[caption id="attachment_16359" align="alignleft" width="300"] Dr. John E. Stapleford
Guest Columnist[/caption]

The objective of Economic Insights is to bridge the gap between the latest economic data and what it means for Delaware businesses.

WHAT'S HAPPENING?

According to the Philadelphia Fed, Delaware's leading index for October suggests contraction in the state's economy into the second quarter of 2016. Aside from Delaware, the economies of all the other states in the region are expected to grow.

WHY IS IT HAPPENING?

The Philadelphia Fed leading index for each state predicts the six-month growth rate of the state's coincident index. (The coincident index combines four state-level indicators to summarize current economic conditions in a single statistic - nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index.)  In addition to the coincident index, the models include other variables that lead the economy: state-level housing permits (one-to-four units), state initial unemployment insurance claims, delivery times from the Institute for Supply Management (ISM) manufacturing survey, and the interest rate spread between the 10-year Treasury bond and the 3-month Treasury bill.

Since Delaware building permits continue to gain, initial unemployment claims fall, and delivery times increase, the drop in the state's leading index is driven primarily by a falling coincidental index.

Delaware retail trade has been shedding jobs and manufacturing employment is flat. Health care hiring, other than hospitals and nursing homes, has slowed. The shift in retail trade sales to the Internet does continue to drive demand for temporary help and employment services and local activity in warehousing and trucking.

The rise in Delaware's unemployment rate is primarily a result of residents entering the state's labor force at a faster rate than Delaware jobs are growing.

THE IMPLICATIONS FOR BUSINESS?

While a prolonged retraction in Delaware's economy during the first half of 2016 is unlikely, a slowdown is guaranteed.

In addition to the losses in retail trade jobs, the increase in interest rates engineered by the Fed will restrain hiring in commercial banking and dampen planned construction.

A flat projection in state government general revenue predicted by DEFAC for the coming fiscal year will reduce personal income and curb government spending on vendors. Any offsetting increase in state taxes to support government spending will come at the expense of the private sector through lower consumer spending or reduced business income.

After absorbing layoffs from DuPont, the state's unemployment rate will stabilize and fall as residents stop entering the labor market as rapidly due to slower growth in jobs.

Delaware businesses should be alert to expanding their customer base beyond the state boundaries, into regional growth spots. WSFS did this years ago by opening branches in high income Chester County, Pennsylvania. Also in Pennsylvania, Lancaster County is growing as is Worcester County on the Eastern Shore of Maryland. Businesses in northern New Castle County should explore ways to better capture the $2.7 billion of annual wages that are earned in the County and exported to residences outside of Delaware.

Finally, if the Delaware business community believes that certain state policies need remedial action, the 2016 legislative session is the time to speak up.

John E. Stapleford is the director of the Center for Economic Policy and Analysis for the Caesar Rodney Institute and works as an associate director and senior economist with Moody's Economy.com