Leading Indicators

Is Philadelphia Heading for a Recession? What Do the Data Say?

In the past few months, talk of an economic downturn or recession in the coming 18-24 months has become commonplace in both the media and government circles [1]. In fact, Philadelphia’s Budget Director Marisa Waxman was asked to propose cutbacks in the coming year’s budget to prepare for the eventuality of such a downturn. But what are the signs of impending recession and how does Philadelphia fare when compared to the rest of the country?  

 

Key Takeaways
  • A National League of Cities’ (NLC) analysis of annual tax revenue data from U.S. cities predicts impending recession 
  • The Economy League conducted a similar analysis using Philadelphia’s revenue data and did not see signs of recession - yet  
  • Philadelphia often experiences recessions later than peer cities because of the makeup of its “mature” and diverse economy 
  • Weathering a recession in a major city requires foresight on the part of local government and for the economy to remain diverse and inclusive 

 

Recessions, or periods of economic decline, are the result of shifting economic factors with effects that ripple through various markets [2]. Their causes vary - e.g. financial crises, sudden production decreases, decreases in spending and/or consumption, trade deficits, etc.- but they negatively affect major cities’ production levels, real estate prices, employment, wages, and tax revenues. In fact, cities are often forced to restructure budgets at the onset of recession since revenue streams immediately decline – leading some to argue that initial decreases in annual tax revenues may be a telltale sign of impending recession for major cities.  

 

Just last month, the National League of Cities (NLC) debuted its annual City Fiscal Conditions report which used year-over-year changes in tax revenues from 550 U.S. cities with populations greater than 10,000 as a leading indicator of impending recession. According to the NLC, tax revenue streams for major U.S. cities began to slightly decline in 2019 after six years of continuous growth – which could indicate upcoming “economic headwinds.”  

 

To visualize this trend and compare it with Philadelphia, we graphed the year-over-year changes for the total tax revenues of both the NLC sample cities and the City of Philadelphia from 2009 to 2019 in Figure 1 below. Compared to the NLC sample, Philadelphia has seen a longer period of growth in tax revenue--with only a slight decrease in 2015--and continued to see growth from 2018 into 2019. By this measure at least, Philadelphia hasn’t experienced the decline in tax revenue seen in the NLC’s sample.

 

Graph instructions

FIGURE 1:

Sources: City of Philadelphia's Department of Revenue final fiscal year revenue reports and NLC's City Fiscal Conditions 2019 report

 

Interpreting Graph tips

To dive deeper, we disaggregated Philadelphia’s tax revenues by tax type and graphed individual year-over-year changes in Figure 2 below. Philadelphia’s tax revenues saw more periods of growth than decline and almost all tax types experienced growth from 2018 to 2019.

 

FIGURE 2:

Sources: Data for Figure 2 were obtained from the City of Philadelphia's Department of Revenue final fiscal year revenue reports . Some tax revenue streams were combined in this table; the Parking Tax includes the “Parking Lot Tax” and the “Valet Parking Tax” categories from monthly revenue reports, while the Other Miscellaneous Tax category includes the “Smokeless Tobacco Tax,” the “Outdoor Advertising Tax,” and the “All Other Taxes” categories from the monthly reports. To learn more about these tax revenue categories, visit: https://www.phila.gov/services/payments-assistance-taxes/business-taxes/.

 

 

