Top officials with the Federal Reserve Bank of Philadelphia are warning that Wisconsin Gov. Scott Walker, Wisconsin Manufacturers & Commerce and others are misusing a monthly index produced by its top economists.

Walker in recent speeches has been touting figures from the “Philly Fed,” claiming they show Wisconsin’s economy as No. 2 in the nation. WMC has been using the same number in a series of advertising buys, thanking Walker for putting the state on the road to prosperity.

But officials with the Philly Fed, who have been following the situation in Wisconsin, issued a statement Friday saying it’s a misreading of their "Coincident Indexes" to try and compare one state to another.

They say the index — which is comprised of several different economic statistics including housing starts, unemployment claims and wages — isn’t designed as a ranking. The Fed does not calculate a ranking based on the index and never has.

Walker and WMC have also been quoting the Philly Fed’s “Leading Indicator," a 6-month forecasting of the Coincident Index for each state, to say Wisconsin’s economy is projected to show the second-largest improvement in the country.

“We do not consider state rankings based on the coincident and leading indexes to be valid,” says Paul Flora, Senior Economic Analyst at the Federal Reserve Bank of Philadelphia in an email to the Cap Times.

Flora says the differences in the various state economies influence the relative change in the index from month to month. He says an older, mature economy, such as New York, tends to experience smaller percentage changes than a smaller, younger economy, such as North Dakota.

“Comparisons between the two are not very meaningful,” he says.

Flora also warns there is significant volatility from month to month in the index, which is designed to serve as a proxy for a state’s GDP or gross domestic product.

“An individual state’s ranking based on the percent change can jump wildly from one end of a relatively narrow range to the other,” he says. “Rank order is not persistent, thus state rankings are misleading.”

While the Fed does not do a ranking, the media and both Republicans and Democrats in Wisconsin have done their own rankings based on the data to make points about the direction of the state economy.

Democrats earlier this year used the Philly Fed index in trying to discredit Walker, who campaigned on improving the state business climate and creating 250,000 new private sector jobs by 2015. 

Questions over the Philly Fed index are the latest case where the Walker Administration has offered misleading economic statistics.

On Thursday, the Bureau of Labor Statistics released its Quarterly Census of Employment and Wages (QCEW), an actual count of jobs based on unemployment insurance data. Walker has picked those figures as the key benchmark since they are hard numbers, not estimates.

The report showed Wisconsin adding 24,305 jobs over the March 2012 to March 2013 period, an increase of 1.1 percent, roughly half the national growth rate of 2 percent. Private-sector jobs grew by 2.8 percent in Michigan, 2.1 percent in Minnesota and 1.2 percent in Iowa over the same period.

That percentage increase put Wisconsin 34th among the states in job growth over the period.

As that news was breaking across the state, however, Walker issued a press release saying Wisconsin was 22nd in the nation in job creation, according to the QCEW, the same figures he had rapped earlier in the week because of their six-month lag time.

Reporters on deadline scrambled to decipher what figures Walker was referring to. It turned out the governor was using raw job numbers, not percentage changes, to say Wisconsin was 22nd in the nation in new jobs.

But UW-Madison economist Laura Dresser says using raw numbers to assess job growth is misleading since more populous states should be expected to add more jobs than smaller states. Wisconsin is the 20th largest state in the U.S.

“The important thing for job growth is the rate of growth, whether Wisconsin is doing better or worse than other states, given our size,” she says.

On Friday, Walker said the weak jobs numbers were due to uncertainty from the recall election last year. He said he expects major improvement in the next round of job reports.

From: Flora, Paul [mailto:paul.flora@phil.frb.org]
Sent: Friday, September 27, 2013 4:00 PM
To: Mike Ivey
Cc: Puenpatom, Tosmai; Elliott, Thomas
Subject: Response on the Coincident and Leading Indexes

 

Mike,

 

I am responding to your query to Tosmai Puenpatom about our coincident and leading indexes. I head up our team of economic analysts, including Tosmai who is currently our lead researcher on the indexes. We have prepared the following explanation regarding the use of state rankings based on our indexes.

 

 

We do not consider state rankings based on the coincident and leading indexes to be valid.

·         The size and maturity of state economies influence the relative size of economic change within a state; an older, mature economy, such as New York, tends to experience smaller percentage changes in its trend than a smaller, younger economy, such as North Dakota. Comparisons between the two are not very meaningful.

·         As a proxy for state GDP, the coincident index measures some states better than others. For example, the index components are heavily influenced by employment rather than output measures. Agricultural activity is largely excluded from the employment statistics and mining activity is heavily influenced by prices. In Pennsylvania, shale gas production has continued to grow, while mining employment has been edging down since January 2011. Some of the unique characteristics of each state’s economy are missing from this approach.

·         Our research suggests that annual benchmark revisions of nonfarm payroll employment and the unemployment rate contribute to revisions in the coincident index. Benchmark revisions may be random across states but may also be positively or negatively correlated. One group of states may be revised upward for a common reason, while other states may be revised downward so that the national aggregate remains the same. Indexes based on data since the last benchmark base month must be used with caution.

·         There is significant volatility in components underlying the indexes, especially for nonfarm payroll employment. This monthly volatility generates substantial volatility of the indexes for each state. Since the volatility of the percent change in these indexes is relatively large compared to the average change, an individual state’s ranking based on the percent change can jump wildly from one end of a relatively narrow range to the other. Rank order is not persistent, thus state rankings are misleading.

 

However, the state coincident indexes track an individual state’s GDP quite well, and in that sense, they are a useful proxy for state GDP. Their principal advantages include being more timely and more frequent than state GDP estimates.

 

Regards,

Paul

 

 

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Paul R. Flora, Senior Economic Analyst,

Research and Policy Support Manager

Research Department

Federal Reserve Bank of Philadelphia

Ten Independence Mall

Philadelphia, PA   19106-1574

 

215-574-6649

215-574-4303  FAX

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