Do Rankings Provide a True Picture of Metro Area Business Climates?

In December 2015, the Kauffman Foundation released their annual Index of Main Street Entrepreneurship (IMSE) that looks at the number of established small businesses as well as the count of business owners in forty U.S. metropolitan statistical areas (MSA).  The Pittsburgh MSA did quite well ranking in the top ten.  This follows the Foundation’s June 2015 release of their Index of Startup Activity that ranks these same MSAs on entrepreneurism as it relates to the starting of a new business.  For the second year in a row, the Pittsburgh MSA finished last on the startup index.  With two separate rankings, and two dramatically different results, what conclusions can be made about Pittsburgh’s entrepreneurial, or more importantly its business, environment?

 

As we wrote in Policy Brief, Volume 15, Number 28, the Index of Startup Activity is comprised of three measures of entrepreneurial activity, the rate of new entrepreneurs, the opportunity share of new entrepreneurs, and the startup density.  The purpose being to see how conducive an area may be to new entrepreneurs in their quest to start a business.  The Index’s final result, after ranking the Pittsburgh metro area next to last in each of the three Index components, places Pittsburgh fortieth of the forty MSAs.

 

The IMSE examines the same MSAs, but this time looks at the number of business owners and the count of established firms (companies with fewer than 50 employees and more than five years old).  Specifically, the two measures used are the rate of business owners and the density of established small businesses. Surprisingly, after the area’s poor finish in the Index of Startup Activity ranking, the Pittsburgh MSA ranked eighth of forty in the IMSE.

 

The first component in the IMSE is the rate of business owners (per 100,000 adults) in an MSA.  It is designed to capture the percentage of the adult population that owns a business.  The Pittsburgh MSA’s score of 5.09 percent means that 5,090 of every 100,000 adults in the area are business owners.  According to the Foundation’s narrative, “it captures all business owners, including those who own incorporated or unincorporated businesses, and those with or without employees.”

 

Values for this component are calculated on a three year moving average with 2014 being the most recent year available (survey data from U.S. Census Bureau and Bureau of Labor Statistics).  The highest score (8.69 percent) belonged to Miami while the lowest score (3.81 percent) went to Cincinnati.  Of the forty metro areas in the study, Pittsburgh’s score ranked ninth lowest (31st of 40).  For the country as a whole this rate is 6.02 percent, meaning that the Pittsburgh MSA is nearly a full point below the national average.  For the seven years covered by the report the Pittsburgh MSA has been very consistent at about 5 percent.

 

Among the top ten ranked MSAs in the overall IMSE ranking, the Pittsburgh MSA rated lowest on the business ownership component.

 

The second IMSE component is the density of established small businesses. This component is the count of established small businesses per 100,000 people in the MSAs.  It is derived from a yearly tally in the U.S. Census Bureau’s Business Dynamics Statistics with 2012 being the most recent year available.  By this measure, the Pittsburgh region does remarkably well.  With a score of 1,165.8, it ranks as the fifth best of the forty MSAs studied, trailing New York (1,267.1), Boston (1,219.0), Providence (1,222.1), and San Francisco (1,169.8).  According to the report, the density of established small businesses for the nation as a whole is 1,006.6.

 

It must be pointed out that there are serious questions about the methodology used to create the IMSE.  First, the report on the IMSE notes that each measure was given equal weight in calculating the final combined ranking.  Obviously, it must be asked:  how can the Pittsburgh region finish fifth highest on small business density and thirty-first on the rate of business owners and still come up with a combined final ranking of eighth?  Furthermore, there is a problem with the dates; they do not match up for the two IMSE components. The rate of business ownership is a three year moving average and goes through 2014 as its most recent data point while the small business density component has no data after 2012. How is it possible to get a combined IMSE for 2014?  Rationale for the combined IMSE, if any, should explain this apparent anomaly.

 

To be sure, at first glance, the Pittsburgh MSA’s top ten IMSE ranking sounds quite positive. However, is it really a reliable or useful indicator of the business environment?   It is a question worth exploring.

