EconSouth (First Quarter 2002)
EconSouth (First Quarter 2002)
Now and Then:
Dissecting Regional Differences
Looking at national and regional patterns in economic data during recessions can be useful in learning about their effects. But because of differences in the nature of recessions over time and variations in the economic environment across regions, comparisons of recessions can point out as many differences as similarities. A comparison of the 1990–91 recession and the one beginning in March 2001 highlights such similarities and differences and their effects on the Southeast.
emarkable,” “a dynamo,” “a well-oiled machine” were some of the words and phrases used to describe the U.S. economy during the nation’s longest post-World War II expansion, which began around April 1991. During 2001, however, a dramatic change occurred as the U.S. economy experienced a sustained contraction in aggregate economic activity, the first in a decade. According to the National Bureau of Economic Research (NBER), a peak in business activity occurred in March 2001, and while economic conditions were showing signs of improvement in early 2002, an end to the current recession had not been announced at press time for this article.
A recession begins just after the economy reaches a peak of activity and ends as activity reaches a trough. Between trough and peak — after surpassing pre-recession levels — the economy is in an expansion. To determine the beginning and end of a recession, the NBER looks at several factors, including the pace of wholesale and retail sales and personal income less transfer payments like welfare. But the most important variable is the level of aggregate employment. In the current downturn, total payroll employment growth gradually began losing momentum (growing at a slower rate), from the summer of 2000. The number of jobs reached a peak in March 2001 and subsequently declined.
The level of aggregate employment is an important statistic for gauging the health of the national economy because it is the broadest available monthly measure. However, aggregate national data do not provide the full story of how individual regions weather a recession because national employment statistics do not equally represent regional economic activity. Each recession affects regions differently depending on the local economic conditions at the time. A comparison of the Southeast to the nation in the current recession as well as a comparison of the region’s performance in the current recession versus the 1990–91 recession illustrates these types of variations.
Employment data reveal disparity
Chart 1 displays employment levels in the United States and the six states in the Southeast from fall 1999 until December 2001. To best compare turning points and the relative pace of change before and after the turning point, employment levels have been scaled so that employment is equal to 1 in March 2001.
The data indicate that aggregate U.S. employment peaked in March 2001 although it did not decline significantly until September of that year. As is usually the case, a turning point in the level of economic activity is discernible from the data only well after the event.
In the Southeast, there was considerable diversity among the six states in the timing of peak employment levels. In Mississippi, for instance, employment peaked in August 2000 — well before the beginning of the current recession — whereas in Florida it did not peak until mid-2001. Louisiana’s employment has been relatively stable during the current recession. However, the state started with a much weaker employment base, which has displayed little growth since mid-2000. In contrast, Georgia’s employment was growing at about the same pace as the nation’s before peaking in April 2001, but it has subsequently declined more sharply than the nation’s.
If this type of disparity were typical of recessions, then it could be used to infer the likely regional effects. But recessions differ in their sources, depth and duration.
This difference is illustrated by comparing employment data for the period 1989 to mid-1991 (see chart 2) with data from the current recession. Like chart 1, the employment levels in chart 2 are normalized to 1 as of July 1990, which was the beginning of the last recession, according to the NBER. This comparison highlights several differences between the two most recent recessions. For example, in the last recession, employment at the state level, except in Louisiana, more closely tracked the national trend, with much less divergence in the timing of the peaks.
An exception to this trend was Louisiana, where employment continued to rise during that recession. Louisiana’s divergence from the national trend can be attributed to the state’s economic dependence on the oil industry, which experienced a boom as a result of the higher prices for oil brought about by the Gulf War.
Manufacturing sparks different reactions
But there are other differences between the two most recent recessions. Part of this difference stems from the experience of the manufacturing sector.
For the nation as a whole, manufacturing employment, which represents around 14 percent of total employment, began to decline in the fall of 2000, as did industrial production (see chart 3). Broadly speaking, a similar pattern developed in the manufacturing sectors in Alabama, Florida, Georgia and Tennessee. Louisiana’s manufacturing employment was stable through early 2001, supported by robust oil and gas activity in the state.
The other regional exception to the general pattern is Mississippi, where employment in manufacturing had declined steadily for more than a year before the beginning of the current recession in March 2001. This development is particularly important because of the relatively high concentration of manufacturing employment in Mississippi, which represents around 20 percent of all payroll jobs in the state.
Part of the decline in Mississippi’s manufacturing sector is due to the secular contraction of the state’s apparel industry in the face of strong foreign competition and weakening domestic demand. But part of the decline is also cyclical. In 2001, Mississippi’s producers of capital equipment such as electronic equipment and industrial machinery experienced a greater percentage of job loses than did the apparel industry.
