Philly Fed Indexes Show Weakest States Narrowing the Gap

October 26th, 2015

This week we update our analysis of the Philly Fed State Coincident Indexes and take a look at the impact of the debt ceiling debate on SLGS.

Philly Fed Indexes Show Weakest States Narrowing the Gap

Last week was a busy week for data regarding the employment picture in the States.  The Federal Reserve Bank of Philadelphia combines four of the labor market releases to calculate their “State Coincident Indexes”.

We find this index especially helpful for gauging variation in the strength of the local economies across the nation. This summer, the Philly Fed statistics showed an overall economy that was trending stronger, but with increasing dispersion between the strongest and weakest States.

The Indexes showed the strongest States improving at close to 3% annually, while the weakest States were barely improving at all.


The data released last week show continued solid performance from the strongest States, but perhaps more importantly, signs of strength in some of the weakest States.

To measure the breadth of economic growth, we track the difference between the growth of the strongest quintile of States and the weakest quintile of States (the difference between the dark blue and light blue lines in the chart above).

During the summer, this difference between the strongest and weakest had been at the highest levels since the financial crisis.  During the last two months, this gap has narrowed.  While one month’s data does not make a trend, this is a good sign.


Weak oil and commodity prices continue to be a driving factor for the many of the weakest economies.  Labor conditions worsened in North Dakota, Wyoming, Alaska, and Montana.  After shrinking by close to 6% in the prior 8 months, West Virginia’s economy was stable during September.


Texas’s economy continues to lag but is performing better than other oil patch States.  Texas’ more diverse economy cushions some (but not all) of the oil impact.  The Texas Comptroller last week adjusted the State’s ’16 and ’17 revenue estimates down by 2.3%.


Among the non-oil patch States; Vermont was one of the weakest during September.   In an earlier Commentary, we contrasted the fortunes of the Vermont and New Hampshire economies.  During the summer, this Vermont-weak/New Hampshire-strong trend continued.  While it’s tempting to attribute some of New Hampshire’s strength to spending on the Presidential primaries, most studies we have seen indicate that this is not a significant factor.

Will the Treasury Reopen the SLGS Window? With no Yield to Burn, Does it Matter?

The fixed income markets will be watching the upcoming debate in Washington regarding an increase in the debt ceiling.  An interesting municipal bond angle relates to the fate of the U.S Department of Treasury’s State and Local Governments Series Securities program.

SLGS are Treasury securities, which are issued directly to State and local governments to help them avoid running afoul of arbitrage restrictions when investing bond proceeds.

While the program has been around since 1972, usage of SLGS increased dramatically in the 90’s in response to increased IRS oversight on the heels of the “yield burning” controversies.   Yield burning was the practice of artificially lowering the yield of securities purchased in the open market and then placed in escrows.  The lowering of yield was achieved by transferring the securities into the escrow accounts at prices higher than market prices.


In March ’15, when the Treasury began extraordinary measures to avoid breaching the current debt ceiling, it suspended sales of SLGS (“closed the SLGS window”).   The current closing (226 days) has been much longer than average (66 days).


Because of the closure of the window, and the decline in advance refundings due to “negative arbitrage”, the outstanding amount of SLGS has been declining after it peaked in August ’08.  Negative arbitrage refers to an unfavorable relationship between the issuer’s borrowing rate and escrow investment rate on a refunding deal.


When advance refundings were more attractive, and available yields on open-market securities were higher, the closure of the SLGS window frequently led to lower municipal new issue volumes.

In the current environment of unattractive refunding economics and little available yield on open market securities, the status of the SLGS window has become less relevant to municipal market conditions.  Depending on the exact resolution of the current debt limit situation, Treasury may elect to keep the window closed for the foreseeable future.


Have a great week,

Michael Craft, CFA