PA’s employment situation improved in June but has far to go

Summary: On July 17, the state Department of Labor and Industry released the June report on the state’s labor market conditions.  Overall, the June results show that significant progress was made since April’s unprecedented collapse of the economy.

___________________________________________________________________________

Household employment and unemployment

The household survey data that measure the size of the labor force, the number of people working and the unemployment rate found that both seasonally-adjusted labor force and number of people working had fallen from the May readings. However, the drop in labor force was larger by 50,000 than the slide in people working causing the unemployment rate to fall slightly from 13.4 to 13 percent. The state’s decline in both labor force and number of people working was very different from the national report for June that saw the unemployment rate drop from 13.4 to 11.1 percent with the number of people working climbing 4.9 million and labor force climbing 1.7 million.

Although June’s 13 percent unemployment rate was down from the horrendous 16.1 percent posting in April, the latest Pennsylvania rate still exceeds any seasonally-adjusted unemployment rate experienced in several decades including the 12.7 percent rate of January 1983 when the national economy was in a deep recession and far surpasses the 8.8 percent high set in March 2010 during the severe 2009-2010 recession. 

Payroll Employment

Meanwhile, in the June report for Pennsylvania, the survey of employers found a fairly sizable 231,000 seasonally-adjusted increase in employees from May to June that contrasts sharply with the decline in number of people working as reported in the household survey. The rise in payroll jobs was accounted for entirely by the private sector where employment was devastated by the virus related mandates and declines in demand in many sectors that shoved jobs down by a million in April compared to the April 2019 figure.

Note that comparisons to the year-ago month provides an indication from month-to-month in the recovery of how far employment has to go to get back to pre-virus levels.

Bear in mind too, that the loss in jobs in April’s report reflects the sharp downturn that began and accelerated in the second half of March as the lockdown was put in place. Much of the March survey of employers had already occurred so the devastated labor market was not revealed in official numbers until the April survey was completed. However, the gigantic and unprecedented increase in unemployment claims in late March pointed to the awful job counts that would be shown in the April employment report.

In May and June, private payroll employment increased a combined 440,000, reducing June’s year-over-year loss compared to April’s massive decline, although it remained a staggering 595,000 below the reading posted for June 2019. Meanwhile, all-government employment (federal, state and local) in June 2020 was down 25,500 compared to a year earlier with local government and school districts accounting for almost 90 percent of the all-government decline. Federal jobs were up slightly.

In short, the state’s private-sector jobs in April fell almost 20 percent below the 12-month earlier level; in May the reading was 15.6 percent below the previous May and in June it was still down 11 percent compared to June last year.  It is important to keep in mind that over the previous three years (2017-2019), annual private employment growth measured by month-over-year-ago-month averaged 59,000 despite slowing to 50,500 in 2019.  Conservatively, the expected monthly year-over-year gains in the April, May and June period, absent the coronavirus, would have averaged around 40,000 jobs or about 3,500 net new additional jobs each month. Thus, not only did the virus lockdown and shrinkage of demand wipe out hundreds of thousands of existing jobs it also prevented the private sector employment gains that could have occurred in a moderately expanding economy.

Employment by Sector

Private employment is divided into goods-producing and service-producing. In 2019, service-producing employment accounted for 83 percent of private-sector jobs.

April employment sustained the biggest loss compared to the 12-month earlier reading since the virus hit. Goods-producing jobs fell an enormous 21.4 percent from 865,000 to 679,000 (-186,000) while service-producing employment plunged 19.2 percent from 4.49 million to 3.63 million (-0.86 million). After posting solid rebounding gains in May and June, goods-producing jobs remained 56,000 (6.4 percent) lower than June 2019 while service-producing jobs were still down 535,000 (11.8 percent).

It is important to note that the April and May 2020 losses in private employment compared to 12-month earlier readings dwarf the largest such declines in modern history.  Prior to 2020, the biggest month-over-the-same-month a year earlier decline going back in recent decades occurred in August of 2009 in the deep recession of 2009-2010 when private employment fell 235,000 (12.2 percent) below the level of August 2008, which is far short of the April 2020 percent decline. And bear in mind that the August 2009 level was the combined result of falling employment over several months preceding.

Goods Employment  

Inthegoods-producing sector, the huge 21.4 percent decline in April was created by a 104,000 (40 percent) decline in construction jobs from the April 2019 posting. Manufacturing in April saw a drop year-over-year of 76,700 jobs (13.3 percent). Mining lost 4,400 jobs (17 percent) from the previous April reading. Thanks to sizable job gains in both manufacturing and construction in May and June, the huge goods sector losses in April were trimmed significantly.  Combined construction gains of 88,000 in the two months along with an added 45,000 manufacturing increase and a small loss in mining lowered the goods sector 12-month loss to 56,000 (6.4 percent).

Despite the sizable rebound in May and June, the employment level in the goods-producing sectors remains in a recession level zone.

Service Employment by Category

As noted above, private-services employment was hammered in April losing 859,000 jobs (19.2 percent) compared to April 2019. And despite regaining about 300,000 jobs in May and June, the sector was still down 535,000 jobs from the previous June (11.8 percent). For comparison, the biggest year-to-year loss in the recession of 2009-2010 occurred in August 2009 when services employment fell 116,700 (2.8 percent) from the August 2008 count. In short, the recent services employment decline is unprecedented in the available, official data going back to 1939.

To be sure, there are enormous differences in losses both in counts and percentages among the large number of service groups and subgroups. 

Among the broad groupings, the leisure and hospitality sector has suffered the biggest decline in jobs, in number and percentage. In April, the group’s employment plummeted by 338,000 (59 percent) from the April 2019 level. Gains in jobs in May and June reduced the percentage loss to 37 percent from June 2019 with losses still well over 200,000, still a depression level shortfall.

Within the leisure and hospitality group, every major category (arts, recreation and entertainment, accommodations and food services) was brutally slammed with unparalleled job losses in April and remains very depressed despite the return of some jobs in most subgroups. 

Retail sales employment fell by 127,000 jobs (21 percent) in April from the year before reading of just over 600,000.  By June the sector had added back over 50,000 jobs but still remained 74,000 (12 percent) below the previous June. Furniture, clothing, sporting goods and auto dealers took large percentage loss hits in April while grocery stores, general merchandise and building materials also fared much better than retail as a whole.

Professional and business services employment suffered a loss of 81,000 jobs (10 percent) in April from the 815,000 level a year earlier. A combined gain of 24,000 in May and June has lowered the year-over-year shortfall to 7 percent. Almost every category in this broad sector lost some jobs on the order of 10 percent or less including architecture, engineering, computer systems and management of companies. However, the administrative support and waste management group was hit hard, accounting for 60 percent of the losses in the professional and business services sector.

Education and health services employment is the largest in the service sector group averaging nearly 1.3 million employees per month in 2019. In April 2020, employment fell 161,000 (12.3 percent) below the previous April level. By June, the return of jobs in most subgroupings reduced the year-over-year shortfall to 76,000 (6.0 percent). April’s loss in this large sector was led by sharp declines in ambulatory health care, childcare and social assistance.  Physicians’ offices and colleges saw 10 percent drops in April. Fortunately, most of these groups had job gains through May and June, but none had recovered to their June 2019 readings.

Financial services did not lose many jobs compared to a year-over-year basis (less than one percent) in the April to June period although the year-over-year gains of the January through March period did not continue. 

