Focus
April 01, 2021 | 13:34
States of Recovery
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
States of Recovery |
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All 50 state economies expanded in 2020 Q4, capping a year in which they followed the exact same pattern: two quarters of recession, with Q2 seeing the worst of it, followed by two quarters of recovery, with Q3 being the best. For the U.S. economy, the 8.6% second-half recovery was not enough to offset the 10.1% first-half recession, leaving GDP down 2.4% from where it stood at the end of 2019. We reckon it should surpass its pre-pandemic level in the current quarter. |
However, five states have already completely recovered from the pandemic recession; talking GDP of course, not jobs (Table 1). Leading this group: Utah’s real GDP was 1.8% above year-ago levels in Q4, followed by Iowa, South Dakota, Washington and Idaho all in the 0.0%-to-0.5% range. Meanwhile, several states still have more than double the national average in terms of economic ground to make up. Hawaii’s situation is the worst with Q4 GDP down 8.4% y/y. The Aloha State is followed by Wyoming, New York, Oklahoma and Louisiana with shortfalls in the 5%-to-7% range. Between these leading and lagging groups, there appears to be a geographical theme to relative economic performance. All the states in the top quintile and 15 in the top 20 are situated in a large swath running from Washington and Idaho in the northwest to Alabama and Georgia in the southeast, bordered by South Dakota and Iowa on the north and, on the south, by Arizona and Texas (Chart 1). However, this large swath also includes bottom-10 members Wyoming, Oklahoma, Louisiana and New Mexico. Meanwhile, apart from Hawaii and Alaska, the other members of the bottom quintile and nearly half of the bottom 20 are in the northeast quadrant. Here, Indiana’s borderline top tier performance is also an exception. |
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Relative economic performance is mostly driven by a state’s industrial structure and how its dominant industries are doing. The former can reflect geography; think agriculture in the Plains states, oil and gas in the Southwest states, and manufacturing in the Great Lakes states. However, since COVID-19, relative economic performance is also being driven by the stringency of a state’s pandemic-related restrictions; less stringent policies impose less constraints on economic activity, and vice versa. Finally, some states were boasting strong economic momentum before the pandemic hit, helping them perform better than others with weak momentum. |
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Again, for the U.S. economy, a pattern of first-half recession followed by second-half recovery was mimicked by the main industrial sectors, with a few exceptions (Table 2). The federal government’s output didn’t contract during H1 as it combatted the pandemic. The broad mining sector and utilities both continued contracting in H2. The former reflected depressed crude oil output and the latter reflected reduced energy demands for cooling/heating owing to weather outcomes. However, several sectors ended 2020 with output above year-ago levels. The industries having fully recovered from the pandemic recession included those with outdoor production such as the economy-leading broad agriculture sector (up 7.3%, assisted by flourishing crop prices) and construction (up 1.3%, helped by a hot housing market). They also included those most amenable to ‘working from home' (WFH) such as finance and insurance (up 5.6%, also helped by a hot housing market and record equity prices), information (up 2.8%, aided by expanding e-commerce and benefitting symbiotically from WFH), and management of companies and enterprises (up 0.7%). Durable goods manufacturing was also able to recover completely, up 0.7% despite lagging vehicle production, as the demand for goods, broadly, was bolstered by income support measures and the shift in outlays from services. |
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However, this group of now-expanding industries was unable to offset the collection of still-contracting ones, hence the aggregate result (-2.4% y/y in Q4). The latter group includes six industries sporting double-digit declines, led by arts, entertainment and recreation (down 39.5%) along with accommodation and food services (down 23.0%). These two sectors obviously involve a high degree of personal contact and, hence, were the hardest hit by the pandemic-related restrictions along with the lack of ‘confidence to crowd’. This was also a theme for transportation and warehousing (down 14.1%, e.g. airlines and public transit), other services (down 11.8%, e.g. salons and barbershops), and education services (down 11.3%). After continuing to contract in H2, output in the broad mining sector was down 14.7%. State exposure to these best- and worst-performing industries, compared to the national average, can partly explain relative economic outcomes, assuming a state’s individual industry performance is comparable to the industry’s nationwide performance. Obviously, this is not always the case given the relative stringency