Ouch! Governor Walker Touts Fed Data. He Shouldn't Have Gone There.

 

Alert:  You may need to be a little wonkish to enjoy this post.  Unless you really dislike Governor Walker.

Yesterday the Philadelphia Federal Reserve Bank issued its monthly report on the coincident index for each state, and its forecast for the next six months of coincident index growth for each of the fifty states, a forecast index known as the "leading index."  The Philly Fed explains in technical papers available on its website that both these indices are intended to permit a state-to-state comparison of the economic health of each state.  For example, one of these papers says, in sum and substance, the indices are intended to allow workers or companies or entrepreneurs to compare the health of the economies as between individual states in order to make decisions about job relocation or establishing a new business in a more vibrant state economy.

What the indices are not intended to be are a reliable method of comparing the performance of two political administrations in charge of the same state at different periods of time.  But, desperate for good news on the state of the Wisconsin economy, any good news, Governor Walker issued a press release today citing the latest Philadelphia Fed data as proof that his policies are showing progress for Wisconsin, especially compared to the Doyle administration.

He should not have gone there.  It exposes him to ridicule.  It is as if some junior intern for the governor looked up from her computer screen and announced: "Hey, here is a really dope map from the Fed, we can use this to show success from our budget reforms!" All this done without bothering to read the fine print available on the Fed website.

Here is the text of Governor Walker's press release, available at the Wheeler Report, and on his website:

The Philadelphia Federal Reserve Bank released a new economic growth forecast for states yesterday.  The report forecasts Wisconsin to grow 1.95 percent over the next six months.  It is the best economic forecast for the state since 2003.  Wisconsin also experienced the most improved forecast in the nation.  Wisconsin’s three-month change was 2.36 percentage points, moving to a forecast of solid gains.  

Governor Scott Walker today released the following statement on the Federal Reserve Bank of Philadelphia’s forecast of solid growth in Wisconsin over the next six months:
“Strong signals suggest we are turning things around for Wisconsin’s economy, and the Federal Reserve Bank of Philadelphia’s newest report of state leading economic indexes provides yet one more indication that our pro-jobs policies are moving us in the right direction.  Although there is much work left to be done, the forecast along with additional economic indicators such as our state’s lowest unemployment rate since 2008 indicate we are heading in the right direction.”  

Democrats previously touted the now outdated Philadelphia Fed forecast as evidence that the Governor’s policies were hurting job growth in Wisconsin.   (Emphasis supplied.)

The reference to "2003" is important because that is when Jim Doyle took office as governor.  "Hurray, we're outpacing the Doyle administration!"  Except this isn't true.  At least under the Fed data.  Let's break it down;  a little propaganda exegesis.

1.       The Fed is projecting that the state's coincident index will grow by 1.95% over the next six months.  This is felt to be consistent with GDP growth in the state, as the coincident index is generally scaled to the state's GDP.  The coincident index compares one state to another based on four very finite metrics: nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.

2.       The method involves a system of five major equations: one equation for each input variable and one equation for an underlying (latent) factor that is reflected in each of the indicator (input) variables. The underlying factor represents the state coincident index. The model and the input variables are consistent across the 50 states, so the state indexes are comparable to one another.

3.       Thus the coincident indices permit you to compare one state to another in terms of economic health.  For example, let's say you are a software developer who has a nice software package for managing inventory and you want to locate near manufacturing customers to whom you can sell the package.  You want to be in the Midwest near product manufacturers and in a state that is on the rise.  You know about the Fed indices, so you go to the recent coincident indices for the Midwest states and here is what you find from the Philadelphia Fed data (assuming you are compulsive in crunching the data):

 

You find that as of this past January (the most current data) Wisconsin ranks near the bottom of the pack of Midwestern states.  You've heard that the Governor of Wisconsin has done a little throw down to Governor Quinn in Illinois about how Wisconsin is going to be eating Illinois lunch in terms of business development and new jobs, but you see that Illinois, and everybody else other than Michigan, is ranked ahead of Wisconsin on the index.  Moreover, you see that the Midwest is doing so-so compared to the nation as a whole, but Wisconsin is doing much worse that the U.S. average.

4.    So you ask yourself, what is the trend line for Wisconsin compared to the other six Midwestern states?  The answer is "not so good."  This is where the effort by the Walker folks to contrast their  score in just one month against the Doyle administration's past record on this same index should leave them a tad red-faced.   If you look at just the first column of data for January of 2012, Wisconsin under-performs the United States average by 9.52 points (155.77 minus 136.25).   Now look at Illinois during this same time frame.  Wisconsin under-performs on the index by 5.95 points.  Score: Illinois 1, Wisconsin nil.

5.     Now let's look at the average performance of the state during the twelve months of the Walker administration from February 2011 to January 2012 (on the assumption that even the Walkerites aren't prepared to claim they did anything in January that took immediate effect on the economy).  Let's compare with Ohio and Illinois.  Wisconsin outpaced Ohio in that twelve month period by .07 points and fell short of Illinois by 3.7 points.  Illinois 2, Wisconsin nil.

6.    OK, but how did Wisconsin fare under Doyle's last year?  The answer is "better" than during the twelve months of Walker's administration.   We outpaced Ohio by 2.82 points on the index (compared to Walker's .07 points, and we fell short of Illinois by a much smaller amount, 2.3 points under Doyle and again 3.7 points under Walker. 

7.  You can do this same kind of exercise for all the Midwestern states and the United States, comparing Wisconsin's performance under a year of Doyle, or under his last four years, with Walker's first year, and the same result attains:  Wisconsin compared more favorably with the other states in terms of the Fed's coincident index under Doyle, usually by a lot.

So now let's go back to the "leading index" that the Walker administration was crowing about, the 1.95 percent expected increase for the state's coincident index for the next six months.  The Walker administration's press release conceded that this number represents the predicted growth rate in the state economy, its gross domestic product (GDP).  Does 1.95% represent a good annual rate of growth for a state economy during a national climb out of recession?  It does represent substantial improvement when the previous twelve months of coincident index for the Badger State under Governor Walker showed economic contraction rather than growth. 

The 1.95% projection puts us pretty low on the totem pole nationally.  Here is a chart showing how we fared on the Fed's leading index in January compared to the other 50 states:



Wisconsin is eighteenth from the bottom, sitting immediately ahead of Mississippi.  (Whew!)  And if you look at the last twelve month averages of the index for each state, on the assumption that this smooths out a few one month bumps, we do extremely poorly,  coming out ahead of only two states, Alaska and Montana, a couple of extraction states.  (All the Republicans other than Dale Schultz want to turn us into an extraction state by luring mining companies into northern Wisconsin by the promise of letting them write their own rules.)

So the exciting news in the Governor's press release turns out to be neither exciting nor accurate when you mine the data.  But maybe we will get some good news tomorrow when the February job numbers get released by the DWD.

At least one good thing has come from the Governor's press release.  He has acknowledged the Philly Fed indices as useful metrics for measuring delivery of his growth promise.








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