The information sector, in a departure from the rest of the economic groupings, saw job losses increase between April and June. In June, losses stood 14,300 (16 percent) below the previous June following April’s 8,700 (10 percent) decline from a year earlier.    

Finally, a look at “other services”. This sector is comprised of three subgroupings; repair and maintenance, personal services and religious, civic, grant making and professional organizations. In April other services suffered a loss of 85,500 jobs (33 percent of its April 2019 count). The year-over-year loss was reduced to 54,900 (21 percent below a year earlier) in June by a two-month gain in excess of 30,000 jobs.

Conclusion Overall, the June employment situation showed that significant strides toward improvement have been made since the unprecedented collapse of jobs in April. But, the situation in many sectors is still in deep recession and some in serious depression levels. Notwithstanding a significant upturn in jobs since April’s calamitous drop, employment in full-service restaurants, hotels and the arts, recreation and entertainment groups along with personal services remain mired at depression levels, and further improvement will be difficult with all the restrictions in place.

The state of Pa.’s business climate

Summary: Business optimism in Pennsylvania continued in late 2019 and only slightly diminished from a year-earlier reading, according to the findings of the Fall 2019 Keystone Business Climate Survey by the Lincoln Institute of Public Opinion Research. 

______________________________________________________________________

Survey respondents indicated the most significant problem facing their businesses was a lack of qualified workers with 38 percent highlighting this problem. The tight labor market poses serious difficulties as 75 percent of respondents noted they were having trouble hiring qualified employees.

This situation mirrors the latest National Federation of Independent Businesses (NFIB) survey results. “Finding qualified workers remained the top issue for owners in December, with 23 percent reporting it as their No.1 problem,” the NFIB data said. “Fifty-three percent reported hiring or trying to hire, but 94 percent of those owners reported few or no qualified applicants for the positions they were trying to fill.” 

In short, the very low unemployment rate nationwide is creating difficulties for businesses.

So, why are businesses struggling to hire qualified employees? Pennsylvania survey respondents listed three crucial factors with 58 percent indicating a lack of essential skills, 31 percent noted a lack of applicants and 17 percent pointed to the failure of applicants to pass drug tests. 

Lincoln Institute survey respondents also pointed to other problems affecting their business.  Eighteen percent indicated excessive regulations and 13 percent mentioned high taxes as obstacles to their businesses. These findings strongly suggest a need for the state to act on tax reform and improving the regulatory environment.  

On a more positive note, sales in Pennsylvania are relatively strong: Thirty-eight percent of respondents reported their sales had increased during the previous six months, 41 percent indicated sales held steady while only 15 percent claimed sales decreased during the prior six months. It’s another sign of strength in Pennsylvania’s economy.

While the fall 2019 survey conveyed continued business optimism, there was a drop off from the fall 2018 results. In the 2019 survey, 23 percent of respondents said business conditions were better than six months earlier, 52 percent reported they were the same and 22 percent believed they were worse. In the fall 2018 survey, the response was 39 percent better than six months earlier, 51 percent the same and only 7 percent worse.

Last year’s Policy Brief (Vol. 19, No. 1) detailed the Lincoln Institute’s fall 2018 Keystone Business Climate Survey in which business leaders attributed their business confidence to federal policies such as the 2017 tax cuts and regulatory reforms. The influence these tax cuts have on bolstering the economy are seen when survey results from fall 2019 and fall 2015 are compared. Both years represent the year leading up to the presidential election.  But the difference between responses from 2019 and 2015 further underscore the positive effects tax cuts and decreased regulation have on business conditions.

When asked the question about how they foresee business conditions over the next six months, 19 percent of respondents in the fall 2019 survey thought it would be better, 50 percent the same and 26 percent worse.  (The remainder had no opinion.) In the fall 2015 survey, business leaders, responding to the same question, indicated only 6 percent thought it would better, 42 percent the same and 49 percent worse.

Phrased another way, business leaders had little optimism in the fall 2015 survey with nearly half indicating business conditions would be worse in the coming six months.

Outlook for employment also contrasted sharply between the fall 2019 and fall 2015 survey. Of the respondents in the fall 2019 survey, 25 percent look to increase jobs over the next six months while 64 percent will hold at current levels.  A mere 6 percent expect to make cuts.

By contrast in the fall 2015 only 14 percent of survey respondents planned to increase employment, 67 percent would hold steady and 16 percent would reduce jobs. 

Thus, in 2019, 10 percent more firms expected to add employees in the next six months compared to the 2015 survey. And in 2019, 10 percent fewer firms planned to make cuts than the 2015 survey found.

While there is always uncertainty regarding upcoming elections, business leaders now are still displaying significant confidence, largely due to a more pro-business climate resulting from federal economic policies.

The majority of business leaders—60 percent—replied the current federal administration has the national economy on the right track. Pennsylvania’s business leaders note approval of the federal administration because, as discussed in a previous Policy Brief (Vol. 19 No. 1), they attributed their optimism to the federal tax cuts and regulatory reform measures in 2017.

Meanwhile respondents to the fall 2019 survey expressed disapproval with the state Senate (27 percent approved while 42 percent disapproved) and the state House (21 percent positive and 49 percent negative). The governor also was viewed negatively, 55 percent to 32 percent—further illustrating disappointment with state government on economic matters.

While the continued confident responses from business leaders in the fall 2019 survey are encouraging, the state’s business optimism is largely a response to federal tax cuts and regulatory reform. Tax cuts and regulatory reform at the state level along the lines of the federal policies would be of enormous help to the commonwealth’s economy.  One need only look around the country at fast-growing states to see the benefits of more pro-business and pro free-market policies.

Pennsylvania’s general fund revenues improve while job growth lags

Summary: The state Legislature will be debating the fiscal 2020 budget soon.  It is helpful to look at how general fund revenues, specifically the large tax revenue components, have fared thus far in fiscal 2019 and compare them to the last few fiscal years.  This Brief also looks at Pennsylvania’s performance in adding jobs and how it compares to the nation as a whole.

 _____________________________________________________________________

Pennsylvania’s fiscal year runs from July 1 to June 30.  Data for fiscal 2019 is available only through April or 10 months into the fiscal year.  For these 10 months general fund revenues have reached $29.16 billion.  This amount is one-half of a percent higher than the first 10 months of the previous fiscal year.  However, it was 2.9 percent higher than was anticipated.

The state was anticipating a drop in non-tax revenues and, thus, estimated lower total general fund revenues to be collected in fiscal 2019.  This was due to a budget-expected drop in miscellaneous non-tax revenues as a result of the 2018 sale of revenue bonds of $1.5 billion backed by future payments from the tobacco settlement and an additional $300 million for a one-time lease of the farm show complex and various special fund transfers (Independent Fiscal Office: Official Revenue Estimate of Fiscal Year 2018-2019).  Combined, it was a temporary one-year hike of about $1.8 billion in non-tax revenue for fiscal 2018.

The largest recent annual bump to general fund revenues occurred from the 2017 fiscal year to the 2018 fiscal year when the amount collected through April rose from $25.82 billion to $29.03 billion—a jump of 12.4 percent.  In three prior fiscal years, 2015, 2016 and 2017, collections barely changed, going from $25.72 billion in fiscal 2015 to the above-mentioned $25.82 billion—an increase of just 0.4 percent over these years.