 

A look at the growth in nonfarm jobs shows the Pittsburgh MSA did not fare well over the 2008 to 2012 time frame of the small business density component of the IMSE, growing a mere three quarters of a percent.  But remarkably, of the MSAs ranked in the IMSE top ten, it was still the highest growth rate over the period. The only other top ten MSA with positive growth in nonfarm jobs is Boston (0.19 percent).  For all the MSAs ranked in the top ten, the average employment growth for the period was a negative 1.73 percent.

 

Interestingly, a look at the MSAs in the overall bottom ten of the IMSE shows that four had very strong or solid job gains including; Houston (3.66 percent), San Antonio (3.48 percent), Dallas (1.31 percent) and Columbus, OH (1.13 percent).  The average for the ten lowest ranked MSAs is negative 2.32 percent.  While that number is fairly close to the average for those ranked in the IMSE top ten, consider that four of the bottom ranked MSAs, Las Vegas (-9.56 percent), Sacramento (-6.16 percent), Phoenix (-5.89 percent), and Riverside, CA (-5.05 percent) all had very deep reductions in employment as their superheated housing markets collapsed and recovery took much longer than in the country as a whole.

 

In sum, for the forty MSAs studied, employment growth does not display any significant statistical correlation with the Kauffman Foundation’s Index of Main Street Entrepreneurship. And therefore it offers little indication of an area’s business environment and small business vitality. If an MSA has a solid job market, the need to strike out on one’s own may not be as great or necessary.  Keep in mind also that the data for established small businesses came from 2012.  While it may be the most recent available at the time the Kauffman Foundation put study together, it is quite dated and not particularly useful in informing policy making decisions in 2016.

 

The two Kauffman studies released in 2015 contained virtually opposite rankings for the Pittsburgh MSA on the same topic.  The takeaway from all this is that such rankings should be viewed carefully and used with caution.  In our analysis of the Index of Startup Activity released last summer, we noted it “is not to be taken as the end-all and be-all of the story of the region’s economic performance, but it is another wake up call.”  Nonetheless, there is enough that is negative in four of the five components of the two Indexes to suggest that the business environment in the Pittsburgh region has a lot of room for improvement.

Was the March to April Increase in Jobs the Best in 25 Years?

job

That is true according to headlines in the paper as a local analyst proclaimed the increase to total non-farm jobs from March to April of 24,600, the best March to April jump in the last 25 years.  Is this a sign of a rebounding economy for the Pittsburgh MSA?  Well, perhaps not.  There are a few problems with this proclamation.

 

First, the data being referenced is coming from preliminary reports.  The April 2015 total non-farm jobs number of 1,175,600 will be adjusted next month, up or down, when the numbers are finalized.  In fact the finalized March 2015 number of 1,151,000, to which the April number is being compared, was revised upward from its preliminary value of 1,149,200.  Comparing preliminary values, the March to April jump would have been even greater (26,400).

 

Secondly there will be a benchmarking revision that will take place early in 2016 that may wipe out much of this increase.  It happens every spring.  When the analyst looked at previous monthly changes, most likely online through the Bureau of Labor Statistics website, he was looking at data that had already been benchmarked.  For example looking at the last few March to April changes, the last three had been revised downward, the last two significantly.  In 2014, the press releases showed a March to April gain of 22,700 jobs.  This spring, after the rebenchmarking, it was revised to 16,200—a loss of 6,500.  The drop in 2013 was even more pronounced going from a gain of 21,800 to 10,200—a loss of 11,600 jobs.  The 2012 increase was reduced slightly from 10,800 to 9,700.  The exceptions were from 2011 (up 400) and 2010 (up 1,700), but the MSA was rebounding from the recession and the jumps were slight.

 

Finally, the source of the job increases is suspect.  Seventy percent of the 24,600 increase is centered about three industries:  construction (6,300), professional and business services (3,800), and leisure and hospitality (7,200).  The first, construction, represents a thirteen percent increase.  These numbers are of course non-seasonally adjusted and so with the weather improving in April, and Act 89 money (see Policy Brief, Volume 13, Number 60) pumping up road and bridge construction, this gain is plausible although only barely.

