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States of Diffusion

States of Diffusion

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Published by Samuel Rines

While the US emerged from its latest recession in 2009, some States have not benefitted from the recovery as much of others. In many ways, the US is a patchwork of economies that are diverse and unique--much like the EU. Yet, somehow, the US seems to have a coherent economic strategy.

While the US emerged from its latest recession in 2009, some States have not benefitted from the recovery as much of others. In many ways, the US is a patchwork of economies that are diverse and unique--much like the EU. Yet, somehow, the US seems to have a coherent economic strategy.

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Categories:Business/Law, Finance
Published by: Samuel Rines on Jan 05, 2013
Copyright:Attribution

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09/17/2013

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O
n September 10, 2010, the National Bureauof Economic Research announced thatthe Great Recession officially ended in thesecond quarter of 2009. Good news, butin many respects, for huge swaths of the coun-try, the recession never ended. The country as awhole grew 1.5 percent in 2011, but some statesstill had negative GDP’s with higher than aver-age unemployment. The US’ economic diversitybrings a host of blessings. But it can also distortthe strengths and weanesses of the economy asregional growth rates diverge.It is understandable that an economy as vastin geography and expertise as the US would haveregional differences. States are endowed with dif-ferent levels of natural resources and have differing climates. Tax rates and structures differ from stateto state, and “business friendliness” is not uniform.In 2011, states grew anywhere from -1.2 to 7.6percent, and unemployment rates ranged from 3.5percent to 11.7. With any close loo at the num-bers, the US appears to be very much a patchwor of economies.
United-Euro
In this respect, the US resembles another wellnown economic coalition—the European Union.The EU contains many unique economies withparticular specialties and situations. While manyhave high debt-to-GDP ratios, a few have been fis-cally prudent. Some Euro Area members (coun-tries that use the Euro currency) have exceedinglyhigh unemployment. In 2011, The Netherlandshad an unemployment rate of 4.4 percent. Atthe other end of the spectrum was Spain with21.7 percent. Germany’s economy grew a fairlyimpressive 3 percent in 2011; while Spain’s grewat just less than half a percent.The European Central Ban has the dubioustas of attempting to set monetary policy for thelot. It sounds fairly easy, especially considering that the ECB’s singular mandate is to maintainEuro Area price stability, a mandate the ECBhas interpreted to mean inflation of “below, butclose to, 2 percent”. Of course, this applies tothe Euro Area as a whole and not any specificindividual member state. The difficulty ariseswhen, as now, there are tremendous deflationarypressures in some areas, and inflationary pres-sures in other areas.
The Euro Area Dilemma
One of the critiques of the European Union isthat it is not an “Optimum Currency Area”, inwhich countries benefit more from joining a cur-rency union than from remaining independent.In exchange for giving up monetary sovereigntyto an overarching central ban, a member stateshould enjoy lower trade costs with other mem-bers and increased macroeconomic stability. Butit is not all rewards and no cost. There is the
States of Diffusion
Samuel Rines
A PUBLICATION OF CHILTON CAPITAL MANAGEMENT
WWW.CHILTONCAPITAL.COM
January 2013
“The European Central Bank hasthe dubious task of attempting to set monetary policy for the lot.” 
 
2
chance a member may join and become uncom-petitive due to the exchange rate. Much of acountry’s ability to react to economic downturnsis also stripped away in a currency regime, asseen in the EU.It may not really matter. The US is not auniform economy with easy policy measures tospur it to growth. Much lie the South of Europe,the Southern US has struggled to find its legs inrecent years even with Fed policies that are muchmore accommodative than those of the ECB.Indeed the US is not so different from the EUwhen broen into regions and states. Both containareas that struggle with generating growth andreducing unemployment. While the ECB mayhave a difficult time initially, there is hope thatthe EU may eventually coalesce into a single-pseudo economy. The US may be an example of what the EU eventually becomes.
 A Booming Recession
Unlie the Euro Area (which seems to always be viewed through the lens of its individual memberstates), the US economy is viewed as a uniformwhole too often. The reality is that, though bothgrew in 2011, the economy of California differssubstantially from Texas in everything from thedrivers of its economic growth to its tax codes.States with exposure to energy, durable goodmanufacturing, and technology have performedwell. States without them have tended to lag.North Daota is a prime example of a state ideallysituated in the recovery. Sitting on the BaenShale, one of the least populous states posted 2percent growth in the depths of the recession.The US unemployment rate is 7.9 percent, butNorth Daota’s rate is 3.1. In 2011, the state grew7.6 percent—by far the fastest in the country.Statistically speaing, the Great Recession nevermade it to North Daota. There is little reason tobelieve North Daota will slow down significantlyin the near future. But it is a very small economy,and it can grow very quicly without maing asignificant impact on overall US GDP.For perspective, 20 US states grew less than1 percent in 2011, with Alabama, Mississippi,New Jersey, Wyoming, Maine, and Hawaii allexperiencing negative growth. These six statesaccount for about 6.2 percent of overall US GDP.This compares with Texas, which grew at a 3.3percent clip, accounting for 8.7 percent of theUS economy. Size matters. Of the 10 states thatposted GDP’s above 2 percent, only four were sig-nificantly higher: West Virginia, boosted by coal;Texas, with broad based gains in oil and gas aswell as manufacturing; North Daota, driven byoil and gas but broad gains as well; and Oregon,accelerated by strong growth in durable goods.And, while California did not have outrageousgrowth, its 2 percent accounted for 17.6 percentof the nation’s growth, second only to Texas at19.4 percent.
The Fed and the Lagging 20
The disparity maes it much more difficult for theFed to create effective policies for the country asa whole. The Fed may accomplish its unemploy-ment and job creation goal in Texas, for example,but the labor marets in Mississippi and Alabamamay continue to lag.Unemployment rates vary spectacularly fromstate to state, but even by region there are varia-tions. The Pacific region (West Coast including Alasa and Hawaii) had an unemployment rateof 11.0 percent in 2011, but the Fed has almostreached its 6.5 percent goal in the West NorthCentral region where unemployment is 6.6 per-cent. Only when we aggregate these sub-regionsto the regional level—West, Midwest, South, andNortheast— do the variations begin to disappear(though the West still has higher unemploymentthan the other regions). The four regions hadinflation rates that differed by only .2 percent in2011 in a range of 1.5-1.7 percent.The Fed can continue to hold down borrowing rates and purchase assets, so long as the broadestmetrics do not exceed its limits. The aim is for theUS as a whole to have a low unemployment rate.Some areas of the country are liely to be a drag,and others are liely to significantly overshoot tothe upside. Even with the diverse and seeminglydisparate economy, the US does tend to have asomewhat coherent growth trajectory.
States of Diffusion
The EU does not really loo lie a single econ-omy—but on further inspection, neither does theUS. The US loos much more lie a diverse set of economies with little in common except proximityand currency. And it wors. Somehow, some way,
“Much like the South of Europe, theSouthern US has struggled to find itslegs in recent years even with Fed policiesthat are much more accommodative thanthose of the ECB.” “The Fed can continue to hold down borrowing rates and purchaseassets, so long as the broadest metrics do not exceed its limits. Theaim is for the US as a whole tohave a low unemployment rate.” 

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