Keep in mind that the one-time jump in miscellaneous non-tax revenues of about $1.8 billion tends to skew the amount a bit and overstates the increase from fiscal 2017 to fiscal 2018 and understates the rise from fiscal 2018 to 2019.

The general fund revenue stream is comprised of tax revenues and non-tax revenues.  Due to the uncertainty in the non-tax revenue stream, this Brief will focus on the tax revenues of which there are many taxes that generate general fund revenue such as corporate taxes, including corporate net income, consumption taxes, including the sales and use tax, and the category of “other taxes”, which includes the personal income tax.

The largest source of general fund revenue is the personal income tax.  Through April of fiscal 2019, this tax produced $11.93 billion.  While the total was up 5.5 percent from the same time in fiscal 2018, it is 0.3 percent below projected year-to-date levels.  The fiscal 2018 total of $11.31 billion represented a 7.4 percent rise over fiscal 2017’s value of $10.53 billion.  From fiscal 2015 through fiscal 2017, revenue rose from $10.17 billion to $10.53 billion—an increase of 3.5 percent over three years.  Personal income collections picked up substantially after fiscal 2017.

The second largest category is the sales and use tax which has brought in $9.19 billion through the first 10 months of the current fiscal year—an increase of 7.6 percent over the same time in fiscal 2018 and 3.1 percent higher than the projected levels, year-to-date.

An increase in sales and use tax collections points to a willingness of consumers to spend based on their perception of the economy.  For example, in fiscal 2015 the 10-month collections were $7.82 billion and had risen to $8.19 billion through fiscal 2017—an increase of 4.7 percent or $369.1 million.  However, the one-year increase from fiscal 2017 to 2018 was $352.6 million or 4.3 percent and then another $645.4 million or 7.6 percent from fiscal 2018 to 2019.  The two-year increase of nearly $1 billion, or 12.2 percent, since fiscal 2017 shows that consumers are reacting to a strong economy as well as having more income to spend.

The final general fund revenue source examined is the corporate net income tax.  This revenue source had the largest rise from the first 10 months of fiscal 2019 over the same time period in fiscal 2018, surging from $2.05 billion to $2.51 billion (22.4 percent).  In fiscal 2015 the corporate income tax collections stood at $2.26 billion over the first 10 months before falling to $1.97 billion in fiscal 2017—a drop of 12.6 percent over those three fiscal years. The rebound in fiscal 2019 can be viewed as firms in Pennsylvania experiencing hefty profit gains reflecting the stronger U.S. economy.

Looking at the three major tax-revenue components, the April year-to-date combined increase of $1.72 billion is more than offset by the reduction in the miscellaneous non-tax revenue decrease of $1.8 billion.  Still, in light of these tax revenue gains, fiscal 2019 can be viewed as a positive for Pennsylvania’s general fund.

But do the tax revenue gains reflect corresponding employment growth?

In April 2019 the number of total nonfarm jobs (from the employer payroll survey) in Pennsylvania reached 6.062 million which is the fourth-highest monthly total since 2000 behind October (6.087 million), November (6.085 million) and December (6.075 million) of 2018.  However, it represents only a 0.89 percent growth rate over the April 2018 reading (6.008 million).  By contrast the growth at the national level was nearly double at 1.7 percent.

A big reason the national growth in total nonfarm jobs is so much better than the commonwealth’s can be seen in the manufacturing sector’s employee count.  In April 2000 the number of manufacturing jobs in Pennsylvania was 862,100 before bottoming out at 557,200 in April 2010—the recession’s low point.  By April 2019 that number managed to reach only 564,100—growth of just 1.2 percent over nine years.  More worrisome, the April 2019 level was 0.35 percent lower than the April 2018 count of 566,100.

On the other hand, manufacturing jobs growth nationally has been quite strong of late. In April 2000 there were 17.25 million manufacturing jobs before plunging to 11.43 million in April 2010.  By April 2019 that number has risen to 12.78 million—11.9 percent above the trough in the recession of 2010 and 1.6 percent higher than April 2018.

A supersector where Pennsylvania has typically fared well, education and health services, can be broken into its two industry sectors—educational services (all colleges and private schools) and health care and social assistance.

Since 2000, jobs in the educational services have increased across Pennsylvania with only a couple of interruptions.  Since 2010—the recession low point—education jobs rose 4.9 percent through April 2019.  However, there have been two setbacks.  There was a loss of 2,200 jobs from April 2012 to April 2013 (0.9 percent) and another loss of 4,500 jobs (4.7 percent) from April 2018 to April 2019.  This compares unfavorably to the national growth which lifted educational services employment 20 percent since 2010—four times the state’s growth.

Meanwhile, health care and social assistance employment has shown strength, rising 18.2 percent from April 2010 to April 2019 and with 2.7 percent over the last year.  Nationally the growth was a bit stronger.  From April 2010 to 2019 the national growth in health care and social assistance jobs climbed 21.3 percent with a 2.7 percent rise over the last year, the same as the commonwealth.

Social assistance jobs have shown a dramatic rise.  From April 2010 through April 2019 these jobs surged by 42.2 percent, significantly faster than the nation’s 32 percent.  While growth in any job sector is welcome these are typically not high-paying jobs that are likely to prop up the general fund revenues for any state.

Leisure and hospitality had enjoyed solid gains since 2010 moving 16.8 percent through April 2019.  Over the past year the sector added another 1.7 percent more jobs.  However, despite the good employment gains during the past decade, it still trailed the national jobs increase of 28.2 percent.  And its latest year-over-year gain was well behind the national rate of 2.7 percent.

And, of course, this is nothing new.  Previous Policy Briefs have been underscoring for years how the state’s economy and employment have not kept pace with the nation.  The only notable exception is with the recession years when the state’s economy bested the national largely because the state was not in the midst of the housing and real estate boom that was underway in many other states. A boom that collapsed when the subprime mortgage bubble burst leading to a serious national downturn.

The recent strong growth to tax revenues, corporate net income, personal income and sales and use taxes, shows that the Pennsylvania economy has picked up steam.  However, it is growth that is likely the result of a faster paced national economy. Pennsylvania is still bogged down by anti-business policies and regulations that keep it from reaching its potential.

The U.S. and Pennsylvania Economies from 1990 to 2016: Massive Growth Rate Shift

Summary: Reflecting many adverse factors including business-inhibiting policies, the trend in the pace of economic growth in the nation and Pennsylvania weakened significantly in the first seven years of the new century and even further after 2008.  During the 2008 to 2016 period longer term gains as measured by increases in the nation’s real GDP from 10 years earlier slowed to half the norm set during the period 1970 to 2000. Fortunately, it appears business-friendly policy changes in regulations and taxes made in 2017 have begun to reinvigorate the economy.

 ____________________________________________________________________

To begin, it is important to note that in the 20-year period prior to 1990 (1970 to 1990), U.S. real GDP grew at an annual average rate of 3.2 percent.  In light of the downturns in the mid-1970s and two recessions in the early 1980s resulting primarily from inflation spikes and the need for monetary restraint the growth rate over the period seems quite remarkable.

