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Auto Rebound Boosts Economic Growth in Great Lakes Region

05/02/2011 by Jim Haughey, RCD Chief Economist

The economic activity index improved in all regions in the three months through March. The largest gain was in the still depressed Great Lakes region driven by a surge in both auto and machinery production. The annual growth pace in the first quarter jumped to 10.8% in Michigan and 8.7% in Ohio. The economic activity index rose to 6.3% in South Carolina which now has a significant share of the auto industry but the index increased to only 2.2% in Tennessee where the largely foreign auto factories lost market share to domestic producers.

Auto production will weaken in the spring due both to consumers turning more cautious in the face of soaring gasoline price and increasing general inflation and to production cutbacks forced by shortages of Japanese auto parts. The impact will be much bigger in the Southeastern than in the Great Lakes states.

State Economic Activity Index
Annual Growth Rate – last 3 months
(sea. adj. ann. rate)
Great Lakes 6.8 Midwest 5.3
Pacific 5.1 West 4.3
New England 4.6 Northeast 3.4
South Central 3.2 South 3.0
Mid Atlantic 3.0
South Atlantic 2.9
Rocky Mountain 2.7
Plains 2.5
Source: Philadelphia Federal Reserve Bank

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 currently below the national growth rate because much of the 4th quarter GDP gain was due to exports. This data is not available immediately at the state level.

Overall, economic growth in the first quarter was above the US average in the Great Lakes, Pacific and New England regions, near average in the Atlantic and Gulf coast states and below average in the Rocky Mountain and Plains states.

Economic growth remains under a 2% annual pace in ten states with only Kansas (-1.3%) declining. Except for New Jersey, all are commodity dependent states where receipts sagged recently after surging higher in 2010. This negative impact should be brief. New Jersey was the first large state to cut spending sharply to deal with structural (not just cyclical) public deficits. This is likely a preview of how restoring budget equilibrium in other state will negatively impact state economic growth for several years. Structural state budget deficits of $5 billion a year or more are yet to be tackled in New York, Illinois, California and Florida.

Other high growth states — over 6% — in the last three months are Vermont, Oregon, North Dakota and Indiana. Oregon is being boosted by the surging world technology market. North Dakota is enjoying large investments in its rapidly expanding energy industry. Indiana is riding the manufacturing boom. It is more dependent on manufacturing than any other state.

Index Decline from Recent Peak
New England -2.2 Northeast -2.4
Mid Atlantic -2.5 South -5.8
South Central -2.6 Midwest -6.1
Pacific -4.9 West -7.3
Plains -5.3
Great Lakes -6.5
South Atlantic -8.7
Rocky Mountain 11.8
Source: Philadelphia Federal Reserve Bank

Among other larger states, Pennsylvania (5.8%), California (5.2%), Massachusetts (4.9%) and Illinois (4.6%) are experiencing relatively rapid economic growth while New Jersey (0.5%), Georgia (1.5%), New York (2.3%), Arizona (2.6%) and Florida and Virginia (2.7%) are growing relatively slowly.

Massachusetts, North Dakota and Alaska recorded record high economic activity indexes in March. North Dakota surpassed it pre-recession high economic activity index fourteen months ago and Alaska six months ago. Economic activity rose above the pre-recession high in Massachusetts only in March. Economic activity in all other states remains below the pre-recession high level. Vermont and New York and possibly New Hampshire and Texas should reach record high economic activity indexes in the spring. The shortfall from the pre-recession level is 10% or more in eight states, including over 20% in Michigan and Nevada.

Arizona, Florida, Idaho, Michigan and Nevada, the five most depressed states all have very large problems with home foreclosures and falling home prices and each experienced significant outmigration during the long recession.

Regional economic growth trends in 2011 will be dominated, as always, by differences in industry growth rates. Rapid manufacturing growth will boost economic growth in the Midwest, New England and California. High energy prices will add to growth in the oil, gas and coal states. Production expansion will be a major growth contributor in the shale gas regions on the northern Appalachian and Rocky Mountain regions. The weak government sector will restrain economic growth in state capitols and major federal government employment centers. Pending cutbacks in the defense budget will impact late 2011 growth and could be very significant in 2012.

Recent Economic Performance by State

Click here to view the chart
Ranking States by Recent Economic Performance – March 2011


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