All Recessions are Not Created Equal

In an announcement that was of little surprise to most of us, the National Bureau of Economic Research (NBER) finally declared that the United States has been in a recession since December 2007. What may not be quite as well known is that not every state is necessarily undergoing an economic recession at any given time. I thought it might be interesting to see which states are doing well despite the recession and which states are suffering the most.

To do my analysis, I downloaded the historical data spreadsheet (Excel file) of the State Coincident Indexes, which is published by the Federal Reserve Bank of Philadelphia. This is a long-running series of indexes that has been published since 1979. What the coincident indexes do is:

...combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average).

Based on this index number, individual state economies can be compared against each other and the nation as a whole to see how well the state is doing. The Philadelphia Fed also create month-by-month color-coded maps so that one can see at a glance each state's performance. Below is the most recent map available, from October 2008. (You can find all of the previously published maps since January 2005 here.)


Looking at the data since December 2007, when the recession officially started, what we find is that fourteen states have actually had economic growth as a percentage change over the past eleven months. Thirty-five states have had a contracting economy while one state (Kansas) has had neither a recession nor growth (a 0.0% "change"). (There is no data for the District of Columbia.) The fourteen states, in order of decreasing economic performance, are: Wyoming, Texas, South Dakota, New Hampshire, North Dakota, Virginia, New York, West Virginia, Colorado, Oklahoma, Louisiana, Nebraska, Massachusetts, and California. What's surprising to me is that California is in this list as they currently have the third highest unemployment rate in the country.

On the other side, the bottom ten states since last December are Delaware (41st), Arizona, South Carolina, Pennsylvania, Rhode Island, Michigan, Idaho, Nevada, Washington, and Oregon (50th). All of these states have had their index drop by at least 2.2% since December and, in the cases of the latter four, by over 4.0%. (Oregon's index has dropped by a whopping 6.1%.)

Of course these index numbers can change significantly from month to month. Both Oregon and Nevada have seen their index numbers drop by double digits within the eleven-month span (and not for the better). However, while things may look gloomy for some individual states, the economy may become better for them within a short period of time while the rest of the country labors under the current recession.

State Coincident Indices Through August 2008

The State Coincident Indices, published by the Federal Reserve Bank of Philadelphia, have been released through the month of August. The top graph is from the month of May, which I've republished to provide some continuity from the previous set of graphs; the latter three graphs are for June, July and August.

As you can see, there has been some strengthening in the Gulf states of Texas and Louisiana (one wonders how the graphs will look after taking into account Hurricanes Gustav and Ike), the western half of the upper Midwest, and West Virginia, which went from deep red to dark blue in a matter of two months. Trouble spots include the Pacific Southwest and the Midwest, although the latter region may be improving; we'll have to wait and see.

From the August 2008 press release [pdf]:

The Federal Reserve Bank of Philadelphia has released the coincident indexes for all 50 states for August 2008. The indexes increased in 12 states for the month, decreased in 31, and were unchanged in the remaining seven (a one-month diffusion index of -38). For the past three months, the indexes have increased in 12 states, decreased in 35, and were unchanged in the other three (a three-month diffusion index of -46). For comparison purposes, the Philadelphia Fed developed a similar coincident index for the entire United States. The Philadelphia Fed’s U.S. index was flat in August and has remained unchanged over the past three months.

State Coincident Indexes

Every month, the Federal Reserve Bank of Philadelphia produces a "State Coincident Index" that allows economists to see how well each of the individual states are doing economically:

The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.

What the graphs below show is a state-by-state analysis of the economy. The first three maps show the month of January for 2005, 2006 and 2007, respectively. (Note that in these maps, a five-point scale is used with dark blue being the best and dark red being the worst.) The last six maps are for the last six months available, December 2007 through May 2008. While the scale has been increased from five points to seven points, the same basic color scheme is still used; i.e., dark blue is the best, dark red is the worst.

As you can see, the American economy has gotten quite bad over the past six months, especially in the Northwest and, to a slightly lesser degree, in the Midwest and South. Some of the states in the Mountain West and Northeast are doing well, with the best state currently being Texas. (I'd be tempted to say that Texas is doing well because of the multiplier effects from higher oil prices, but if that's the case, then why isn't Alaska doing well too?)