Indeed, average annual growth remained strong through the 1990s climbing at a 3.5 percent rate between 1990 and 2000.  However, since 2000 the U.S. economy moved to a much slower growth path and averaged only a 1.8 percent growth rate over the 16 years through 2016. After slowing to a 2.4 percent average between 2000 to 2007, real GDP from 2007 (the pre-recession high point) and 2016 climbed at its slowest rate for a comparable time period in the modern era posting an annual average rate for the nine years of just 1.3 percent.  Even more concerning is in the six years after the recession ended in 2010 through 2016, annual gains averaged only 2 percent and were far weaker than in the six-year periods following recessions in the 1980s and 1990s when yearly gains for the six-year post-recession period averaged 3.7 percent and 4.4 percent, respectively.

Indeed, calculating the change in each year’s real GDP from the 10-year earlier level and smoothing the series with a moving average to remove effects of recessionary slowdowns and the fast gains during recoveries shows a slowing in 10-year growth beginning in 2008 to a pace barely half its historic norm.

Similar to the pattern in the U.S., growth in Pennsylvania’s real GDP slowed from 2.6 percent annually over the 1990 to 2000 period to a 1.8 percent per year average from 2000 to 2007 and then slipped further to just 1.3 percent in the 2007 to 2016 time frame. In the post-recession period between 2010 and 2016 the annual pace averaged 1.7 percent, a significantly slower pace than the 1990 to 2000 growth. And while the slowdown pattern is similar to the nation, it is important to note that the commonwealth lagged behind the pace of U.S. GDP gains in each period. What’s more, from 1990 to 2016, the nation saw real output expand by 84 percent while Pennsylvania grew only 63 percent making the national gain over the period 33 percent faster than the state’s.

As for the Pittsburgh seven county MSA, a comparable period of analysis of real GDP is not possible since those data were not produced until 2001. It is noteworthy however that from 2001 to 2008 real GDP in the Pittsburgh MSA was basically flat, rising only 0.1 percent during the seven years. Contrary to the national pattern, output actually grew 4 percent from 2008 to 2010 while the U.S. and Pennsylvania had no net growth over the two years.  And from 2010 to 2016, the MSA had output gains averaging 2 percent per year, the same as the nation and faster than the state’s 1.7 percent. One possible explanation could be the advent of the Marcellus Shale gas operations.

Still, this must be viewed in the context of the very slow 1.1 percent per year average growth since 2001. This is much slower than the national rate of 1.8 percent and below Pennsylvania’s 1.4 percent during the period.

To be sure, the shift to much weaker national gains posted in the 2007 to 2016 period can be attributed to many factors but a lack of fiscal and monetary stimulus were certainly not among them. Working through the financial crisis created by subprime mortgages, massive increases in healthcare regulations including mandates and costs on businesses and individuals along with tighter regulations on the environment, financial activities and labor relations all figured prominently in acting as a drag on business formation, expansion and hiring during the period.

But there is another factor that undoubtedly had a major impact on output and employment growth throughout the 2000s. In the late 1990s the U.S. trade deficit in goods and services rose from $96.4 billion in 1995 to $372.5 billion in 2000. During that period, the trade deficit on goods climbed from $174.2 billion to $446.8 billion. And that was just the beginning. The goods and services gap increased further to $705.2 billion in 2008 as the goods gap rose to $821.2 billion. During the 2009-2010 recession the goods deficit shrank considerably but started to rise again as the economy began to recover. By 2016 it was up to $751 billion, still below 2008’s record level.

Meanwhile, real GDP nationally slowed from the healthy 3.5 percent per year pace in the 1990 to 2000 period to just 2.4 percent in the 2000 to 2008 period.  Jobs growth also shifted to match the slower output gains. In the decade of the 1990s private sector employment grew at an average yearly pace of 2 percent. However, from 2000 to 2008 private jobs managed only 0.4 percent yearly growth.  And from 2007 to 2016 grew only 0.6 percent per year despite stronger gains after 2010 through restored losses during the recession.

In Pennsylvania, private jobs rose an average of 1.2 percent per year from 1990 to 2000 but slowed dramatically to 0.25 percent over the next seven years to 2007 and only 0.4 percent from 2007 to 2016. Meanwhile, MSA private employment climbed 1.1 percent annually or about half the national rate in the 1990s. Between 2000 and 2008 jobs managed a tiny annual gain of 0.03 percent far below the national pace. Employment gains picked up after 2010 rising 0.8 percent annually through 2016 but less than half of the national rate.

In light of the massive increase in the goods trade deficit it is not a surprise that manufacturing jobs suffered the greatest losses over the last 20 years. After recovering from the early 1990s downturn and rising to 17.56 million jobs in 1998, manufacturing employment fell every year through 2010 shedding 6.03 million workers, 34 percent of the employment posted in 1998. With the economy recovering and the goods deficit falling for a couple of years before picking back up and stabilizing to just under $800 billion, there was a modest job gain of 824,000 from 2010 to 2016. Still, that left manufacturing employment 5.2 million below the 1998 mark.

Moreover, from 1997, just before manufacturing employment reached the highest level of the last 20 years, manufacturing value-added as a percent of national GDP has dropped from 16.1 percent to 11.6 percent in the fourth quarter of 2016.  Manufacturing supports jobs in many other sectors through its multiplier effects. Thus, it is not surprising that big declines in manufacturing’s share of output have had a slowing effect on overall employment gains.

Pennsylvania’s manufacturing employment count also suffered a big loss during the 1998 to 2010 period falling by 313,700 jobs or 36 percent. This is close to the 34 percent decline in U.S. manufacturing jobs in that period.  Pittsburgh MSA manufacturing jobs were steady in the 1990s but fell sharply from 2000 through 2010 losing 3.9 percent annually. Since 2010 there has been no net gain in the MSA’s manufacturing employment.

In both Pennsylvania and the U.S. there was a slow and very modest recovery in manufacturing employment from 2010 through the middle of 2016 that left the jobs count well below the pre-recession levels of 2007. Then in mid-2016 manufacturing jobs started to weaken somewhat both nationally and in the commonwealth. Fortunately however, manufacturing job gains in Pennsylvania and the U.S. returned in the second half of 2017 and have continued through June 2018. The U.S. gains have been more robust than Pennsylvania with 362,000 jobs added since December 2016.  U.S. factory jobs in June 2018 stood at their highest level since December 2008. Meanwhile, Pennsylvania’s June count is the highest posted for the month since June 2008.

The abrupt slowing in the U.S. long-term growth rate—as  measured by growth over 10-year spans— that began in 2008 appears to be showing signs of being replaced by a return to more normal historical levels but it will take some time to make up for the prolonged weakness.  An upturn in new business formation and increased business investment in the country and in the state will be key factors in the process of restoring a long-term growth rate more in line with the norms of the 30 years prior to the weaker growth since 2007. The business friendlier regulatory and tax climate recently put in place should prove extremely beneficial in fostering a sustained strengthening in the economy.

Pennsylvania will need to do far more than it has been able to do in the past to keep up with U.S. trends in output and employment. Regulations, labor laws and taxation that inhibit business expansion must be addressed.

Pennsylvania Jobs Growth in Perspective

Summary: By almost every measure, 2017 was a good year for the national economy as evidenced by a big rise in the stock market and a sizable gain in employment, especially in manufacturing.  In fact, across the country, private jobs increased by nearly 2 percent over the 2016 level.  But how did Pennsylvania’s economy fare, especially in comparison to other states?