 

While the increase to the professional and business sector would be a positive, the gains actually accrue to the administrative and waste services subsector (2,900 or a jump of 5.65 percent) from March to April.  This is an unusual gain considering that the year-over-year totals (from last April removing the seasonality) had fallen by 3,000.  It lends suspicion to the number.  Finally, the boost of 7,200 to the leisure and hospitality sector is comprised of a 3,300 bump to the art, entertainment, and recreation subsector.  As we had written about before (Policy Brief, Volume 14, Number 33), this subsector is quite small, and the sample size too low to permit a separate estimate of jobs at the Pittsburgh MSA level, but can be deduced using simple math.  For the past year or so it accounted for large job gains each month, yet those were mostly wiped out by benchmark downward revisions (Policy Brief, Volume 15, Number 23).

 

Thus it is difficult to get too excited over this month-to-month increase to total non-farm jobs as a sign the economy is improving dramatically.  Recent history shows that revisions can take, and very often do, a large bite out of the data, long after the headlines have faded from memory.

Pittsburgh Area Jobs Count Revised Downward—Again

For the second year in a row the Department of Labor and Industry has made downward benchmark revisions to the establishment payroll employment data for the Pittsburgh region, altering the jobs picture as portrayed in the numbers originally released the prior year.

 

In March of 2014, the revisions erased virtually all of the strong employment net gains initially reported for 2013.  Recently, the Department released revised numbers for 2014.  While 2014’s originally released numbers showed employer payrolls to be growing at a less than robust pace, the revisions produced gains that were even more anemic than the initial reports depicted. For example before the revisions, the monthly average of nonfarm (including government) payrolls in 2014 increased by just over 6,100 compared to the 2013 average. After the revisions that number fell to just over 3,600 jobs, a growth rate of less than three tenths of a percent.  A similar change happened with private employment as the rise in the monthly average was lowered from 7,760 to just fewer than 5,000 with the benchmark adjustments.

 

Going back even further, we can see that job growth in the Pittsburgh MSA has cooled considerably since the rebound following the end of the recession that began in late 2008. From the pre-recession peak in May 2008 to the low point in February 2010, seasonally adjusted nonfarm jobs fell by 42,500. As the economy rebounded from early 2010 to March 2012, nonfarm jobs recovered the losses incurred during the downturn and tacked on 12,000 beyond the May 2008 peak. However, since March 2012 growth has virtually stopped with the March 2015 job count at almost the same level it was in March 2012. In short, nonfarm employment recovered rather quickly after the recession, but has sputtered along since 2012.

 

A similar pattern emerges for private jobs. Employment dropped by 41,000 from February 2008 to February 2010. Growth then resumed and accelerated throughout the year and into 2011 finally returning private jobs to the level from the same month in 2008 with the September 2011 reading. Job gains continued at a strong pace through the summer hitting new record levels in 2012 and then slowed sharply throughout with virtually no growth for the year. The pace picked up again in the second quarter of 2014 but remained much weaker than the heady expansion months of 2011 and 2012—a pattern that has persisted into 2015 thus far. Bear in mind that, as noted above, the private job counts were lowered by an average of over 2,500 for each month of 2014, this on top of very large downward revisions in the 2013 numbers.

 

How did the individual sectors fare in the revisions? For the goods producing sector overall the average annual employment count was adjusted upward by about 2,400 jobs.  There are three goods producing industries—construction, manufacturing, and mining and logging.  The construction sector was virtually untouched by the adjustments, while, promisingly, manufacturing picked up nearly 1,800 of those jobs with mining and logging realizing the rest.

 

However, the private service providing sector did not fare as well as the average annual number of jobs was revised downward in the aggregate by nearly 5,000 employees.  Most of the subsectors such as trade, transportation, and utilities, information, professional and business services, and education and health services were virtually unchanged. The financial services sector was revised downward by about 700 employees.  The biggest change occurred with the leisure and hospitality sector which is explored in more detail below.