of pandemic-related restrictions along with other things like local labour disruptions and extreme climate events. Importantly, the impact on relative economic performance is reinforced to the extent that larger exposures to the strongest industries are mirrored in smaller exposures to the weakest industries, and vice versa. For example, among the five states having completely recovered and the others in the top quintile, Iowa, South Dakota and Idaho have more exposure to the broad agriculture sector (compared to the 2019 U.S. share, 6.4 ppts, 9.2 ppts, and 6.6 ppts more, respectively). Iowa and South Dakota also have higher exposure to finance and insurance (by 6.4 ppts and 4.4 ppts, respectively). Washington and Georgia have more exposure to information (10.2 ppts and 3.0 ppts). For Alabama, it’s durable goods manufacturing (4.8 ppts). Utah is an interesting case in that it has higher exposures to construction (1.8 ppts) and durable goods manufacturing (1.0 ppts) but these don’t seem to be that extreme given the state’s top ranking. For the states in the bottom quintile, Hawaii, Vermont and Maine have more exposure to accommodation and food services (by 6.6 ppts, 2.4 ppts and 1.4 ppts, respectively). Wyoming, Oklahoma, Louisiana, New Mexico and Alaska have higher exposure to the broad mining sector (22.4 ppts, 18.3 ppts, 4.5 ppts, 14.7 ppts and 2.5 ppts). Hawaii, Wyoming, Oklahoma and Alaska also have more exposure to transportation and warehousing (2.4 ppts, 5.6 ppts, 2.6 ppts and 7.9 ppts). The lagging automotive sector largely drove Michigan into the bottom tier, while Nevada barely avoided it despite its higher exposure to accommodation and food services (9.6 ppts) along with arts, entertainment and recreation (1.8 ppts). New York is another interesting case in that it doesn’t have extreme exposure to any of the weakest industries, but it does have more exposure to finance and insurance (9.3 ppts) and information (4.4 ppts). The cases of Utah and New York emphasize another driver of relative economic performance in 2020: the stringency of a state’s pandemic-related restrictions. A New York Times study looked at how these policies unfolded over the March 1-November 16 interval employing the ‘Coronavirus containment index’ constructed by Oxford University [1]. The average level of this index over the interval is a measure of the cumulative stringency of a state’s restrictions; it picks up the regional differences in timing and intensity of policy changes. The study ranked the state indices from the least to the most stringent policies (Table 3) [2]. |
For the states in the top quintile of real GDP growth, four were among the 10 jurisdictions with the least stringent polices, including Utah. For the states in the bottom growth quintile, five were among the 10 jurisdictions with the most stringent policies, including New York. And there were some interesting juxtapositions. Colorado had top-tier growth but policy stringency was well above average (34th), suggesting the state’s higher exposure to construction (by 1.3 ppts) might have helped. Oklahoma had bottom-tier growth but also the fourth least stringent policies, as negative oil sector developments weighed heavy. Economic momentum heading into the pandemic, and the underlying factors influencing it, appeared to matter as well. Utah, Washington, Idaho and Colorado were among the fastest growing states in 2019, with growth of at least 4.0% (the U.S economy was up 2.3% y/y in 2019 Q4). Meanwhile, Hawaii, Oklahoma, Vermont and Alaska were among the slowest growing states with rates under 1%. Interestingly, Iowa, top-tier in 2020, was also in the under-1% group in 2019. New Mexico, bottom-tier in 2020, was the fastest growing state in 2019 at 5.4%. Bottom Line: All the factors mentioned above (industrial structure, stringency of restrictions and prior momentum), taken together, help inform on relative economic performance and the extent of recovery across the 50 states. As the U.S. economy likely crosses its GDP recovery line in Q2, so, too, will more states and industries. Indeed, with restrictions being relaxed after COVID cases peaked (nationwide) in early January (Chart 2), and with vaccine rollout having gone full throttle, there are brightening prospects for last year’s lagging industries and states playing some catch-up this year. |
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Endnotes:[1] See https://www.nytimes.com/interactive/2020/11/18/us/covid-state-restrictions.html. The Oxford COVID-19 Government Response Tracker records changes in national and sub-national government responses to COVID-19, focusing on containment and closure policies (e.g., school and workplace closings, restrictions on gathering size, stay at home requirements), and health system policies (e.g., testing, contact tracing, facial covering). [^][2] By the study’s interval end many states were already increasing or extending restrictions owing to the second-wave surge in COVID-19 infections. While this could alter the potential year-end ranking, since the indices are already averaging over the previous 8½ months, relative positions might not change that much. [^] |
With files from Shelly Kaushik. |