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April 05, 2024 | 13:34
America’s Industry and State Leaderboards
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America’s Industry and State Leaderboards |
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The U.S. economy topped all expectations over the past year—including a sizzling second half of 2023, when GDP climbed above a 4% annualized pace. Below, we delve into which industries and regions drove that surprisingly strong growth performance. IndustriesThe mining sector, which includes oil and gas, topped the industry leaderboard, growing 14.1% y/y in 2023Q4 (Table 1). No other broad industry was able to post double-digit real output growth. During 2023, domestic crude oil production averaged a record-high 12.6 mbpd, up 5.6% from the year before, with the weekly production pace surpassing the prior (pre-pandemic) peak of 13.1 mbpd since October. Meanwhile, increased construction activity (see below) caused increased demand for aggregates (i.e., sand, gravel, and crushed rock) to make concrete and roadbeds. |
Despite its top rank, mining is still a relatively small share of the economy (1.4%), and it added less than 0.20 ppts to GDP growth. Meantime, more than 60% of total growth was generated by five sectors: retail trade; construction; information; health care and social assistance; and, professional, scientific, and technical services. This combined contribution to growth was roughly double their joint GDP share. Retail trade was the second-fastest growing sector (9.7% y/y) and the largest single-industry contributor to GDP growth (0.6 ppts). With real personal consumption expenditures (PCE) on goods slightly outpacing the overall economy, this outcome was further supported by business outlays made through the retail channel (think vehicles); ebbing goods price inflation and, in some cases, outright price declines; along with widening sales margins (which get reflected in the sector’s ‘value added’). The construction sector increased 7.5% y/y (ranked 4th), pumped by policies supporting investment in infrastructure, semiconductors and clean energy. Real non-residential investment in structures increased more than 16% y/y in 2023Q4, with the manufacturing sector soaring more than 70%. |
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Real output growth in the information sector along with health care and social assistance both topped 5% (ranked 5th and 6th, respectively). The information sector’s outperformance continues to be driven by data processing (think data centers and cloud computing) and internet publishing. The outperformance of health care and social assistance was mostly owing to expanding ambulatory (outside-of-hospitals) health care services, such as specialized clinics and telehealth. Barely cracking the Top 10 in terms of output growth, professional, scientific, and technical services made the Top 5 in terms of contribution to GDP growth. Like the information industry, ‘tech’ continues to be the dominant driver of this sector’s outperformance, which in this case is computer systems design and related activities. Robust growth in mining and construction is also having an impact in this sector, for example, via increased demand for engineering and architectural services. At the bottom of the industry leaderboard, wholesale trade contracted almost 3%. Part of the weakness reflected the 1.5% pullback in real business spending on equipment, apart from transportation equipment, along with slowing two-way international trade. Meanwhile, retailers have been (re)stocking their shelves less aggressively than in the past, casting a contractionary tide along their distribution channels, as the “Direct to Consumer” (D2C) business model continues to challenge wholesale distribution. Second from the bottom is ‘other private services’, which includes the range of personal and laundry services to individuals, households, and businesses. Not only has this sector’s output contracted in the past year, but it’s also the only broad industry to not yet completely recover from the pandemic recession. Four years after the fact (since 2019Q4), output is still down more than 6%. This is probably picking up the persistence of the ‘work from home’ phenomenon (think less need for dry cleaning). Indeed, remote work and related reduced demand for office space is a headwind for many sectors including accommodation and food services owing to less business travel and take-out lunches (this sector grew at roughly half GDP’s pace), along with administrative and waste management services (the only other broad industry to contract in the past year). StatesA state’s relative economic performance can be explained partly by its sectoral composition. States with greater exposures to the fastest expanding industries tend to rank higher and those with larger exposures to the slowest growing industries tend to rank lower. Kansas topped the state leaderboard with real GSP growth of 6.0% y/y, owing to a rebound in the agricultural, forestry, fishing, and hunting sector [1]. Given the state’s share of the U.S. economy (under 0.85%), this contributed less than 0.05 ppts to GDP growth (Table 2 at end). Texas came in second (5.6% y/y) and was the largest single-state contributor to GDP growth (more than 0.5 ppts). The outperformance was paced by its greater exposure to the top-ranked mining (oil) sector, in which Texas’ real output rose 17.7% y/y. Another important driver of state growth was the real estate, rental, and leasing industry (up 5.4% y/y), a lagging sector nationally. This is