 

During the recessionary period from mid-2008 to early 2010 the drop in the average annual job total for the leisure and hospitality sector was very slight—fewer than 300 jobs.  In the first two years of recovery jobs grew 3.7 percent (3,950) before slowing a bit from 2012 to 2014 (2.6 percent or 2,950 jobs).  But what made this sector noteworthy are the enormous revisions to the 2014 employee count. Based on the original data, the monthly average for jobs for 2014 was listed at 119,933.  But when the figures were released in the spring of 2015, that number was adjusted downward by 5,300 jobs to 114,633.

 

At the MSA level, only the accommodation and food services subsector is large enough to be estimated. Accommodation and foods services had its 2014 average monthly job count revised downward by about 1,270 jobs. However, the remaining subsector, identified by the BLS as arts, entertainment, and recreation but not tracked for the Pittsburgh MSA, had its jobs count lowered by the remaining 4,000 plus jobs.  While this subsector accounts for only a tiny fraction of total employment, during 2014 it was responsible for a large share of private job growth. After revisions, those unexplainably large gains were a mirage.  Something we have repeatedly suggested was likely to happen.

 

The revisions to the last two years’ jobs number show just how volatile and unreliable labor data can be.  As was just demonstrated, on first reading, the 2014 Pittsburgh MSA economy appeared to be sluggish compared to 2013.  Then revisions pushed the economy from looking sluggish to being anemic when the one sector with strong employment gains during the year, leisure and hospitality, saw those gains wiped away.

 

All of this underscores a key point. The Pittsburgh economy has been languishing under the weight of heavy taxation and a restrictive regulatory and labor environment.  Until the area and state adopt more business friendly, pro-free market growth policies, we can expect more of the same for years to come.

Cross Currents in the Pittsburgh Region’s Job Situation

December employment data for the Pittsburgh region show a respectable 14,700 rise in private sector jobs from the December 2013 reading. At first glance, this 1.4 percent twelve month increase is fairly impressive. But as we shall demonstrate the overall job growth number does not provide the whole story. It’s the categories of job gains and job weakness that raises concerns about the employment picture.  Moreover, as we have seen in recent years, the re-benchmarked data coming in March could contain major revisions.  Policy Brief Volume 14, Number 14 detailed how virtually all of the gains originally reported in 2013 had been wiped away by the updated figures. Re-benchmarking changes have been large on many occasions so they will bear close watching.

 

After beginning 2014 with year-over-year losses for every month of the first quarter, Labor Department reports showed private job growth strengthening significantly in the second quarter, although year-over-year growth did not reach one percent. The second half of 2014 saw a further quickening in the pace of expansion, averaging 1.2 percent year-over-year growth. July and December posted the best gains at 1.4 percent.  By way of comparison, national private employment in the second half of 2014 rose 2.4 percent compared to the second half of 2013.

 

However, as noted earlier, the pace of the region’s job growth is not nearly the whole story. It is important to look at the sectors of the economy that posted gains and those that did not to get a better assessment.

 

Of the region’s 14,700 private jobs increase from December 2013 to December 2014, 13,500 are service providing jobs with only 1,200 additional goods producing jobs.  Manufacturing jobs were down very slightly while construction and mining posted small gains. In the service producing sector, three industry components account for virtually all the gains; retail trade, leisure and hospitality, and health care.

 

According to the latest report, retail trade jobs grew by 4,100 year-over-year in December.  However, and somewhat baffling, the report shows that most of the large categories comprising retail trade are down:  food and beverage stores (-500); clothing and clothing accessories stores (-500); and general merchandise stores (-300).  The only one showing improvement was building material and supplies dealers (100).  So where has the growth happened?  How can it be that these four sectors, that make up over half of retail employment, had a net a decline of 1,200 jobs and yet the retail trade category grew by 4,100?  This implies that some unidentified sector, or a combination of sectors, had to have grown by 5,300 jobs over the twelve month period. That would mean those sectors grew by 8 percent during this time. It would be very helpful to know where such rapid growth has occurred, if it has in fact increased that much.

 

Moreover, it is important to keep in mind that many retail jobs are part time with few benefits and that the wages are well below the all-industry average. Indeed, in light of the Affordable Care Act requirement that full time workers in firms over 50 employees must receive health insurance coverage or the company pays a penalty, it would be instructive to know how many existing employees in retail have had their hours reduced.

