Focus
November 05, 2021 | 13:19
America’s K-Shaped Recovery
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Economics
America’s K-Shaped Recovery |
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U.S. real GDP pushed above its pre-pandemic level in the second quarter of this year, completing the recovery from the recession. But, when viewed through the lens of disaggregated industry and state GDP, the recovery looks to be far from complete. While some industries and states have strongly outpaced the national average and have long since fully recouped their recession losses, others remain mired at GDP levels well below their pre-pandemic perches, thus underscoring the ‘K-shape’ of America’s recovery. Below, we focus on industry and state data up to 2021Q2, as Q3 GDP figures won’t be released until the end of next month. The national aggregate’s Q2 growth capped a 12.2% recovery that followed a 10.1% recession, resulting in a net gain of 0.9% from 2019Q4 (that subsequently increased to 1.4% in Q3). On a quarterly basis, GDP data are available in disaggregated form for 22 industries and, of course, all 50 states. |
Industries: Table 1 ranks the net growth rates of real GDP by industry since the pandemic. Compared to the national norm, 11 industries displayed stronger GDP growth while 11 posted weaker performance. Within the latter group, 10 industries were still below their pre-pandemic GDP mark. And, further emphasizing the K-shape of the recovery, the top six performing industries more than quadrupled the average 0.9% net gain, while the bottom six registered at least a 10% reduction. The information sector topped the ranking with a 13.5% net gain in real output. The tech industry, both the software and hardware sides, benefitted profoundly from the pandemic’s work-from-home phenomenon along with the shift to e-commerce. The finance and insurance industry follows with just under a 10% net gain. This sector was bolstered by booming housing and equity markets. It was also boosted by administering some of the government’s business support programs, and by absorbing the $3.7 trillion of additional money supply sitting in deposits and retail money funds (above what February 2020’s annual trend would imply). Activity in the information sector along with finance and insurance also benefitted from being very amenable to working remotely. This likely provided a lift to other top-six industries such as management of companies and enterprises, the administrative services segment of administrative and waste management services, along with some professional, scientific and technical services. |
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In stark contrast, apart from mining, the bottom-six industries critically required in-person customer contact and were massively impacted by the pandemic’s restrictions and continued customer caution even after the restrictions were eased or removed. Arts, entertainment and recreation took the biggest hit. This industry’s output contracted the most during the recession (almost 60%). And despite registering the strongest growth in the past year (nearly 75%), output is still down a net 28%. Second from the bottom, mining is the only sector along with utilities to net contract in the past year. For mining, this was greased by the slide in oil output that has yet to rebound meaningfully despite noticeably higher crude oil prices. Utilities output appears to have partly suffered from weather events, such as the winter storm in Texas, during the past year. States: Table 2 ranks the net growth rates of real GDP by state since 2019Q4. Compared to the national norm, 24 states showed stronger gains while 26 posted weaker performance. Within the latter group, 19 states still have not recouped their recession losses. And, once again, further emphasizing the K-shape of the recovery, the top seven performing states at least quadrupled the average 0.9% net gain, while the bottom five did the same but with a negative sign. |
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Industrial structure can help explain relative state economic performance. States with the highest exposures to the best-performing industries, which often coincides with relatively lower exposures to the worst-performing sectors, tend to rank higher in terms of GDP growth. Meanwhile, states with the highest exposures to the worst-performing industries, which is often mirrored by relatively lower exposures to the best-performing sectors, tend to rank lower in terms of GDP growth. (Note: Given we are concerned with net gains since 2019Q4, any reference to industry weights are for 2019). For example, top-ranked Washington is the most exposed to the high-flying information sector. California and New York have larger industries but in much larger economies. And, Washington also has at least slightly below-average exposure to the seven weakest performing industries. Some of the states in the top quintile are heavily exposed to the broad agriculture sector including South Dakota (the most exposed), Nebraska, Iowa, Montana and Idaho. Note that with the drought, agricultural-related gains will partly reverse in the second half of this year. South Dakota, Iowa and Nebraska also have high exposures to finance and insurance, surpassed only by Delaware and New York. Indiana has the most exposure to manufacturing. Bottom-ranked Hawaii is the second most exposed to accommodation and food services (Nevada has the highest exposure, partly explaining its bottom-quintile ranking.) Furthermore, Hawaii has below average exposure to each of the eight strongest performing industries. Meanwhile, though the state’s tourism industry has been making strides during the reopening process, it still has much ground to cover. Hawaii’s leisure and hospitality sector remains around 25% underwater. Suppliers and professional services, which shore up the tourism industry, have felt the ripple effects, while local retailers have been hurt from lack of visitor spending. Second from the bottom, Alaska has the highest exposure of any state to mining even though Texas houses more than half of the nationwide industry (again, the Lone Star State’s economy is much larger than The Last Frontier’s). Along with oil, Alaska’s tourism sector has been slow to recover, with cruise ships hit hard by the pandemic. Other states in the bottom quintile are also heavily exposed to mining, including Wyoming, Oklahoma and West Virginia (coal). And, yes, also relatively more than Texas. The oil sector also weighed on Louisiana’s performance. In addition to industrial structure, the stringency of states’ COVID-related restrictions affected relative economic performance. Economic momentum heading into the pandemic, and the undercurrents shaping it, also played a role in relative state rankings. Looking at real GDP gains in 2019 (on a Q4/Q4 basis), Utah, Washington, Idaho and California recorded top-quintile growth rates at or above 3.5% y/y (with the U.S. total at 2.6% y/y). On the other end of the spectrum, Hawaii was the only state to contract in 2019 (-0.2% y/y). Meanwhile, Alaska, Connecticut, West Virginia and Louisiana also registered bottom-quintile growth rates at or below 0.8% y/y. Bottom Line: The U.S. economy passed the recovery-from-recession mark in 2021Q2, with real GDP posting a 0.9% net gain from its pre-pandemic level. However, industry and state GDP net gains and losses since 2019Q4 paint a K-shaped picture of increasingly stronger and weaker outcomes extending from this national norm. Indeed, even as the U.S. economy was passing the above-mentioned mark, 10 of 22 industries still hadn't recouped their losses from the recession, along with 19 of 50 states. America’s K-shaped recovery has become its K-shaped expansion. |