where another factor partly explaining a state’s relative economic performance comes into play. Texas (officially) had the third-highest state population growth at 1.6% y/y in 2023Q4, following South Carolina and Florida (both at 1.7%), and well above the nationwide figure of 0.5% (Chart 1). However, recent estimates by the Congressional Budget Office suggest current U.S. population growth is stronger owing to immigration flows (including illegal migrants), which is probably disproportionately impacting Texas (thus lifting economic activity even more). Meanwhile, the Lone Star state boasted a relatively larger and faster growing construction sector (vs. the national average), building factories in addition to homes for new residents. Texas has garnered the largest share of announced (multiyear) investments in manufacturing tied to the trifecta of industrial polices mentioned above ($124 billion or 18% of the $688 billion total). |
Both Texas and Kansas are part of the swath of eight contiguous states running from the southern border with Mexico to the northern border with Canada, that are all in the Top 10 in terms of real GSP growth (Chart 2). There are some themes that stood out among the ‘elite eight’ in terms of their growth drivers. These include mining sectors that were, meaningfully, relatively larger and/or grew faster than the national norm (TX, WY, ND, OK, MT). This was also the case for agriculture, forestry, fishing, and hunting sectors (KS, WY, NE, ND, OK, SD, MT). Across the Great Plains states drought conditions improved last year compared to 2022 and crop yields were higher (which wasn’t great for prices). Finally, the personal incomes generated by Top-10 economic performance, along with some strong population growth, boosted the retail trade and construction (housing) sectors. Six of the eight states sported either first- or second-quintile population growth (TX, SD, MT, OK, ND, NE). Rounding out the Top 10, Alaska (#5) grew 5.2% y/y, with the mining sector contributing almost half of the growth. Supporting Florida’s economic expansion (#6 at 5.1% y/y), the state’s population grew 1.7% y/y, tied with South Carolina for top spot. The state’s construction industry and real estate, rental, and leasing sector are both relatively larger and faster growing. The same is the case for the other nationally leading industries: retail trade (up 14.1%); health care and social assistance; and, professional, scientific, and technical services. Even the state’s wholesale trade sector grew strongly. |
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Elsewhere, California, the largest state economy, expanded 3.7% y/y (ranked 18th but still contributing nearly as much as Texas to GDP growth). The information industry (more than 10% of the Golden State) increased 9.9%, contributing 1 ppt to GSP growth. The sectoral theme of ‘relatively larger and faster growing’ also played for professional, scientific, and technical services along with durable goods manufacturing (kicking in another 1 ppt combined). The arts, entertainment and recreation sector was slowed by strike activity. The state’s above-average growth shines further in the light of its 0.2% y/y drop in population. In contrast to the Great Plains states’ show of strength, the Midwest states are displaying weakness. Ohio and Michigan rank in the mid-30s in terms of real GSP growth, while Illinois, Wisconsin, and Minnesota rank in the low-to-mid-40s. And, like the ‘elite eight’, there are some themes that stood out among the ‘G5’ in terms of their growth drivers. These include durable goods manufacturing sectors that were relatively larger or comparable to the national norm but slower growing (MI, IL which is contracting (-), MN, WI). And the same for nondurable manufacturing sectors (OH, MN, WI) and wholesale trade industries (OH, IL, MN). Also, real estate, rental, and leasing sectors were slower growing (OH, MI (-), IL (-), MN, WI (-)). And, similarly, all five states registered below-average population growth with Illinois contracting (-0.2%). But, proving that strong demographic trends alone are not a recipe for economic outperformance, both Delaware and Georgia, in the first quintile of population growth, were among the three weakest states in terms of real GSP growth. Delaware was the only state that posted negative growth (-0.7% y/y). The heavyweight finance and insurance sector (topping 20% of GSP) contracted more than 5%, partly owing to pressured margins and slowing loan growth. Meanwhile, Georgia grew only 0.5% y/y. It was one of the few states that posted declines in the information sector (-8.9% y/y) as a major news network in the state faced headwinds and there was likely spillover from the Hollywood strike. This sector weighs in above the national norm, which is also the case for wholesale trade (-6.4%). Looking ahead, U.S. GDP growth is expected to slow as this year unfolds, succumbing further to the lagged impact of monetary policy restraint, before starting to pick up in the wake of rate cuts. As always, there’s going to be a wide distribution of industry and state growth outcomes around the national average with its perennial outperformers and chronic underachievers. |
[1] The official figure shows real output in the agriculture (et al.) sector soaring 187% y/y, more than 2½ times any other state including all the ones bordering Kansas (their sectors’ gains were in the 65%-to-75% range), which makes this traditionally-volatile figure a bit suspect. However, even excluding this sector, Kansas real GSP still expanded at a respectable 3.0% y/y rate. [^] |