 

The leisure and hospitality sector posted a sizable year-over-year gain for December 2014, rising by 9,000 jobs—a growth rate of 8.2 percent. Employment counts are provided only for the accommodation and food services component and it recorded an increase of 4,800 jobs.  Keep in mind that the Pittsburgh region had 118,800 employees working in the leisure and hospitality industry in December 2014.  Of these, 95,500 (80 percent) worked in the accommodation and food services subcategory.  Thus, the remaining 20 percent (23,300) worked in the arts, entertainment, and recreation subcategory. No data is reported for this component although simple arithmetic says it must have added 4,200 jobs over the twelve month period.  That is an expansion rate of 18 percent.  This number cries out for explanation but none has been forthcoming.

 

What’s more, the 8.2 percent growth to the Pittsburgh region’s leisure and hospitality industry dwarfs the good but modest 2.3 percent growth nationwide, which is in line with overall national job gains.  Amazingly, while leisure and hospitality jobs represent only 11.2 percent of private employment in the region, the 9,000 increase in this component accounts for 61 percent of all private job gains over the last year.  Indeed, even more stunning, the arts, entertainment and recreation sub component, which represents a mere 2.2 percent of private jobs, accounted for 28.5 percent of the private employment expansion over the twelve month period—more evidence that the reporting seems to have areas that require careful scrutiny.

 

One industry that had been strong, but took a step back in December, is the professional and business services sector.  The December 2014 year-over-year loss was only one percent (-1,800 jobs), but as before it is the mix that is of concern.  Even though the category of professional and technical services increased by 3,300 jobs, architectural and engineering services posted a decline of 200 while scientific research and development service showed a modest gain of 100.  Again, because only data for these two subsectors are reported for professional and technical services, there is no way of knowing which other components are showing strength in hiring. Thus, important service sectors such as accounting, marketing, consulting, legal, design, etc., must be adding to payrolls but which ones and by how much is left unknown. Nonetheless, at the national level most of these subsectors posted good to outstanding gains with the exception of legal services where the jobs count fell.

 

The administrative and waste services component of professional and business services suffered the worst year-over-year loss of any sector in the region (-5,500) with 4,200 of that coming from administrative and support services sector.  Of this, 200 were lost in the employment services subsector.  What could have happened to precipitate such a large decline in the administrative and support services sector?  Or is it a sampling error problem and not actually that big of a drop?  Contrast the regional data to the national situation where administrative and support services registered above average growth.  Significant gains nationally were seen in temporary help services, office administrative services, and call centers.

 

The education and health services sector had a respectable year-over-year growth in December 2014 of 3,200 with 1,000 coming from (private) educational services (colleges and universities (800)) and the remainder coming from health care and social assistance.  Health care and social assistance is comprised of ambulatory health care (1,100), hospitals (-100), nursing and residential care facilities (700), and social assistance (500).  Health care in its various forms continues to contribute to the region’s employment gains although hospitals have been losing share for some time.

 

In sum, private employment in terms of overall job count had a good year in 2014 as measured from December to December after a very weak first quarter and so-so second quarter.  But as demonstrated in the discussion above there are some serious reservations about the validity of the job growth.  And given the hefty percentage of the total employment increase accounted for by relatively low paying jobs, it seems certain that absent major revisions in the coming benchmark data, the employment growth as reported for 2014 will not translate into the kind of income gains that would occur if the bulk of the job expansion had occurred in manufacturing, construction, mining or other high paying sectors.

More Disappointing News on Pittsburgh’s Labor Market Data

A month ago, the Department of Labor and Industry released a stunningly negative report showing huge downward adjustments to establishment payroll jobs for 2013—revisions that wiped out all of the significant growth that had been reported each month last year.   In December for example, the so called establishment survey of jobs figure was lowered by 21,000, erasing entirely the originally reported gain.

 

And now, the Department is out with newly revised data obtained through the household survey; the survey that measures the number in the work force, the number of persons employed and the unemployment rate.  Revisions cover all five years from 2009 through 2013 inclusive. Generally speaking the revisions are downward for both employment and labor force and get larger going forward in time from 2009.