Notably, since the onset of the current recession, the decline in the Southeast’s manufacturing payrolls has generally been less severe than in the nation as a whole. Aggregate manufacturing employment for the nation declined by some 6 percent during the nine months between March and December 2001 compared with an average 4 percent decline in the Southeastern states. One reason for this difference is that the current recession has taken a particularly heavy toll on producers of durable consumer and capital goods, industries that are less concentrated in the Southeast than in the nation as a whole.
The nation, in fact, has one-third more people employed in durable goods industries than in nondurable goods industries whereas in the Southeast the durable goods sector currently employs about the same number of people as the nondurable goods sector. But times have changed. In 1990, by contrast, the Southeast employed around 10 percent more people in nondurable goods production than in durable goods production. Over time, this relative concentration has been changing gradually as some nondurable industries, such as apparel, have contracted and durable goods industries, such as autos, have expanded in the Southeast.
The manufacturing sector’s overall performance in the region has also been different during the current recession in comparison to the previous recession. In the 1990–91 recession, manufacturing employment in the Southeast was stable before the recession and actually grew in some states during the recession (see chart 4). For instance, it is particularly notable that Mississippi’s manufacturing sector was not in sharp decline prior to that recession, and the impact of the recession was relatively small on the state’s manufacturing sector. Of course, the fact that the recession largely swept past Mississippi, having only modest negative effects, does not imply that the state’s economy was in great shape. Mississippi at that time, in fact, had the region’s highest civilian unemployment rate.
In Louisiana, as noted earlier, manufacturing employment grew during the 1990–91 recession because of the domestic oil boom brought about by the Gulf War. The other Southeastern states more or less tracked national trends although Alabama’s manufacturing sector, like Mississippi’s, was relatively unaffected by the recession. Florida’s manufacturing sector was particularly hard hit during that recession by cutbacks in aerospace defense spending and a decline in demand for building materials.
During the nine-month period of the 1990–91 recession, aggregate employment in manufacturing declined by only 4 percent, the smallest percentage decline in any postwar recession. One reason for the relatively mild impact on manufacturing both nationally and regionally was that the recession was concentrated more in real estate and related industries like banking (see chart 5).
Residential real estate
The experience of the Southeast’s two largest markets for existing home sales, Florida and Georgia, illustrates several facets of the 1990–91 recession’s impact on real estate markets.
First, there was substantial volatility in home sales before and during the recession. The nation experienced a 10 percent decline in the rate of home sales during the recession, and Georgia and Florida experienced even larger declines. In these two states problems in the real estate sector were evidenced by an almost 50 percent decline in single-family building permits from their cyclical highs in the mid-1980s. The flood of speculative construction during the 1980s led to a glut of housing inventory, but by the end of the recession the pace of home sales had recovered both nationally and locally.
In contrast to the 1990–91 recession, the current downturn has had a relatively small effect on housing markets thus far (see chart 6). National and Southeastern residential real estate markets have displayed much less volatility and, in fact, have held up quite strongly even as the recession has unfolded. This relative strength is due in part to the favorable interest rate environment and in part to the fact that workers’ incomes, in the aggregate, have held up well even in the face of weakening labor markets.
Typically, housing demand wanes during a recession as incomes stagnate and homebuyers postpone their purchasing decisions. Residential investment contracted considerably in the years leading up to the 1990–91 recession and then into the recession, starting with a 0.5 percent decline in 1988 and culminating in a 13 percent decline during 1990–91. In contrast, residential investment grew nearly 0.8 percent in 2000 and 1.4 percent in 2001.
If residential real estate markets remain relatively strong into 2002, housing may not provide the kind of cyclical boost that it has typically done as a recession ends because there is less pent-up demand for housing.
Variations on a theme
While recessions are defined in terms of declining aggregate employment, industrial production, sales and income, each recession also has its own individual identity. This individuality is particularly evident when looking across regions of the country and can be attributed at least partly to differences in the industry mix between states and the nature of the economic shocks hitting the economy at a given time. Understanding local or regional economic activity during a particular recession requires looking beyond national trends.
In addition to the difference between regions, there can also be considerable variation between different time periods. Because the mix of industries changes only rather gradually at a regional level, this type of variation can be attributed mostly to differences in the nature of the economic downturn. While the current recession has been heavily concentrated in the manufacturing sector, with some spillover into other sectors, the 1990–91 recession was concentrated primarily in real estate and financial sectors with a spillover to manufacturing.
When comparing the depth of the current recession with the previous one, it seems the current recession is less severe overall and has witnessed lower retrenchment in traditionally highly cyclical sectors such as housing and automobile manufacturing. If this recession is indeed milder than the last, then the pace of recovery will likely not be boosted by the traditionally pro-cyclical sectors such as housing and automobiles, which are already operating at a robust level. For that reason, one might suspect that the pace of the ensuing economic recovery this year may be more moderate and more gradual than has often been the case in previous recoveries.