month…also the likely direction …six months ahead.”

The Business Leaders Survey “asks companies across New York State, northern New Jersey, and Fairfield County Connecticut about recent and expected trends in key business indicators.”

Other regional Federal Reserve Banks conduct similar surveys.

There have been numerous studies about the usefulness of the “current conditions” portion of qualitative economic surveys to fill in gaps before official statistics become available.  These studies have found that responses to “current conditions” questions yield timely information regarding the health of the economy.  An article by the Philly Fed  noted: “many researchers have shown that monthly national manufacturing surveys do provide value in explaining current-quarter economic activity. “

We have seen less analysis of the value of the “future conditions” portions of these surveys.

To assess the value of the “future conditions” responses, we compared the value of the current conditions index to what the respondents predicted in their “future conditions” responses six months earlier.


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The results were not encouraging.  For the Empire State Manufacturing Survey (since ‘01) the correlation between current conditions vs. what had been predicted was .16.  For the Business Leaders Survey (since ‘04) the correlation was .47.

For both surveys, responses to the six months forward question appeared to be more influenced by current conditions than by a considered judgment of the future path of the economy.

Future conditions responses were much more correlated to current conditions than they were to realized conditions in the future.

For the Empire Manufacturing Survey, correlation of predicted vs. realized was .16, while the correlation vs. current as of response date was .63.  For the Business Leaders Survey the difference was .47 vs. .81.

It’s not clear whether this is due to behavioral biases or simply a lack of effort in responding to the survey.

Based on our previous analysis of future sentiment indicators in the muni market, we lean toward behavioral bias.

An interesting side note is that just like many professional economists, the respondents to NY Business Leaders survey have been consistently surprised by the weakness of the recovery from the recession.  Since the recession, their predictions of future conditions have averaged 20 index points above actual (whether lagged or not).

Nassau County: How to Turn a Great Economy into a Mediocre Credit

Each year, Thomas DiNapoli, the Comptroller of the State of New York, collects and publishes financial data for New York State counties, cities, towns, villages, and school districts in the Fiscal Stress Monitoring System.

The focus of the Fiscal Stress Monitoring System is measuring the fiscal health of the municipalities using a “Fiscal Score.” The Fiscal Score grades a municipality on a scale of 0% to 100% (lower is better) and is calculated based on 7 to 10 financial variables.

The credit quality of a municipality is a function of both financial variables and economic and demographic conditions. We created the chart below to combine the financial information contained in the Fiscal Score with our DIVER Geo Score which measures relative economic strength.

For the counties covered by the NYS Comptroller, we plot the DIVER Geo Score on the X-axis and the Fiscal Score on the Y-axis (inverted scale).

The DIVER Geo Score represents a relative score of the economic health of a U.S. State, county or city. Based on a scale of 0-10, with 10 being the best, this data is updated monthly and is calculated from multiple economic and demographic factors related to three primary data categories—employment, income and housing.

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Most of the counties in New York show both strong credit and economic metrics. These are the data points in the upper right hand corner of the chart.

Nassau (along with Suffolk, and Rockland) is notable because it has a below average credit profile despite one of the strongest economies (highest Geo Scores) in the nation.

Time of Trade Disclosure and Related Rules—One Year Later

Lumesis recently published an update to our white paper “Municipal Time of Trade Disclosure and Suitability”.  The update focuses on areas of interest and concern for compliance and legal professionals, senior management, regulators and other industry professionals.

In addition to addressing aspects and nuances of the Time of Trade and Suitability rules, it also incorporates a discussion on supervisory responsibilities (MSRB Rule G-27), the ever-increasing importance of documentation and other recent regulatory developments (SMMP designation) that can, or have, impacted the municipal market.

The update can be found here.

Have a great week,

Michael Craft, CFA

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