 

The revisions are not encouraging.  Remarkably, the downward revision to the number of persons reporting they are working puts the annual average employment for 2013 below the average employment for 2008—instead of the 8,000 gain in employed over the period in the originally reported figures.  Over the last seven months of 2013 the downward adjustments averaged 14,265 per month. Note that for the year as a whole the adjustment was 10,268 lower than the originally reported figures for 2013.

 

Downward revisions were especially pronounced for June and July employment counts with reductions averaging 17,300 per month compared to originally reported figures. New employment estimates for the fourth quarter also showed sizable cuts from original reports that average 13,400 workers for the three months. These reductions put the fourth quarter of 2013 employment nearly 8,000 below the fourth quarter of 2012. Before the revisions, the average for 2013 as a whole stood 8,500 higher than in 2012—after the revisions it was up only 2,300. It is noteworthy that even before the latest round of revisions the monthly gains in late 2013 had already slowed substantially compared to the gains recorded during the midyear months.

 

Fourth Quarter Average Household Employment

Year

Original

Revised

Difference

2008

1,170,103

1,170,103

0

2012

1,175,051

1,169,614

-5,437

2013

1,175,515

1,162,095

-13,420

 

While the number of people working, either self-employed or for another entity, is hugely important as an indicator of economic vitality, it does not by itself however, capture the whole story. Thus, the survey also asks those who report to the interviewer they are not working whether they are actively seeking work. Those who respond “not working but looking” are classified as unemployed.  Added together, the number employed and the number unemployed are called the labor force. Those of working age (over 16) who are not institutionalized and are neither working nor looking for work are termed “not in the labor force”.

 

The unemployment rate, the closely watched monthly statistic that grabs headlines, is simply the ratio of the number unemployed to the number in the labor force usually expressed as a percentage. Interestingly, the number unemployed were revised upward by a monthly average of 527 in 2010 and just under a thousand in 2011. During the first eight months of 2012, the upward revisions in unemployment continued to average around 1,000 but in the latter third of the year, the revisions shifted downward hitting negative 3,000 by year end. This was followed by a 5,890 reduction in January 2013 and further reductions throughout the year. For 2013 as a whole, the revisions lowered the unemployed count by almost 2,000 per month on average.

 

But as it turns out, the unemployment rate itself was barely changed by revisions for most months over the five year period except in the few months with exceptionally large revisions in the number unemployed.  Note that in both the original reports and the revised data, the number unemployed began to fall rather sharply in the second half of 2013.  At the same time, employment began to fall below the twelve month earlier levels reflecting a distinct weakening in the labor market.  So, of necessity, with both unemployment and employment falling the labor force also fell and by more than employment to reflect the decline in both.

 

What does this tell us about the recent dramatic declines in the unemployment rate?  A drop in the number unemployed accompanied by rising employment would be unambiguously positive in that it would point to some unemployed persons finding work. However, with employment falling or holding steady when unemployment falls, the implication is that out of work persons are not moving into jobs but rather out of the labor force altogether, that is to say they are no longer looking for work.  Some argue that the falling labor force could reflect retirements.  That might be possible but it would suggest that as people with jobs are retiring some of the unemployed are filling the positions opened up by the retirements including those created by promotions into the vacancies resulting from the retirements. It could happen, but the sudden rather rapid decline in unemployment in the second half of 2013 implies something else is at work, either in measurement issues or in actual changes in labor market dynamics.

Employment Slowdown Deepens

A recent Policy Brief (Volume 13, Number 16) noted that total private employment growth in the Pittsburgh region had cooled considerably.  The twelve month rise from January 2012 to January 2013 was only one percent, representing about a 10,000 job increase, and a continuation of the slowing trend that began in the second half of 2012. Unfortunately, preliminary jobs figures for February 2013 (the latest reported) show the employment gains cooling still further.