HT: Economist's View

The Economist: Bernanke's Bind

An important article in this week's Economist. As I had first pointed out a couple weeks ago on my new blog, part of the reason for the rising inflation in commodity prices, such as oil and rice has been due to the combination of dollar-denominated commodity prices and a weakening U.S. dollar; i.e., as the dollar weakens against other currencies, this causes the prices for commodities to rise in order to maintain value. (For you non-Econogeeks out there, this is what is known as "purchasing power parity." A McDonald's Big Mac here in Singapore is the same as a Big Mac in the U.S., and the exchange rate between the Singapore and U.S. dollars should be such that you would pay the same amount for the same product (the Big Mac) regardless of what currency you're using.)

The other major problem is that, as interest rates keep going down (as they did again last week), the real value of the interest rate goes into negative territory. The real interest rate is (essentially) the nominal interest rate minus the rate of inflation. With this negative real interest rate, commodity producers such as farmers, miners, oilers, etc., have more incentive not to sell their products, even though this hurts them in the short-term by not bringing in revenue. As a a result, the amount of supply is lowered, which, in turn, raises prices.

There is another problem mentioned in the final paragraph below; however, the primary argument remains that the Federal Reserve must take some share of the blame for rising commodity prices, whether it's oil or agricultural products, due to their continued lowering of interest rates. This argument suggests, then, that commodity prices might not begin to drop until the U.S. dollar starts to strengthen.

An excerpt from the article:

But oil—and other commodities—are the crux of the problem. In the past, economic weakness in America has usually pushed the price of oil and other commodities down. That relationship has weakened thanks to demand growth in big commodity-intensive emerging economies. But the recent surprise is that commodity prices have soared even as America’s economy has stalled and forecasts for global growth have been trimmed as well. Supply shocks are clearly part of the problem. But the fact that prices have soared across so many commodities suggests a common cause.

Could the culprit be the Fed? Advocates of this idea point to two channels. First, by slashing real interest rates, the Fed has encouraged speculation in commodities by reducing the cost of holding inventories. Second, by pushing down the dollar, Fed looseness is pushing up the price of dollar-denominated commodities.

Jeff Frankel, a Harvard economist, has long argued that low real interest rates lead to higher commodity prices. When real rates fall, he points out, commodity producers have more incentive to keep their asset—whether crude oil, gold or grain—in the ground or in a silo, than to sell today. Speculators, in turn, have more incentive to shift into commodities. There is no doubt that commodities have become an increasingly popular investment category—in fact they bear many of the hallmarks of a speculative bubble. But inventories for many commodities, particularly grains, are unusually low.

What about the dollar link? Chakib Khelil, president of the Organisation of Petroleum-Exporting Countries, argued this week that oil could reach $200 a barrel largely because the market was being driven by the dollar’s slide. Movements in the euro/dollar exchange rate and the price of oil have become extremely close (see chart). An analysis by Jens Nordvig and Jeffrey Currie of Goldman Sachs shows that the correlation between weekly changes in the oil price and the euro/dollar exchange rate has risen from 1% between 1999 and 2004 to 52% in the past six months.

That link is partly a matter of accounting. If the dollar falls, the dollar price of a commodity must rise for its overall price—in terms of a basket of global currencies—to remain stable. But commodity prices have risen even when priced in non-dollar currencies. And the correlation between changes in the price of oil and the euro/dollar exchange rate has risen even when oil is priced in a basket of currencies, such as the IMF’s special drawing rights.

So is the weaker dollar driving oil prices up or are high oil prices driving the dollar down? The Goldman analysts argue the latter because oil exporters import more from Europe than America and hold less of their oil revenues in dollars. A second factor lies with central banks. Because the Fed focuses on “core” inflation (which excludes food and fuel), whereas the ECB targets overall inflation, America’s central bank runs a looser policy in response to higher oil prices, thus pushing the dollar down.

Another reason to suspect that the Fed is more than a bit player is that American interest-rate decisions have a disproportionate effect on global monetary conditions. Some emerging economies still peg their currencies to the dollar; many others have been reluctant to let their exchange rates rise enough to make up for the dollar’s decline. As a result, monetary conditions in many emerging markets remain too loose. This fuels domestic demand, pushing up pressure on prices, particularly of commodities. All of which suggests that the Fed’s decisions are propagated widely through the dollar.

Originally posted at Dunner's.