News - Bill's Blog

Recession indicator provides a reminder about government financial reporting

October 1, 2019

The world of economics includes a huge jungle of statistics. Some of them are fearsome, dangerous beasts – complex, difficult to calculate, untimely, and subject to discretion if not willful distortion. Others are gentle, caring, helpful creatures – simple, timely, reliable and worth caring for (and about).

The former scary category arguably includes things like Gross Domestic Product, the Consumer Price Index, and measures of the Money Supply. 

From the world of kinder and helpful statistics, the economics world gave us some scary news today. 

The Institute for Supply Management (ISM) provides a monthly Report on Business, which includes a simple, timely and reliable index of manufacturing activity. Unfortunately, the news wasn’t good. That gentle creature has been weeping lately, with negative (below 50) index levels combining with things like a narrowing/inverted yield curve to raise warning bells about a developing recession.

The ISM index used to be called the NAPM (National Association of Purchasing Managers) index. The organization would poll its members, and ask simple questions such as “Is your firm’s production up, down, or about the same this month?” and “Are the prices you pay for supplies going up, down, or staying about the same?” From there, they would add the percentage of people saying “up” to the number saying “about the same,” and develop a simple index number.

This index isn’t perfect, but it is available in a very timely fashion, compared to other economic statistics. The latest ISM Report on Business was released today, October 1, for the month of September that just ended. The simple index design yields another value -- it isn’t revised in the future as statisticians update their previous estimates. And it doesn’t need to be audited, like corporation or government financial accounting information. 

For anyone trying to stay on top of economic trends on a regular basis, the ISM index has long been one of the best things to watch.

So, let’s assume (which may not be the case) that a recession is getting underway. How is it impacting our local, state, and federal government finances? Are they ready for a recession? How can we stay on top of how they are doing?

Back in late August, a little more than a month ago, the State of Illinois released its Comprehensive Annual Financial Report. But that report, released in August 2019, covered a fiscal year that ended more than a year earlier (in June 2018). And we won’t see the next federal government annual financial report until about February 2020 – a report that covers a fiscal year that ended yesterday (as an assumed recession was just getting underway).

Meanwhile, today, the stock market -- a key contributor to investment income (and risk) in public pension plans -- dropped more than 300 points (on the DJIA, speaking of indexes), on the heels of the recession news from the ISM index. Another reason to be concerned as citizens and taxpayers, especially we hold much of the downside of the investement risk in these pension plans.

We are often flying while blind when it comes to understanding the current condition of the public purse. We would all benefit from more timely – and reliable -- government financial reporting.



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