 ______________________________________________________________________

This Brief compares Pennsylvania’s jobs performance in key sectors of the economy to national gains as well as to the performance of neighboring states Ohio and Maryland and two right-to-work states—North Carolina and Texas.  All data are from the Bureau of Labor Statistics’ current employment statistics survey.

Nationally private jobs total rose 1.8 percent from 2016 to 2017.  Pennsylvania’s 1.2 percent increase was well below the national gain and slower than Texas and North Carolina (1.9 percent each).  It did however, best neighboring Ohio (0.8 percent) and Maryland (1.05 percent).

Moreover, during the five years from 2012 to 2017, the commonwealth’s private jobs growth has been quite weak compared to the nation and the other states.  Over the period, annual average private jobs in the country climbed by 10.7 percent. North Carolina posted a 12.5 percent gain while Texas’ private jobs jumped by 13.2 percent.  Maryland’s increase was 6.8 percent and Ohio’s job count was up 7.1 percent.  Pennsylvania’s rise of 5 percent trails the nation badly and is far less robust than the stronger performing states.

As has been noted in earlier Briefs, manufacturing jobs in Pennsylvania were on a downward trend for quite some time. However, in a bit of a turnaround, 2017’s monthly average manufacturing job count registered a near one-half of a percent increase over the 2016 level.  This was smaller than the national increase of 0.73 percent, but not by much.  All of the other states in this comparison group also had gains of less than one percent with Maryland leading the pack at 0.85 percent and Ohio at 0.25 percent was the slowest and the only state in this group with growth slower than Pennsylvania’s.

Over the last five years, national manufacturing jobs were up 4.3 percent thanks largely to a muted recovery from the plunge that occurred during the severe 2008-2010 recession.  Most of the growth occurred in the 2011 to 2015 rebound period. After stumbling in the second half of 2016 manufacturing employment regained significant momentum and moved up briskly in the last three quarters of 2017. Nonetheless, despite recent strong gains employment remains below its 2007 level.

Two of the states reviewed beat the five-year national gain (North Carolina, 6.2 percent and Ohio, 4.6 percent) while the others posted losses (Pennsylvania, -1.0 percent, Maryland, -4.3 percent and Texas, -2.2 percent).  Manufacturing, a goods-producing sector, is prized for its higher wages and multiplier effect it has on the economy. Pennsylvania has been struggling with manufacturing job losses going back to the collapse of the steel industry.

Meanwhile, several service sectors in Pennsylvania have fared better than manufacturing in terms of jobs. This Brief reviews the sectors of trade, transportation and utilities; education and health; professional and business services; and leisure and hospitality.

Trade, transportation and utilities employment includes wholesale trade, retail trade, transportation and warehousing along with utilities. From 2016 to 2017 the annual average jobs count in this sector nationally rose 0.9 percent.  Both Pennsylvania and Maryland registered small declines in this sector (-0.07 percent and -0.17 percent respectively).  The other states in the sample posted gains with North Carolina highest at 1.5 percent and Ohio lowest with jobs up by only 0.2 percent.

Over the five years 2012 to 2017, jobs in this sector rose 7.9 percent nationally.   Pennsylvania’s modest uptick of 2.6 percent was the lowest of the states in the five-state group. The fastest growth was recorded in Texas at 13.2 percent. North Carolina was close behind (11.2 percent) followed by Ohio (5.3 percent) and Maryland (3.6 percent).

Pennsylvania has done fairly well over the last five years in the education and health sector.  From 2012 through 2017, this sector posted a 7.8 percent rise in average annual jobs. Even with this gain however, the commonwealth failed to keep pace with the national growth of 11.6 percent.  It did slightly outpace Ohio (7.5 percent) but trailed North Carolina (9.1 percent), Texas (15.2 percent) and Maryland (10.2 percent).  Interestingly, health and education job growth from 2016 to 2017 was in a tight range of 2.2 percent to 2.7 percent for all states in the group except Ohio where the gain was a much slower 1.2 percent. The national pickup was 2.4 percent.

Much is made of the state’s strength in “eds and meds” but the reality is that over the long term it has lagged the national rate and other states that are also strong in growing this sector.

The professional and business services sector is another area in which Pennsylvania typically does well.  Over the last five years jobs in this sector climbed 9.2 percent in the state.  This was faster than neighboring Ohio (6.9 percent) and Maryland (8.1 percent) but lags well behind North Carolina (16.4 percent) and Texas (17.8 percent).  National growth over the last five years was 14.1 percent.  Thus while Pennsylvania posted respectable growth, it still lagged well behind the national increase and even further behind the faster growing states in the comparison group.

Looking at the 2017-over-2016 results, Pennsylvania grew 0.9 percent besting Maryland (0.7 percent) and Ohio (-0.4 percent).  The national gain was 2.1 percent (same for North Carolina) with Texas leading at 2.2 percent.

Leisure and hospitality concludes the sector employment comparisons. Overall, this sector has grown the fastest of all the major sectors. During the 2012 to 2017 period, national growth was 16.6 percent (an average compound growth of 3.1 percent per year). Five-year growth for the comparison group ranges from a high of 21.9 percent in Texas to a low of 8.1 percent in Pennsylvania. North Carolina’s 18.4 percent also exceeded the national gain while Ohio (11.8 percent) and Maryland (13.7 percent) trailed.

On a year-over-year basis, Ohio had the smallest rise (1.5 percent) with Pennsylvania slightly ahead of that pace (1.7 percent).  National growth in this sector was 2.5 percent with both North Carolina and Texas (2.7 percent apiece) exceeding that gain.  To be sure, this sector represents something of a mixed bag. While the increase in jobs is welcome, most are not high-paying jobs and are unlikely to have a spin-off effect on other sectors of the economy.

Pennsylvania’s comparative jobs record over the last five years leaves a lot to be desired.  The state was neither able to keep up with growth in total private jobs nationally nor in the economic sectors examined.  In the group of states reviewed, Maryland and Ohio along with typically higher growth states North Carolina and Texas, it had the lowest growth in total private jobs.  It also finished last in this group of states in job expansion for the trade, transportation and utilities and the leisure and hospitality sectors and next to last in the education and health sector.

The reasons for this relatively poor performance are not difficult to find.  As we have written in previous Policy Briefs, Pennsylvania has an overall poor business climate, high business taxes and a business stifling regulatory climate. Its fealty to unions is evident in the absence of a right-to-work law, high rates of unionization of public sector employees and allowing teachers and transit workers to strike.  If Pennsylvania wants stronger economic growth, it needs to remove the glaring constraints it places on free market economics and it needs to address its shortsighted governance practices.

A Comparative Look at Pennsylvania’s Recent Economic Performance

Summary: After holding its own and even enjoying a handful of years with better than national economic performance during the last recession and early recovery from the deep downturn that began in late 2008, Pennsylvania’s economy has unfortunately returned to its long term pattern of lagging national growth.  Part of the relatively good performance from 2010 to 2012 can be attributed to the rapid expansion of Marcellus Shale gas drilling and production. Unfortunately, that boost has diminished somewhat with the slowdown in drilling and the big drop in the price of gas.