Philadelphia’s largest tax revenue streams, in order of magnitude, are the Wage, Earnings, & Net Profits Tax, the Realty Transfer Tax, the City’s Sales Tax, the Business Income and Receipts Tax (BIRT), and the Real Estate Tax. In economic terms, these taxes (except the real estate tax) are considered “elastic” or highly responsive to economic forces beyond a city’s control. In other words, these tax revenues ought to be highly correlated and sensitive to economic downturns – or upswings. Taking a closer look at these more elastic taxes, however, still shows that Philadelphia’s tax revenues saw more periods of growth than decline in the past few years. The most volatile has been the City’s Sales Tax, which shifted largely in response to local policy: the growth in 2010 corresponds to the City’s increase of the sales tax from 1% to 2% in 2009 to ease the impact of the Great Recession, while the 2015 decline results from legislation that redistributed a portion of the sales tax in incremental amounts to the School District of Philadelphia. Looking at 2018 and 2019, the growth of these more-elastic tax revenue streams seems to have slowed—except for BIRT’s 20% growth since 2018 and the Realty Transfer Tax’s 2.4% decline—yet it still stands in contrast to the decline in revenue seen by the NLC’s sample of cities during the same time period.

 

The less-elastic sources of tax revenue—specifically the Parking Tax, Amusement Tax, Other Misc. Tax, and Philadelphia Beverage Tax—also support this general trend of growth from 2018 to 2019. The only anomaly is the Beverage Tax which was rolled out halfway through fiscal year 2017. So, the large growth in 2018 is comparing a half year of collection in 2017 to a full year of collection in 2018. Its decline in 2019 is minimal and doesn’t provide much detail about its trajectory. More years of collection are needed to understand exactly how this tax behaves.

 

From the perspective of tax revenue trends alone, the Philadelphia data does not support the impending economic decline suggested by the NLC’s report. Most of the City’s tax revenue streams saw growth from 2018 to 2019, though some of this growth seems to be slowing. This is not to say that Philadelphia is recession-proof or even recession-resilient, but rather that Philadelphia may behave differently in the face of recession than other cities. Why might this be? First, Philadelphia’s economy is largely “mature” and tends to experience the effects of recession later than other major cities [3,4]. Unlike many other major cities or metro regions with economies that rely heavily on one overly dominant sector - e.g. finance in New York City, tech in San Francisco, or automobiles in Detroit – Philadelphia’s economy is relatively diverse. At its core are a cluster of relatively non-volatile, nonprofit-based “eds-and-meds” institutions that are slow to experience the brunt of economic downturn after it trickles its way down from more susceptible industries like finance and tech. Additionally, annual changes in tax revenue only provide a portion of the equation when predicting economic trends. A more comprehensive approach would consider national trade policy, local industry concentrations, full-time employment trends, and private investments – just to name a few. Year-over-year changes to revenues, while interesting, only provide a snippet of predictive information.

 

Predicting a recession is difficult but weathering a recession can be harrowing for a city’s population – particularly for low-income families and workers employed in low-skilled jobs that are often the first to be cut. To successfully navigate a recession, the local government needs to be forward-thinking and the local economy needs to remain diverse and inclusive. Luckily, Philadelphia’s economy remains quite diverse, and the current administration seems to be considering the potential effects of recession with its plan to deposit $34.3 million in its Budget Stabilization Reserve Fund (aka Rainy-Day Fund) and the recent push for drafting budget cuts in the upcoming year. These steps might help Philadelphia better endure any upcoming economic troubles.

 

SOURCES:

[1] National Association for Business Economics. 2019. Economic Policy Survey, 19 August. Retrieved from: https://files.constantcontact.com/668faa28001/2f0b98b4-3c7e-47e3-ade5-9887542aa300.pdf

 

[2] The National Bureau of Economic Research. 2008. “The NBER’s Recession Dating Procedure.” Retrieved from: https://www.nber.org/cycles/jan08bcdc_memo.html 

 

[3]  Select Greater Philadelphia. 2012. "Greater Philadelphia Economy Continues to Grow at Slower Rate." Retrieved from: https://selectgreaterphl.com/greater-philadelphia-economy-continues-to-grow-at-slower-rate/

 

[4] Armstrong, Mike. 2010. "Too Soon to Call a Turn in the Philadelphia Economy." The Philadelphia Inquirer, 15 March. Retrieved from: (https://www.inquirer.com/philly/blogs/phillyinc/Too_soon_to_call_a_turn_in_the_Philadelphia_economy.html).