Weak Philly Fed Index Does Not Bode Well for Munis


 By TJ Kim

October 1, 2012

Weak Philadelphia Fed Index continued in August, sprouting worries in municipal bonds with more than two thirds of states lagging behind the nation’s three-month diffusion.

Looking at the index that compiles how much each state has improved from its post-2007 low, the data also presents disappointing results.

U.S. Municipal Strategy team from RBC wrote in their report,

“We find it instructive to look at the state composition of the three-month diffusion index. The chart in Exhibit 2 depicts the three-month percentage changes in the Philly Fed indexes for each of the 50 states and for the US as a whole. Over the last three months the collection of states outperforming the US is fairly diverse and includes states that were significantly impacted by the recession such as Arizona and Rhode Island. In contrast, the indexes for Michigan and West Virginia declined about 2% over the last three months, more than double the 0.8% decline posted by Alaska, New Mexico and Alabama. What’s more illuminating is the chart in Exhibit 3 which illustrates the percentage change in the individual state indexes since their respective post-2007 recession lows. Here the results are a little different. The most notable data point in this chart is that of New Mexico whose August index represents the post-2007 low for that state’s data series. Additionally, while it’s not a surprise that the best postrecession performer has been North Dakota, we find it notable that the runner-ups are the industrial Midwestern states of Michigan, Ohio and Indiana, underscoring the strength of the manufacturing revival in those states.While a few recent economic statistics have indicated some incremental improvement in state economic profiles, we continue to be concerned about the direction that the Philly Fed indexes have taken in recent months. In our view, state fiscal conditions, while modestly improved, will remain fragile until we see meaningful growth in employment and earnings.”


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