 ________________________________________________________________________

PA Gross Product Growth Compared to the National Performance

Over the nine years ending in 2006, 41 states had faster real gross domestic product (GDP) growth than PA’s 18.6 percent. The nation posted a gain for the period of 32.4 percent. Eighteen states had growth above the national rate, with nine of those higher than 40 percent.  Except for Florida and South Dakota, all of the states with over forty percent increases were in the mountain west and Pacific coast

During the next ten years from 2006 through 2016, PA’s economy looked comparatively strong owing to the deep recession in many states that were hard hit by the subprime mortgage debacle and the devastating effects on construction, the financial sector and the overall economy created by a misguided policy disaster.  During the ten year period the U.S. grew 14 percent while PA posted a better than national increase of 15.9 percent. Over the ten years PA’s GDP performance was better than 36 states, with only twelve having stronger increases. One was about the same as PA. Some of the fastest growing states had horrendous declines in growth.

However, while PA performed slightly better than many states over the last ten years as a result of severe weakness in many states during the recession and early recovery period,  signs have started to appear that suggest most hard hit states have shaken off the worst of the recession and returned to a stronger growth path after 2013.  The recent pattern of jobs and jobs related data provide evidence that Pennsylvania’s relative standing compared to the nation is quickly slipping back into its long term pattern established before the last recession in which it typically trails the national performance.

PA and U.S. Private Employment and Earnings Gains Compared 

In the four years since 2013, the comparative economic performance picture has begun to look more like the old, longer term scenario wherein PA’s growth lagged well behind the country and most states.  This comparison of recent performance looks at private sector employment indicators.  For some reason the Bureau of Labor Statistics does not report data for government job related measures.  That is a serious shortcoming that deserves explanation.

Comparisons of PA and the nation are made for total private employment; total hours worked by all private sector employees, total real earnings for all private employees and real weekly earnings for all private employees.

The last month of available data is July 2017. All comparisons are made using non-seasonally adjusted July data from 2007 to 2017.

U.S. private employment fell by eight million workers between 2007 and 2010, a drop of 6.9 percent of all jobs. Most of the decline occurred from 2008 to 2009.  A slow recovery began in late 2010 but it took until 2014 to return employment to 2007 levels.  Since the low point reached in 2010, jobs have risen by 15 percent. Obviously, that includes the eight million jobs that were recovered since the trough. Private employment in the U.S. now stands 7.2 percent or 8.44 million jobs above the pre-recession reading of 2007. That means that for the ten year period, jobs grew at an annual average rate of 0.7 percent. That modest pace is 40 percent slower than the 1.13 percent per year growth posted in the ten year period ending in 2007.

Meanwhile, PA’s private employment traced a very different pattern. From 2007 the employment count fell by 232,000 to reach its low point of 4.855 million in 2009, a drop of 4.6 percent from the 2007 reading, a considerably smaller percentage decline than experienced in the U.S. where jobs continued to fall into 2010.  By 2010 PA employment had already started to rise but nonetheless took until 2014 to get back to the 2007 level. Since 2013 private employment is up by five percent bringing the 2017 level to 5.299 million, a total increase of 212,000 since 2007—a very slim 4.15 percent rise (0.4 percent per year) over the ten years, and a massive 44 percent plunge from the 7.5 percent increase in the ten years ending in 2007.  Thus, in both the 1997 to 2007 period and the 2007 to 2017 period, PA’s private employment growth rate lagged  behind the U.S. rate by around 40 percent, while national and PA growth are both down 40 percent from the earlier period.

Total hours worked by all private employees per week is also a revealing statistic. This statistic is obtained by multiplying private employment by average hours worked in the private sector for the U.S. and PA. Not surprisingly, this statistic tracks employment figures fairly closely but differences and variations in the work week also play an important part. Indeed, a very sharp contraction in the average hours worked nationally combined with the 6.7 percent decline in jobs from 2007 to 2009, caused the total hours worked for all employees to fall 9.4 percent in just two years. In PA, total hours worked by all employees dropped eight percent from 2007 to 2009. However, for the years 2008 through 2011, PA averaged 1.2 percent more total employee hours worked than the U.S. figure compared to the level they would have worked if the 2007 pace had been maintained.  Because output tracks fairly closely with hours worked, this finding could be a partial explanation of why PA GDP did not slow as much as the U.S in that period.

A companion measure to hours worked by all employees is total real weekly earnings of all employees.  Total real weekly earnings are a rough proxy for private sector output, bearing in mind productivity changes created by shifting industry mix, new technology and process improvements are also important. This statistic is calculated by multiplying real weekly pay by the number of employees. Real weekly earnings are available for employees at the national level. However, only nominal earnings data are provided for states and industries.

Real PA earnings were determined by using the national deflation factor to adjust the nominal to real earnings. Since the national deflator might be slightly different from a PA deflator—if one were available, which it is not—there might be some errors in the comparisons but it is unlikely they will be significant enough to be concerned about. Over the last ten years, total real weekly earnings of all private employees have risen 14.8 percent nationally and 10.1 percent in PA.

From 2008 to 2012 PA’s total real earnings held up better than in the nation. PA earnings fell a cumulative 22.6 percent compared to what they would have been if earnings each year through 2012 had held at the 2007 level. National earnings for the five years fell a cumulative 26.3 percent compared to the 2007 level, four percentage points more than in PA. As with hours worked, this measure suggests a more dramatic slowing in private sector output in the nation than in Pennsylvania during the 2008 to 2012 period.

However, in an enormous shift in performance since 2013, U.S. total real weekly earnings of all employees are up 16.2 percent while PA earnings rose only 9.5 percent over the period. Of particular concern is that since 2015, U.S. real earnings for all employees are up 8.1 percent compared to only a 3.6 percent pickup for PA.

Bear in mind too that average weekly earnings for private sector employees, not adjusted for inflation, stood at $917.37 nationally in 2017, up from $728.71 in 2007—a 25.8 percent rise. In PA weekly earnings in 2017 were placed at $848.64, up from $683.32 in 2007, a 24 percent increase.  When adjusted for inflation, adjusted weekly earnings nationally climbed 7.1 percent over the ten years (well below one percent per year) while the ten year gain in real weekly earnings in PA was a slower 5.7 percent. Thus the gap in real weekly pay widened still further over the ten years.

Trends in PA’s Service and Goods Producing Sectors

Finally, it is important to note the very different paths goods producing jobs and service producing jobs, as well as weekly pay and total pay for the two sectors, have taken in PA since 2007. Goods producing jobs in PA fell by 120,000 between 2007 and 2017 to stand at 842,000, a drop of almost 13 percent.  Meantime, service jobs climbed by 331,000 or eight percent over the period to stand at 4.457 million in 2017. Weekly pay for goods producing workers was $1,076.80 in 2017 compared to $803.93 for service producing jobs. Moreover, real weekly pay in the goods sector rose 9.4 percent from 2007, while service pay moved only 5.6 percent higher.

Nonetheless, total real weekly earnings for all service producing employees climbed 14.1 percent over the ten years thanks to the eight percent increase in jobs. Total real earnings in goods production fell 4.2 percent because of the large 13 percent decline in employment. This held the total real earnings gain for all employees to ten percent. Note that goods employment with its higher weekly pay fell from 19 percent of total private jobs to 15.9 percent between 2007 and 2017.

Interestingly, the sizable gap in real weekly pay between goods and service producing jobs is due primarily to the much lower average hours worked per week in services—32 hours compared to 40 hours in goods producing jobs. The hourly pay is fairly close, $24.51 in services and $26.92 in goods. It happens that some service industries’ jobs are well paid such as professional and business services, $32.22 per hour, up 30 percent since 2007, and finance at $33.42 per hour, 31 percent above the 2007 reading.

