By ABiz Staff
Monday, June 17, 2013
In cooperation with the Lafayette Economic Development Authority, each quarter ABiz presents the Lafayette Economic Performance Index. The EPI, which LEDA launched last year, is also presented annually at LEDA President and Chief Executive Officer Gregg Gothreaux’s State of the Economy presentation (this year’s event was May 9). The EPI tracks the strength of the local economy by combining multiple data points into a single score that is compared over time. It monitors 15,000 data points and 15 local statistics that tell the story on how the Lafayette economy is performing.
Local real estate agents and brokers who gathered June 6 to discuss the state of the commercial sector told ABiz that LEDA’s EPI has become an invaluable tool in their efforts to attract companies to Lafayette (read more beginning on Page 14).
In the report below, Gothreaux further explains the EPI and the first quarter’s performance:
LEDA believes the Index is the most accurate reflection of the economy, because it is seasonally and inflation adjusted, meaning movement within is based on actual changes, not those caused by changes in periodic variation or time. The EPI is also retroactively adjusted to allow for a more accurate comparison between present and past performance of the economy, allowing for an “apples to apples” comparison of where we are and where we have been.
The March 2013 Index totaled 121.97, up .29 points compared to March 2012. Although the index increased 1.1% from February to March, the Index dropped below the 12-month moving average during the first quarter. This dip follows the all-time high set in September of 2012 and is not unexpected after such a performance. As seen in Figure 1, the EPI experienced a slight drop in January, but has since regained an upward momentum. Currently, the EPI is only .01 points under the 12-month moving average. The Index’s position relative to the 12-month moving average— in our case it has been above for 10 of the past 13 months — signals that the economy is headed in that general direction. The steady climb of the EPI since the brief post-holiday dip signals an upward turn in the economy.
Generally speaking, Lafayette’s economy has been on the uptick for the past three years. Since March 2010, the Index has increased 7.2%. This supports Lafayette’s first place ranking in Area Development’s Leading Locations list of 380 U.S. metro areas. Not only did the Lafayette MSA (Lafayette and St. Martin Parishes) finish first overall, Lafayette topped the mid-sized city list and the overall list for Economic Strength which looked at workforce and labor factors. Lafayette ranked first for Recession-Busting mid-sized cities (second overall) and eighth for Prime Workforce in mid-sized cities. Lafayette also ranked 1st overall for Year-Over-Year Growth which looked at growth since 2011, measuring short-term economic success.
Upon closer inspection the indicators (see below the chart), as a whole, are performing well as compared to the first quarter of 2012. When all three categories of indicators — leading, current, and lagging — move in the same upward direction it means that the local economy is on track for continued growth and prosperity.
Leading indicators are those that change three to six months prior to the overall economy showing signs of adjustment. When compared to December 2012, we did see some dips in the leading indicator data. In March, two of the six leading indicators saw declines from their previous year’s score, and one indicator saw a decline from February to March.
Lafayette Average Weekly Initial Unemployment Insurance Claims are down 32.7% from February to March and are down 34.8% from March 2012. Seasonally-adjusted claims haven’t just performed better than the 12-month moving average; they are at the lowest they have been in five years.
The Lafayette Stock Index has continued its upward trend with a score of 238.89. This is 6.2% higher than March of last year. Over the past 10 years the Stock Index has increased from 141 to 238; that’s 70% growth.
Louisiana Average Manufacturing Weekly Hours has dipped slightly to 42.6 hours worked a week — a decrease of 1.2% since March 2012. The decrease indicates a fall in demand for production, which is normal following a holiday season. The fact that each month since April 2011 has averaged more than 41 hours per week and no month after February 2010 has averaged less than 40 hours per week is something to appreciate. Anything above 40 hours per week is considered healthy.
Residential building permits, although down 31.3% from March 2012, fluctuate widely from month to month. Much of the residential growth in the parish has been attributed to home construction in neighboring municipalities, which are not reflected in the index. Given the vitality of the overall economy, local housing conditions should improve, if only marginally.
In March, the Bureau of Safety and Environment Enforcement approved 14 drilling permits in the Gulf of Mexico — slightly more than the 12 permits issued during the same month of 2012. Despite some month-to-month volatility, GOM drilling permits have ended three of the last four quarters above the 12-month moving average, signaling sustained improvement. Louisiana drilling permits saw an uptick between February and March and is up 31.2% since March 2012. Like GOM drilling permits, Louisiana drilling permits have seen some month-to-month volatility and should be monitored over the next year to see if they are truly signaling growth for the long-term.
Current indicators — those that change at the same time that the overall economy shows signs of adjustment — continue to show strength in the first quarter.
