Sustained Recovery Underway in 46 States

Economic activity expanded in forty-six states in the three months through May which is persistent enough to assure that a sustained recovery is underway. The economic activity index increased in forty-seven state in May from April. The recession is still lingering in Alaska, Montana, Colorado and Nevada which all experienced no growth in the last three months and had a steady or declining economic activity index in May.

The rise in the state economic activity indexes is consistent with May national data for jobs, consumer spending and factory production which all improved. A broader and stronger expansion likely occurred in May based on early reports for jobs and consumer spending, specifically over 400,000 people hired for temporary 2010 Census work. Over 200,000 Census workers were laid off since the May jobs survey date and most of the rest will finish work in June or July. This will drop a few states back into recession conditions during the summer.

The growth rates are the state economic growth indexes calculated by the Philadelphia Federal Reserve Bank from state employment and income data which are benchmarked to approximately track national GDP growth. State growth rates are below the national growth rate. Most of the 1st quarter gain in GDP and a large share of expected GDP growth in the second quarter were due to reduced inventory absorption. This data is not available at the state level.

State economic activity indexes remain below the 2007-08 peak level in every state. The gap is under 2% in Alaska, New York and the Dakotas. The commodities boom made the recession late and mild in Alaska and the Dakotas. New York weathered the financial collapse much better than expected and suffered a relatively small construction decline. Long and expensive permitting practices caused New York to enter the recession with relatively small space surpluses and construction trade unions made major wage concessions to keep projects underway and about to start profitable for developers.

Current economic activity remains 10% or more below the recent peak level in thirteen states. The 29% shortfall in Michigan mostly reflects the collapse of the auto industry which began well before the recent recession. Michigan, Ohio and Indiana are now expanding at a 7% annual pace, more than twice as fast as the rest of the country. The manufacturing boom for exports and machinery that drives this will gradually subside. But manufacturing dependent states will expand very strongly well into next year. But it will take longer than that for the huge space surpluses that built in the last decade to be absorbed so that additional general use space is needed.

Among larger states, the smallest gaps are 3-5% in Louisiana, Massachusetts, Texas, Minnesota and Virginia, Iowa and Connecticut. The California and New Jersey economies remain 5 plus percent below the pre-recession peak activity level. Both of these states have serious budget problems, as does New York, which will restrain their expansion over the next few years as public spending is absolutely cut.

The manufacturing boom has pushed the industrial Great Lakes states past New England as the strongest regional economy after many years at the bottom of the list.

In New England, the large technology and professional services sectors are leading the recovery from a relatively mild recession. Metro Boston is the strongest part of the regional economy with Rhode Island and Maine, which have not attracted today’s high growth industries, the weakest part. The boom continues in production and hiring in the very cyclical durable goods industries in the Midwest. . Economic growth remains sluggish in Illinois. The constraints in Illinois are weak coal and corn prices, a large dependence on slow growing non-durables manufacturing plants and one of the most serious state budget deficits in the country.

The Pacific, Mid-Atlantic, Plains and Gulf regions are all growing at about the national average. Growth is above average now in New York, Texas, Minnesota and California. California is getting a boost from the rapid recovery in technology industries which export most of their production. Texas continues to attract immigrants although its energy industry has weakened. Minnesota has a favorable mix of the durable goods manufacturing that is boosting the Great Lakes states and the farm products that are supporting income growth in the Dakotas.

The Rocky Mountain States are the weakest part of the national economy. This region is now further behind its previous peak activity level than the Great Lakes Region. But unlike in the Great Lakes Regions, the Rocky Mountain Region has barely positive current economic growth with several states still in decline. This region was the hardest hit by the housing collapse. The large coal industry has experienced a substantial drop in volume as well as much weaker prices. The very income sensitive tourist industry has an abrupt decline and only now beginning to recover. Although impossible to document, the recession forced many immigrant workers to leave the region and reduced the in flow of new immigrant workers.

Caution: While all of the drivers that set off the pre-recession boom in this region are now dormant, they will return a year or two ahead. The Rocky Mountain States still have cheap land, cheap and abundant labor, low business operating costs and large commodity resources. Recovery in this region will be quicker than it was in Midwest industrial states.