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There’s only one state expected to see economic activity deteriorate in the next six months, according to data released this week.
Hang your head, Free State — Maryland’s leading index fell 0.66%, according to data from the Philadelphia Fed.
The national average was for a gain of 1.51%, with Utah rising an impressive 4.36% and New Mexico, Oklahoma and Wyoming each growing above 3%.
The Philadelphia Fed’s leading indexes is based on data including state-level housing permits, state initial jobless claims, delivery times from the Institute for Supply Management manufacturing survey, and the interest rate spread between the 10-year Treasury bond and the 3-month Treasury bill .
It forecasts not GDP growth per se but a coincident index, which combines four state-level indicators to summarize current economic conditions in a single statistic.
The news surprised Steven Cochrane, managing director at Moody’s Analytics, who specializes in regional economics. “If I had to pick one [state] that might be declining, it wouldn’t be Maryland,” he said.
It’s Maryland’s unemployment rate increase that is driving the increase. At 4.3% in March, the unemployment rate is 29th in the nation, but it’s climbed by a tenth each month this year.
“It’s been quite rare for Maryland to be above the national average, but unemployment can be misleading as it can rise if a community is adding enough people to the labor market,” said Anirban Basu, chairman and CEO of Sage Policy Group and chairman of the Maryland Economic Development Commission.
And that’s indeed what has happened. In Maryland, employment has actually increased during the first three months of the year, it’s just that the labor force has grown more quickly.
That said, the Philadelphia Fed’s assessment isn’t wildly at odds with other data. While the Richmond Fed’s Maryland survey of business activity bounced back in April, the three-month average has dropped sharply over the past year.
Maryland’s economy grew at just a 1.2% annualized rate in the fourth quarter, the 43rd best, according to data released Friday by the Commerce Department. For all of 2017, Maryland’s economy grew 1.5%.
Basu said one factor weighing on the Philadelphia Fed index is the lack of permits growth. “My feeling is that’s merely temporary,” he said. “The Maryland home building community understands demographics are shifting and Homeownership is on the rise, realizing more and more renters are thinking of homeownership as the stronger economy has rendered them more confident about paying student loans.”
The state will benefit from the increase in federal spending signed into law. However, Maryland’s economy is geared more toward nondefense spending than neighboring Virginia.
“What drives the Maryland economy is the federal government,” said Richard Clinch, executive director of the University of Baltimore’s Jacob France Institute. Maryland does have vibrant life sciences, cybersecurity and information technology companies, but they’re still very highly influenced by federal spending, Clinch said. “The core driver is federal spending, and [nondefense spending] is not expected to accelerate.”
“The new administration has been looking really closely at existing federal government contracts,” added Basu. “Suppressing growth in those contracts and renegotiate existing ones, this would have a disproportionate impact on suburban Maryland.”
Basu’s Sage Policy Group recently published a report on Montgomery County, which neighbors Washington, D.C., that criticized the county for the tax and regulatory burden. “Unlike Silicon Valley and Wall Street, people can move out of Montgomery County, including to Loudoun County (in Virginia) and even the District of Columbia,” he said. Pointing to new office space that has opened in Virginia — “those tenants are coming from somewhere.”
Over the last decade, establishment growth in Maryland’s Montgomery and Prince George’s counties has lagged behind Virginia’s Arlington and Fairfax counties, as well as Washington, D.C.
All that said, Montgomery County is on Amazon’s shortlist for its second headquarters, as is D.C. and Northern Virginia. “If Amazon comes to the area, Maryland wins most if it comes to Montgomery County, but it wins second most if it goes to D.C. and also wins if it goes to Northern Virginia,” Clinch said.
Cochrane pointed out one issue confronting the Northeast in general is the availability of labor, and how that leads to slowing employment growth. “It’s an important thing to be watching around the country,” he said.