Of course some industries such as leisure and hospitality have both fewer hours worked per week (25) and much lower wages at $14 per hour. This sector has accounted for 88,000 of the total services employment gain of 331,000 since 2007. Jobs in the sector are up a sharp 50,000 since 2014 and account for over a fourth of the overall private sector gain since 2014.

Thus, there should be little or no surprise that the increase in total real private pay trails the national gains badly over the last couple of years.

Jobs and State Tax Revenue Still Tied Together

Summary: In a recent Policy Brief, we discussed the Lincoln Institute of Public Opinion’s spring business climate survey and noted how it struck a more optimistic tone compared to previous surveys.  But is this optimism based on actual performance or simply a better attitude?  There appears to be some pickup in employment but as of yet it is not strengthening appreciably.

_________________________________________________________________________

 The statewide employer payroll data, seasonally adjusted, indicates that March 2017’s level of total non-farm employment is about one percent better than one year ago.  In fact since September 2016 the non-farm employment levels are about one percent higher than the twelve month earlier levels for each month.  However, prior to that, from January 2015 to August 2016, the year over year increase was less than one percent each month with the exceptions of March and April 2015.  While the recent pickup in growth is not eye-popping, it does show slow acceleration over the past few months, perhaps reflecting business optimism.

Statewide employment levels in the goods producing industries (manufacturing, construction, mining and logging) appeared to be slowing their losses in the last several months.  For instance, the levels for January and March 2017 are less than one percent below what they were in 2016, with February’s level slightly better than February 2016 (up 0.10 percent).  The smaller losses in goods producing jobs can be traced to a leveling off in mining jobs following a sharp decline through the early part of 2016.  Construction continued to add jobs in March, tacking on an almost three percent gain. Unfortunately, manufacturing employment has yet to shift to a growth path.

On the other hand, service providing industries that are comprised of industries such as education and healthcare, professional and business services, leisure and hospitality, and trade, transportation, and utilities have continued to post gains. From March 2016 through March 2017 service industries added just over 60,000 workers to payrolls, a rise of 1.25 percent. After a slowdown in 2015, the service industries returned to the one percent growth range in 2016 and appear to have picked up the pace slightly in recent months.

However, retail has not fared well of late. In March 2017, the seasonally adjusted level of employment in the statewide retail sector was 0.85 percent below March 2016.  And the weak retail jobs numbers extend back for some time.  Indeed, the March 2017 posting is below the early 2011 level as recovery from the last recession got underway and is 35,000 jobs under the 1990 reading.

As we have been documenting during this fiscal year, revenue collections for the Commonwealth have not been keeping pace with their projected levels. And through March with three quarters of the fiscal year completed this pattern has not changed.  The year to date collection is 0.7 percent higher than the revenue for the first nine months of the last fiscal year. But the nine month total continues to trail the budget’s projected level. After the first quarter of this fiscal year, general fund revenues were below projections by over $218.5 million.  After three quarters, that gap has widened to more than $679.3 million or three percent below official estimates.

The corporate net income tax has the widest gap between what has actually been collected through three quarters and the projected level—$1.738 billion vs. $1.974 billion, a difference of twelve percent.  Indeed, this year’s nine months of collected revenue has fallen almost seven percent behind the $1.864 billion collected through the first three quarters of the previous fiscal year.

The personal income tax also lags its projected level by 1.62 percent so far in this fiscal year ($8.684 billion vs. $8.828 billion). On a year to date basis however, it is above the fiscal 2016 collections by just over one percent.  Keeping in mind that April is the biggest revenue month for this tax, revenue may rebound when April’s data becomes available.  But given the trend of not keeping up with its projected level, it is far from certain that will happen.

The sales and use tax is also trailing its projected level through three quarters of the fiscal year.  It was projected to collect $7.488 billion but the state has only actually collected $7.356 billion—a shortfall of 1.76 percent.  But, like the personal income tax, it is ahead of fiscal 2016’s year to date level by 1.5 percent.

The Pennsylvania economy, as measured by seasonally adjusted employment levels, has been plodding along with slow growth in non-farm jobs.  While recent growth has been slightly faster since September 2016, it is still struggling to shift to a higher sustained pace, especially with manufacturing weakness and mining still yet to launch a full recovery. While job growth of any kind is welcome, when much of it is lower wage employment, the effect on incomes and profits can be felt. This is being reflected in the amount of tax revenues being collected by the state.  The corporate net income tax is struggling to match last year’s pace let alone meet budget projections.

The improvement in business optimism and consumer optimism bodes well for the Pennsylvania economy. But hard realities must still be faced. Very high fuel taxes, the pension crisis facing the state, school districts and the two largest municipalities, labor legislation that is increasingly out of step with much of the nation where 28 states have now adopted right to work laws and many have significantly lower corporate taxes.  A stronger national economy will help Pennsylvania, but much more needs to be done to improve the regulatory and policy environment in the Commonwealth.

Optimism Among Pennsylvania Businesses Increasing

Summary: Recently the Lincoln Institute of Public Opinion released its annual Spring Keystone Business Climate Survey.  This latest survey showed a decided pickup in optimism among Pennsylvania businesses.  This upturn parallels a rise in business optimism nationally.

____________________________________________________________________

The survey asked 325 executives from all over the Commonwealth about their thoughts on the state of the economy, about current policy issues, as well as about the performance of state and federal level officials.  Over the past few years, iterations of this survey have shown optimism to be in short supply, but the 2017 version shows changes in business attitudes.  The survey is conducted twice each year.

There are six questions about the business climate that are consistently on each survey regarding business conditions, employment levels, and sales.  For the first time in quite a while, a more optimistic tone dominates the answers.

For example, when asked how they would rate business conditions in Pennsylvania today when compared to six months ago, 26.6 percent of the respondents answered that conditions are better.  The results from the spring and fall 2016 surveys were 5.7 and 4.97 percent respectively.  Furthermore, fifty percent claimed that conditions were the same as six months ago, up from 39.5 percent and 45 percent in the two previous surveys, while only 19.6 percent said they had deteriorated compared to 53.4 and 49.7 percent respectively in the spring and fall surveys.

When asked how they think business conditions will be six months down the road, 35.7 percent of the respondents indicated that they believe conditions will be better than they are today.  This is compared to just 7.9 percent of spring 2016 respondents and only 5.3 percent in the fall of 2016.  The percent of respondents indicating that conditions will likely be the same was 41.7 percent which is comparable to 40.8 percent in the spring of 2016 and 46.8 percent in the fall of 2016.  The difference can be seen in the percent of those responding that conditions will get worse.  In the current survey only 18.2 percent believe conditions will get worse compared to 46.7 and 43.5 percent who thought they would get worse in the two previous surveys.

It is worth nothing that the percent of respondents claiming that business conditions are/will be better in the above questions is the highest they have been in a long time.  Responses to the “are things better” question are the highest since 2005 while the number who think things will get better are at its highest point since coming out of the recession in 2011.

Optimism regarding employment levels in six months has also improved dramatically with 27.6 percent of respondents indicated those levels will be higher.  This is nearly twice as high as a year ago compared to the spring 2016 rate of only 14.6 percent.

