Patching Together the U.S. Economy


By Margaret Popper At a BusinessWeek-sponsored conference in San Diego in late June, a group of execs were talking over lunch about what they see on the horizon for their businesses. One side of the table maintained the outlook was much bleaker than the picture painted by the national media. "From what our clients are telling us, things are going to get a lot worse in the third quarter. This is going to be much worse than anybody thinks," said an ad executive from New York.

A media consultant from the Los Angeles area agreed: "You can see it in the real estate market, too," he said. "We're trying to sell a property of ours in Huntington Beach. When we put the house on the market in February, there were six others in our price range. Now there are 38."

On the other side of the table, the conversation had a decidedly different tone. The CIO of an Ohio-based retailer declared he was still hiring and intended to increase his information-technology spending this year vs. last year. "Sure, we're seeing slower growth -- maybe we planned 4% to 5% [earnings] growth over last year and now we're expecting 2% growth -- but it's not a disaster," he said. A consultant from Chicago noted the real estate market there was booming: "There are 20 new residential towers going up."

THE GREAT DIVIDE. The two sides of the table weren't living in different worlds, just different regions of the U.S. There is no doubt the slowdown is nationwide, but the severity depends on where you live. Regional differences are largely caused by the industrial mix of local economies, but there are other factors, such as energy costs or the demographics of a regional population, that can affect the general feeling of well-being in a state or region.

The lunch discussion was no fluke: If you look at the statistics and anecdotal evidence, the coasts -- particularly the West Coast -- and many states along the northern and southern borders of the country have been harder hit than the middle of the country in this downturn.

The industrial mix of the U.S. varies widely from state to state. Those with high concentrations of tech, like California, or manufacturing, like North Carolina, benefited in the past couple of years as these industries boomed. Now they are bearing the brunt of the downturn.

Service-oriented economies like those in the Southeast (the Tarheel State excepted) are holding up better. States that rely heavily on agriculture haven't felt the slowdown to the same degree as some of their neighbors, because their economies have been suffering from low crop prices for several years now.

THANK-YOU STATES. If we escape a recession, we may well have to thank a swath of states stretching from Nevada and Utah across the plains all the way to Kentucky and Tennessee, along with pockets of prosperity in the Southeast and New England. A state like California, with a big economy that had further to fall, will take longer to recover. Meanwhile, it is likely to provide more of a drag on the economy on the way down, just as it helped to lead at the boom's peak.

"The high-tech industries led the boom, and the regions that benefited from high tech are also the ones feeling the decline the most," says Fiona Sigalla, an economist at the Federal Reserve Bank of Dallas. Although the Texas economy would be far worse off than it is without oil and gas, it has also been hit hard by the tech downturn.

The high concentration of telecommunications companies in North Dallas' Richardson corridor contributed a lot to the growth of the Texas economy. "The area has felt the cutbacks in the real-estate sector as [these telecom] firms have consolidated," says Sigalla. "Fast job growth has turned into layoffs." In the late 1990s, Texas overall experienced a 4% to 5% annual rate of job growth, she says. That has dropped to 2% in the current year.

MEGA-WOES. The most recent state unemployment statistics indicate that a big part of the worsening employment picture can be attributed to the mega-states of California and Texas. Of the 50 states, 19 had jobless rates above the national average of 4.4% in May, according to a Bureau of Labor Statistics report. Of those, 12 had a change in their unemployment rate of less than 0.9 percentage points between May, 2000, and May, 2001. In other words, before the slowdown they probably had lower employment than the national average.

Another five of the states with higher-than-average unemployment -- Washington, Alaska, Idaho, New Mexico, and North Carolina -- saw their jobless rates rise between 1 percentage point and 1.9 percentage points during that year. California and Texas were the only states of the 19 that saw unemployment rise 2 to 2.9 percentage points between May, 2000, and May, 2001. California's unemployment rate hit 4.9% this May, and Texas' was 4.5%.

"Economic cycles never treat everyone the same," says David Blitzer, chief economist for Standard & Poor's, like BW Online a unit of The McGraw-Hill Companies. "New York City has become more focused on financial services over the past 20 years, so changes in the capital markets ripple through its economy with more severity." The Midwest and mountain region of the country have been somewhat protected from both the drop in the capital markets and the tech wreck because these industries are not dominant there, he says.

In the Southeast, including South Carolina, Georgia, and Florida, demographics have had a key influence on the economy. "These are the places attracting the aging baby boomers," notes Marci Rossell, chief economist at Oppenheimer Funds. While real estate has held up in this region, the fixed incomes of retirees have been hurt by declines in the financial markets.

MANUFACTURING WHAMMY. Service-oriented economies are doing better in this downturn than manufacturing-oriented economies. "Washington, D.C., is the ultimate service economy, and over the past year, unemployment there has dropped a tenth of a percentage point," points out Ray Owens, economist at the Federal Reserve Bank of Richmond, Va. "The most service-oriented economies by state in our district are Maryland and Virginia. Maryland had unemployment of 4% a year ago and now it's at 3.7%."

Of course, there are nuances even within regional economies. Virginia's unemployment rate, which thanks to Northern Virginia is generally below the national average, actually rose to 2.9%, from 2.2%, between May, 2000, and May of this year. That's due to the heavy concentration of high-tech companies in Northern Virginia.

Compare that with North Carolina, which may rank second or third in manufacturing in the country, according to Owens. A year ago North Carolina had unemployment of 3.6%, and now it's at 5.2%. Small wonder that California, with the double whammy of being the No. 1 manufacturing state and a bastion of high tech, experienced a comparable run-up in unemployment to around the same level as North Carolina.

"STEADY AS SHE GOES." For now, the strongest economic scene is in the middle of the country. "The bulk of energy extraction occurs in mid-America, and any economy where they are producing energy is going to be better off than an area where they don't," says Oppenheimer's Rossell. But there's a lot more to it than energy. "Housing has stayed strong in the midst of the downturn and [consumer spending] hasn't been falling off to the same extent" as elsewhere, she adds.

If these states can somehow keep from being hit as hard by the downturn as places like California and North Carolina, the nation should continue to avoid a recession. Popper covers the markets for BW Online in our daily Street Wise column


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