State (and Local) Economic Dispersion, Effectiveness of MCDC, Puerto Rico Index

Categories: Commentary |

May 18, 2015

This week we continue our discussion from last week of economic dispersion around the nation, first by expanding on a topic from a Washington Post column, then by looking at Continuing Claims data.  We also discuss the effectiveness of MCDC and review the GDB’s index of Puerto Rico’s economic health.

Washington Post Touches on a Favorite DIVER Theme

In last week’s Commentary, we discussed the growing dispersion of economic health among the States reflected in the Philly Fed’s Coincident Index.

Washington Post columnist Barry Ritholtz touched on a similar theme in his column over the weekend.

We agree with Ritholtz that the cities of New York, Washington, D.C., Seattle, San Francisco and Boston are thriving, but have observed that even within these metropolitan areas, economic conditions vary.


While Washington, D.C. remains strong, many of the neighboring counties have been lagging.  We attribute this primarily to the ongoing impact of sequestration.  In particular, the ex-urban Maryland counties of Calvert and Charles have shown weakness.

The ability to identify this kind of variation in local conditions is a valuable benefit of the DIVER Geo Score.

Continuing Claims for Unemployment are Growing in Energy Dependent States

Like the Philly Fed Indices, data released by the Department of Labor last week on Continuing Claims for Unemployment Insurance also reflects wide differences across the nation.

Comparing the most recent 4-week moving average of Continuing Claims to the same period last year reflects that most of the country has shown great improvement:  the United States average is down -16%.

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While Continuing Claims have declined in most States, they are up in five States:  North Dakota, Wyoming, Oklahoma, Louisiana and Texas.  These States all share dependence on energy:  oil, natural gas and coal.

Oil prices have recovered from their lows, but we remain concerned about the negative effects on particular State and local economies from recent declines in energy prices.  We appreciate the point made by many that Texas’s economy is more diverse and less energy dependent than it once was, however, we believe that the risk to portions of Texas’s economy are significant.

The chart below highlights how dramatically the employment situation in Texas and other energy dependent States has started to diverge from the nation overall.

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Since the middle of January, the year over year change in Continuing Claims in these States has moved from -17% to +12%.

MCDC has Changed the Number of Disclosures, But Not the Timing

Several of the panel discussions at last week’s NFMA National Conference touched on the SEC’s MCDC initiative.  The dealer and issuer representatives were generally critical; viewing MCDC as heavy-handed and rolled out with greatly understated estimates of the effort required to respond.

The view from the investment community was more mixed.  As the primary beneficiaries of better disclosure triggered by increased 15c-2-12 compliance, investors were less critical of MCDC.

In addition to the cost of compliance question, key criteria in assessing the wisdom and success of MCDC will be whether it improved the timing and amount of disclosure.  According to an MSRB report published recently, the lag after fiscal year end for submission of annual and audited financial information was unchanged in 2014.  This is consistent with the DIVER CAFR Filing Index data for cities, which showed a modest decline in the median filing time for cities (165 days à 162 days).

Using the DIVER database on 15c-2-12 filings, we can analyze more recent filing data to determine whether the amount of disclosure has increased.  It is important in the analysis to focus on filings made during 2015 to exclude the impact of “make-up” filings during 2014, while the grace window under the MCDC initiative was still open.

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Based on the first four months of this year, MCDC has lead to a 30% increase over prior years in the number of issuer filings under 15c-2-12.

Puerto Rico Economy Doing Better, Still Shrinking, Exactly How Much Not Clear

Last week the Puerto Rico GDB released the most recent value of its Economic Activity Index.  The Economic Activity Index is designed to provide a monthly reading of the economic health of the Commonwealth.   The components of the index are: Employment, Electric Power Generation, Gasoline Consumption, and Cement Sales.

The GDB-EAI is best viewed a helpful, but somewhat imprecise indicator of the condition of the economy of Puerto Rico.  The imprecision of the index has been emphasized by several adjustments this year.

The first adjustment was due to a periodic revision by the United States BLS to its payroll employment statistics.  This revision increased the estimated number of employees in Puerto Rico during 2013, but reduced them in 2014.  The effect of the revision was to worsen the estimated decrease in the index during 2014 from -1.4% to -2.7%.

The second adjustment was announced last week by the GDB. This adjustment is a methodology change by the GDB to its handling of seasonal factors. The index will be published under the old and new methodologies until June.  This new methodology improves the estimated change for 2014 from -2.7% to -2.0%.

To recap:  due to the two adjustments since January, the estimate of the index for 2014:  -1.4% –> -2.7% –> -2.0%.

The impact of the adjustment on the indicated progress of the economy during 2015 is also significant.  The “old” index shows the economy declining by -1.5% this year, while the “new” index shows only a -.4% decline.

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While both the “old” and “new” indexes show a similar trough during 2014, the “new” index indicates a much better trend during 2015.  Perhaps the GDB is hoping that by the time of full implementation in June, the “new” index will be showing growth.

Have a great week,

Michael Craft, CFA

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