This optimism may have its basis in the actual business activity that the executives experienced.  When asked how company sales today compare with those of six months ago, 26.6 percent indicate that they are better.  This compares to just 18.2 percent one year ago and 21.1 percent in fall 2016.  The percentage of executives claiming that sales have lagged the level six months ago is just 24.4 percent.  In the spring of 2016 that percentage was 39 percent and in the fall it was nearly 40 percent.  Again, sales would provide tangible evidence on which to base the optimism.

When asked if they believe how their sales levels would change relative to today, 47.1 percent indicated that sales would be better.  This is nearly double the percentage from the fall survey at 24.1 percent and significantly higher than last spring at 27.2 percent.  But more importantly only 8.7 percent indicated that sales would be worse six months from now.  This is in sharp contrast to the 23.3 percent in the fall survey who thought sales would decline.

Results from the Lincoln Institute’s Spring 2017 Keystone Business Climate Survey show levels of optimism not seen in quite some time—at least since before the last recession.  Causes for this optimism can be debated, but one factor could be the current president’s approval rating that was nearly 70 percent.  The two previous surveys had given the former president approval ratings of 8.8 and 11.1 percent respectively (his highest rating was 28 percent in fall 2012).  This suggests that optimism stems more from national influences than state ones.  In fact, the current Governor’s approval rating is just 16.4 percent, but is his highest level to date.  While this is much better than his two previous ratings of 5.4 and 6.9 percent, it does not approach a high enough level to imply business executives place credit for their optimism at the state level.

It remains to be seen if this upturn in optimism persists as federal and state level policy and regulation changes unfold.  But for now there seems to be a definite shift toward more optimism from business executives throughout the Commonwealth.

Sluggish Economy Creates State Revenue and Budget Problems

Summary:  Three months ago (see Policy Brief Vol. 16, No. 47) we called attention to the slowdown in statewide employment since March of 2016. Data since indicates the slowdown has not been reversed. Recently released private sector employment figures for December 2016 continued to disappoint, dipping below November’s reading and standing only 37,000 above the December 2015 level. This weakness is having a ripple effect in the state’s economy and tax revenues that trail projected estimates and widening the budget deficit.  Fixing the economy should be top priority and talk of tax increases is exactly the wrong approach.

_________________________________________________________________________

Pennsylvania’s private sector job count in December 2016 rose only 37,000 from December 2015, well below the average gain of 52,000 from December 2010 to December 2015. Indeed, the pace of job growth coming out of the recession has been replaced by a cooling, especially noteworthy during the last few months of 2016 following a respectable first half. There can be little doubt that for much of the period of 2010 through 2015 the relatively strong job gains reflected the advent of Marcellus gas drilling and production.  Still, notwithstanding the stronger gains since the 2009-10 recession the average yearly job gains of 13,600 private jobs in the new century pale in comparison to the 84,600 average yearly rise in the late 1990s.

Sluggish growth of late can be traced to the weakness in goods producing categories, mining and logging, construction, and manufacturing. Reflecting the slide in natural gas prices mining jobs fell on a year over year basis every month in 2016—a trend that actually began in April 2015.  By 2016 the monthly average of the sector had dropped by 12,800 jobs (-34 percent).  And that decline has had a significant negative effect on other sectors.

Manufacturing tells a similar story, losing 2,300 jobs in 2016 compared to the 2015 yearly average.   After a small rebound from the recession low point, factory employment has been basically flat for four years. Moreover, the longer term picture is very poor with 2016’s average of 566,000 jobs a drop of 15 percent from 2006’s level of 670,400.

Employment in service producing industries has fared much better than in the goods producing sectors with education and health services leading the way.  For instance, private services employment grew 41,300 from December 2015 to December 2016. Moreover, the sector has added 30,600 jobs per year since 2006 thanks to a relatively strong performance after the recession that accounts for all the net private sector job gains during the period.

In fact, overall the private sector managed average annual increases of only 18,000 jobs from 2006 to 2016 reflecting the big losses in manufacturing.

With the new national emphasis on policies focused on stimulating manufacturing and energy production perhaps this picture might change for the better in the future.

For the present and near term, service sectors are keeping the Pennsylvania economy moving forward, albeit slowly. But the reality is that many of the service jobs being created are very low paying with few benefits and their output has little or no multiplier impact on the economy. Thus, a concentration of employment gains in low labor productivity, low wage jobs industries provide only a very small impetus to state revenue. This is evident in the state’s tax revenue collections data.

Moreover, the recent slackening pace of overall job gains and the dramatic shift in the industry mix of employment away from goods production are definitely having an effect on state revenue collections. Since the recession ended in 2010, annual (calendar year not fiscal year) general fund revenue has risen at a slow 2.5 percent average yearly rate, with the highest increase posted at only 3.7 percent in 2011 and two other years reaching just over three percent. 2012’s increase was barely two percent and 2013 registered a paltry 1.6 percent gain.  But the low point over the last six years was the 1.2 percent increase from 2015 to 2016. Thus far in the first six months of the current fiscal year, general fund revenue is maintaining its weak growth pattern and is up only 0.4 percent compared to the first six months of the prior fiscal year ($13.45 billion vs. $13.40 billion).

While this is a slim positive gain, it is $367 million or 2.7 percent below what the Commonwealth budget projected would be collected thus far ($13.82 billion).  And December’s monthly revenue collection was four percent below the budget estimate figure.

Based on the slow pace of revenue gains of late it is not surprising that year to date collections in all major categories of tax revenue (corporate net income, personal income and sales and use) are running behind the forecast for the first six months of FY 2016-17.

Of the three, the $116 million shortfall in the corporate net income tax is largest in percentage terms at 8.9 percent under forecast. The personal income tax has also performed below not just last year’s level, but estimated levels as well.  Through the first six months of FY 2016-17, the collections on personal income tax are $126 million or 2.3 percent under the budgeted figure. Meanwhile, sales and use tax revenue was $133.3 million (2.6 percent under budget.) These three account for most of the overall revenue shortfall although other categories were also lower and a few small sources registered increases.

Of course revenues are only half of the ledger—spending being the other half.  Thus far in FY 2016-17, general fund spending is running about $4.4 billion higher than revenues collected.  Typically, the first six months of the fiscal years have spending running ahead of revenues. With the heaviest revenue inflows in the spring, the spending–revenue gap is dramatically reduced. But for the last few years, the fiscal years have ended with increasingly larger deficits.

Just recently the Independent Fiscal Office (IFO) reported that it is now estimating the current year deficit at $700 million as a result of a forecast for a further $250 million revenue shortfall. The Director of the IFO in comments to the Associated Press on January 27th said, “We’re really not getting any kind of economic growth through January…So it’s very puzzling.”

On the contrary, slow growth in Pennsylvania is not much of a mystery. The state rates very poorly in state rankings of business taxes, business climate, and its two largest metro areas are among the lowest ranking for new business formations.  High taxes, the threat of more taxes, (especially on the gas industry) enormous unfunded liabilities in the state employee and teacher pensions that portend tax increases all hamper the state’s ability to grow and attract business.  Labor union problems, especially with public sector employees, combined with the rapid expansion of the number of Midwestern states adopting right to work laws will put the Commonwealth at an ongoing serious competitive disadvantage.

One thing should be perfectly clear. Raising tax rates or levying new taxes on business in an attempt to close the deficit will be counterproductive.  There is no substitute for adopting policies that favor free enterprise and making the state more business friendly.