 

Total private employment registered a very modest pickup of only 5,600 jobs in February 2013 compared to the same month in 2012. While there is some good news in the fact that growth is still occurring, the bad news is this is the smallest twelve month increase since the Pittsburgh region emerged from the recession in June 2010 with a twelve month gain of 6,100 net new jobs.  Not since June 2010 has the year over year increase in total private jobs been fewer than 10,000.  Perhaps this is just a one-time monthly occurrence and not the start of a protracted weakening trend.  But as was noted in the earlier Policy Brief, sluggishness in job growth appeared in the second half of 2012 and has shown progressive deceleration.

 

The recent weakening in the Pittsburgh job market as measured by the establishment survey is mirrored in the national jobs numbers for March. Nationally, the March job figure was very troubling with only 95,000 net private sector payroll jobs added compared to the February level.   

 

Meanwhile, data from the national household survey (which provides labor force and unemployment figures) confirms the cooling down of payroll job gains. Seasonally adjusted data show the nation’s labor force declining by 496,000 from February to March.  This followed a January to February decline of 130,000.  Clearly, hopes of finding a good job are waning rapidly and many people are choosing to leave the labor force and not bother looking for work. In contrast the labor force in the Pittsburgh MSA had been showing some strength with month to month increases throughout most of 2012.  However the negative change from January to February marked the first drop in nearly a year (March to April 2012).    

 

In Pittsburgh, manufacturing along with the trade, transportation, and utilities sector have turned noticeably weaker. Manufacturing, which had recorded year over year gains since July 2010, lost another 500 jobs from its year ago level this February following a 200 decline from a year earlier in January.  The trade, transportation, and utilities sector in February was 1,300 positions lower than a year ago after losing 1,100 this January. Perhaps the biggest surprise occurred with the leisure and hospitality sector shedding 2,600 jobs in February compared to a year ago. This sector has been one of the jobs producing stalwarts over the past couple of years. It could be the weakness in the two consumer oriented sectors reflecting a loss in consumer confidence as well as possibly showing the impact of the national tax hikes that occurred in January.  

 

Fortunately, three sectors are providing some strength for the local jobs market; professional and business services, education and health, and mining and logging.  Professional and business services had 4,000 more employees on February’s payroll than a year earlier following January’s increase of 3,700.  The eds and meds sector had a February increase of 2,200, which was slightly less than January’s increase of 3,400.  Mining and logging, led by the development of natural gas in the Marcellus Shale formation, added another 900 people to payrolls in February besting January’s year over year increase of 800.

 

Nonetheless, the takeaway in this story is the much smaller than expected increase in private sector jobs of just 5,600 persons from a year ago.  As mentioned above this is the fewest new jobs in the area since the recovery from recession began in mid-2010. This recent weakness has also appeared in the national numbers. This latest sharp slowdown is worrisome to say the least.  And the national labor force plunge is certainly not reassuring as to the underlying robustness of a recovery that would have to pick up speed to be deemed lackluster.

Employment Growth in the Region Cools

The recently released January employment data for the Pittsburgh metropolitan statistical area (MSA) were not very encouraging.  After a reasonably strong 2011 and first half of 2012, data from the region’s employers show quite a slowdown in job additions for the latter half of 2012 with 2013 starting off just as sluggish. 

 

 Household data seems to confirm the slowing, as the area’s unemployment rate increased more than one-half of a percentage point from the same time last year. There was positive news in the form of a 2.5 percent jump in the labor force since January 2013 perhaps signaling more confidence among job seekers that the region has plenty of jobs to be filled.  But is this confidence warranted?

 

The employer payroll survey (which reports data unadjusted for seasonality) shows the MSA adding ten thousand total private jobs in January 2013 over the January 2012 level-a modest one percent increase.  By comparison January 2012 had 21,300 more jobs than its year earlier level which, in turn, had more than 24,500 jobs above the January 2010 reading. By looking at the levels compared to twelve months earlier, any seasonal effects are eliminated.  As mentioned, the growth in total private jobs was much stronger in 2011 and the beginning of 2012.  On average, the 2011 monthly year over year gains to total private jobs was 23,100.  The first half of 2012 averaged 22,100 more jobs compared to a year before, while the second half average fell to less than 13,200.  Nonetheless, despite the reduction by half in the rate of employment growth, it is a moderately positive sign that no month in the last two years had decreases in private sector jobs.