Once again, Non-Farm Employment in the Lafayette MSA (Lafayette and St. Martin Parishes) is among the strongest indicators, with almost 160,000 jobs. More than 15,000 jobs were added in the MSA in 2012; and that growth did not go unnoticed. The MSA is ranked 24th out of 200 metro areas in Milken’s Best Performing Cities Index — ranking 1st in current job growth, 10th in one-year job growth, and 15th in five-year job growth. Area businesses have consistently added jobs since the beginning of 2010, even as other areas of the country have struggled to maintain jobs. As long as the indicators continue to improve, look for local businesses to continue adding jobs.
Retail Sales is one of the top economic indicators because it indicates the amount of consumer spending and confidence present in a community. March saw more than $521 million in sales; and in the first quarter, Lafayette retailers reached $1.4 billion in sales — the highest first quarter total ever. This is a 5% increase over the first quarter of 2012. All three months of the first quarter saw monthly sales above the 12-month moving average. Lafayette Parish Hotel/Motel Receipts also continue to outperform 2012 numbers. March receipts totaled $7.9 million and outperformed 2012 by 1.4%. The performance of Retail Sales and Hotel/Motel Receipts indicates just how strong the Lafayette hospitality market truly is, especially since these numbers are adjusted for inflation and seasonality.
Other current indicators such as Lafayette Regional Airport Enplanements and Average Home Sale Prices continue to show positive momentum. Monthly Enplanements in March (19,001) signal good news for the airport which is planning a passenger terminal expansion. The Average Home Sale Price of single family homes in Lafayette is also performing well, reflecting strong performances by other indicators. Not only did prices beat the 12-month moving average for the entire quarter, but March saw an average sales price of $177,129, an increase of 8.5% from March 2012.
In the past few months the lagging indicators — those changing three to six months after the overall economy adjusts — have begun to align themselves with the leading and current indicators.
Lafayette’s seasonally-adjusted unemployment rate is 4.1%, the second lowest in the state. The Unemployment Rate was one of the last indicators to recover after the recession. An unemployment rate of 4.0% is viewed as the natural unemployment rate and is a sign of a healthy economy. Not only is the unemployment rate in Lafayette Parish one of the lowest in the state (and among the lowest in the country), those individuals that are unemployed are unemployed for shorter lengths of time. The average duration of unemployment in Lafayette is 17.1 weeks — 11.9% less time than March 2012.
In addition to the positive employment indicators, the state of bankruptcies in the Western District of Louisiana has continued to improve. Continuing a downward trend, bankruptcies have decreased 0.1% from last March and are down 27% from their high in September 2009.
Louisiana Rig Counts are the only lagging indicator that has not shown considerable improvement in the past two years. There were 107 rigs on and offshore this March, which is down from 136 last March. The continuing decline in rigs is the result of falling natural gas prices. Rapid drilling programs and enhanced recovery techniques resulted in an increase to the natural gas supply which was not met with an equal amount of demand, causing gas prices to drop to nearly $2/MMBtu. Continuing a six-week trend, March prices have risen to more than $4/MMBtu for the first time since September 2011. The higher natural gas prices could positively affect rig counts, but for the mean time this indicator continues to decrease.
Onshore rig counts have decreased to 59 as a result of lower counts in the Haynesville Shale. In March, the offshore rig count climbed to 47, up from the low of 14 in 2010. Though offshore and North Louisiana rig counts are sending mixed signals, the offshore rig counts are optimistic. Due to record highs in the price per barrel of crude oil, companies have reported record earnings. This should translate into more exploration and development by those companies. When one rig may represent thousands of jobs and hundreds of millions of dollars in capital investment, this is welcomed news to Louisiana and especially Lafayette Parish.
The Stat Tracker provides raw data for each of the 15 indicators used to create the Economic Performance Index. Local indicators are very volatile from month-to-month and changes should not be taken at face value. For example, retail sales will always decrease from December to January because of the increased holiday shopping in December. The index itself, along with the data represented in the graphs, is adjusted for inflation and seasonality in order for the data to be comparable over time.
• Leading Indicators: change 3-6 months before the overall economy shows any signs of adjustment
• Current Indicators: change about the same time as the overall economy shows signs of adjustment
• Lagging Indicators: change 3-6 months after the overall economy shows signs of adjustment
Interpreting economic indicators may seem confusing especially when dealing with local indicators that tend to be highly volatile. The month-to-month changes may not represent true changes in economic conditions. Looking at data month by month, it is clear that there have been many brief declines that have nothing to do with cyclical downturns in the economy. Indeed, if economists took every one- or two-month decline seriously, they would be forecasting a recession several times each year.