 

As was pointed out in previous Briefs, the Pittsburgh MSA has a major advantage created by the presence of the Marcellus Shale formation and is benefitting from a gas drilling boom. The number of jobs in the mining and logging sector surged in 2011 rising year over year by an average of 28 percent.  In the first quarter of 2012 the growth continued to top 22 percent before falling below 20 percent in April and then below nine percent from September through the close of the year.  This coincides with the fall in the average annual price of natural gas (as calculated for the State’s well impact fee) as it went from an average of just over $4.00/million BTUs in 2011 before falling to $2.79 in 2012-a decrease of 30 percent.  As the price falls, fewer wells will be drilled and growth will slow.  Even though it is very early in 2013, the average annual price has crept up to $3.40 and perhaps drilling activity may start to pick up. Another possibility to consider is that perhaps the pace of drilling new wells has already reached its apex in the region and additional drilling will be at a somewhat slower pace going forward. 

 

Other industries related to natural gas drilling seemed to follow suit, most specifically manufacturing and construction.  After years of decline, the manufacturing sector started to see positive year over year gains beginning in the second half of 2010.  While these gains were slight, anywhere from one to two percent from late 2010 through mid-2012, they turned negative in December 2012 and again in January 2013.  The construction sector followed a similar pattern of strong growth at the end of 2011 and through the first half of 2012 before weakening in the latter months of 2012 before posting a loss in January 2013. 

 

But these are relatively small sectors in the MSA and their slowdown cost the region around 2,500 jobs which is just a quarter of the cool down in the jobs market.  Marcellus Shale exploration and drilling propped up the region’s economy during the national recession and subsequent sluggish recovery, but it may be settling into more sustainable levels of activity.

 

Another sector that showed considerable slowing includes professional and business services.  This sector averaged a 7,700 monthly year over year increase to jobs for 2011.  That figure dropped to 5,200 in 2012 due to much slower gains in late 2012-the final quarter average was only 2,400.  While January 2013 had a year over year increase of 3,700, the torrid pace of 2011 through the first half of 2012 has not been sustained. 

 

So where is the good news? 

 

Keep in mind that the area gained more than 10,000 total private jobs year over year in January 2013 to settle in at more than 1.02 million-the highest January total since at least 1990 (as far back as the data go).  While the fast pace set coming out of the recession may have cooled off, the region is still moving forward.  And as we showed in a previous Policy Brief (Volume 13, Number 2) other sectors such as professional and technical services are emerging with substantial gains.  Likewise, the region’s healthcare subsector continues to grow albeit at a slower pace. Notwithstanding the moderately good performance of late, the region’s leaders cannot rest as there is plenty of work to be done to make the area more inviting to employers.

Analysis of the Strong Labor Force Growth in the Pittsburgh MSA

When the Bureau of Labor Statistics (BLS) released the July household data many were happy to learn that the labor force for the seven-county Pittsburgh Metropolitan Statistical Area (MSA) had reached a high-water mark of more than 1.281 million. The previous high was recorded just one month earlier in June 2012.  How “bullish” a signal is it for the region’s economy?  To answer the question, we’ll need to take a closer look at the data.

 

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Recent County Employment Data Appear to be Contrived

As we have written in previous Policy Briefs, the Pittsburgh metropolitan statistical area (MSA) experienced strong employment growth in 2011 (as measured by the establishment survey), especially in the final quarter.  While the data for the first part of 2012 showed a slowdown, the MSA still showed positive growth.  The question arises, how did the counties that make up the MSA fare during the last couple of years? 

 

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Revisions Boost 2011 Job Gains Estimates

When the Pennsylvania Department of Labor and Industry (L&I) issued the January workforce information release for the Pittsburgh metropolitan statistical area (MSA), the household employment data indicated a slowdown in the local economy compared to the brisk pace of 2011, especially the strong growth posted in the fourth quarter.  While this caused a minor stir in the media, of more importance was that January’s data reflected newly re-benchmarked household employment (persons reporting themselves as working) and labor force data for 2011. The updated benchmarks in the household survey data show a more robust labor market in the Pittsburgh MSA in 2011 than was originally reported last year.

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