One should apply the three Ds principle in interpreting economic indicators. The three Ds are: duration (how persistent the change has been), diffusion (how widespread the change is) and depth (how large the change is). The longer the weakness continues, the deeper it gets; and the more widespread it becomes, the more likely a recession will occur.
The Stat Tracker reports raw data, unadjusted for seasonality and inflation. With that being said, an increase in the unemployment rate from December to January does not mean much because every year it increases due to the loss of seasonal holiday employment. In the same way, a home sold for $200,000 in 2003 is not the same as one sold for the identical amount in 2011 because of inflation. For this reason, the index itself along with the graphs in this report reflects data that has been adjusted for seasonality and inflation. Doing so enables autonomous comparison over time.
Each data point has its own significance in determining the economic performance index and below describes their importance and how to interpret the changes:
• New Residential Building Permits: Building permits mean future construction; and construction moves ahead of other types of production, making this a leading indicator. Also, people buying new homes tend to spend money on other consumer goods such as furniture, lawn and garden supplies and home appliances. According to the Census Bureau, investors should look past often-volatile month to month results and study more closely the forming patterns. Due to varying building code requirements in the Parish, only permits in Lafayette city limits and in the unincorporated areas of Lafayette Parish are tracked.
• Lafayette Stock Index: Considered a leading indicator because changes in stock prices reflect investor’s expectations for the future of the economy. The eight companies tracked for the index (LHC Group, Home Bancorp, Iberia Bank, PHI, MidSouth Bancorp, Petroquest Energy, Teche Holding Company and Stone Energy) represent some of the largest economic drivers in the community that add hundreds of millions of dollars to parish GDP.
• Louisiana Manufacturing Average Weekly Hours: If demand for production rises, employers ask their workers to work more hours and put off hiring additional workers until they are sure the increased demand is long-term. If demand for production holds up, businesses will be forced to hire more workers, signaling a growing economy. Conversely, if demand for production slows, employers ask workers to log fewer hours before laying them off.
• Louisiana Drilling Permits: Much like residential building permits, this is a leading indicator because it represents future production, jobs and income. Because the energy industry plays such a large role in the overall performance of the local economy, it is important to track a statistic that will help predict future economic growth or contraction.
• Average Weekly Initial Unemployment Insurance Claims: The initial jobless-claims data is more sensitive to business conditions than other measures of unemployment. It is important due to the theory that the healthier the job market, the healthier the economy—more people working means more disposable income, which leads to higher personal consumption and gross domestic product (GDP). Most economists agree that a sustained change (as shown in the moving averages) is the benchmark for real job growth or job loss in the economy.
• Lafayette Parish Retail Sales: Historically, retail sales are 40% of Personal Consumption Expenditures, which in turn make up two-thirds of the Gross Domestic Product (GDP). Retail sales are an indication of consumer spending and confidence.
• Lafayette Parish Hotel Receipts: Like retail sales this is a coincident indicator, in that activity reflects the current state of the economy. The importance of hotel receipts comes from tracking outside visitors to the area and the money they bring with them whether it’s an individual business traveler, leisure traveler or a group.
• Lafayette Average Home Price: Measures of home price are used in identifying housing bubbles. Month-to-month changes are not significant, but continuing trends over many months can symbolize a change in the housing market.
• Lafayette MSA Non-Farm Employment: It is the benchmark labor statistic used to determine the health of the job market because of its large sample size and historical significance in relation to accurately predicting business cycles.
• Lafayette Regional Airport Enplanements: Changes in the number of passengers coming into LFT Airport reflect the local and national economy and people’s willingness to spend money on an expensive form of travel. Increases to enplanements can also signal more infrastructure, flights, or airlines which show the strength of the local and non-local demand for flights.
• Lafayette Parish Unemployment Rate: Considered a lagging indicator, as people tend to be out of work when problems in the economy have already manifested themselves.
• Rig Counts: Rig counts are considered a lagging indicator because they change 3-6 months after the overall economy shows signs of adjustment. Decisions about rigs are made in response to economic conditions, government policies, and other variables such as prices. In a business where one rig could signify thousands of jobs and tens, if not hundreds, or millions of dollars in capital investment, rig counts are a great indicator to follow.
• Louisiana Average Unemployment Duration: This lagging indicator shows how persistent the current change in the economy has been. As recessions get under way, unemployment increases and hiring slows, both of which tend to increase unemployment duration (though a sudden mass of layoffs could decrease duration due to the large influx of newly unemployed workers).
• Western Louisiana District Bankruptcies: This is a lagging indicator because individuals and businesses tend to file for bankruptcy after a prolonged period of indebtedness.
Download the full report here