By Michael McKeown, CFA, CPA - Chief Investment Officer
Whenever people talk about the “U.S. economy” in broad terms, we can forget how diverse the industries and regions are in this vast land. The Federal Reserve Bank of Philadelphia publishes an index every month for all 50 states to provide a gauge of where growth stands today and where it points in the months ahead. The Leading Index takes into account employment, manufacturing, housing permits, and interest rates. We will look to see what this data shows us about economic conditions today and if we can draw any parallels to the past.
Let’s start with looking at how many states out of 50 show expansion. The graphic below shows the total count on the vertical axis with time on the horizontal axis. Only four times in its history have less than 40 states been positive – 1982, 1986, 1990, 2001, and 2008. The only one of these years that did not contain a recession was 1986.
Today, 45 states show expansion with Tennessee and Nevada at the highest levels. On the other end, just slightly in negative territory is Iowa followed by Louisiana, North Dakota, West Virginia, and Wyoming.
Next, we have five states chosen for the size and differences in their economies, including California, whose $2.4 trillion in economic output is roughly the same size as France. Here is how the Leading Index for each state grew and contracted over time.
The dip in the above chart in 1986 from both Texas and North Dakota were from the oil price shock that year, when prices fell 61% in just a few months. Over-supply drove prices down, rather than less demand from end consumers and businesses. This is similar to the situation today, where fracking in the U.S. and continued pumping from abroad led the supply of oil to overwhelm the price, thus pushing it from $115 per barrel in June 2014 to $27 per barrel in January 2016 to about $45 per barrel today.
In the first quarter, markets worried that the oil price fall was indicating a demand problem. Our friends at Guggenheim coined the phrase, “The Great Recession Scare of 2016,” which may end up sticking as demand seems to be in good shape. The states showing negative data have economies reliant upon the energy sector – North Dakota, Wyoming, West Virginia – so the supply shock idea holds weight, while the most other states continue to do well.
Let’s look at where most of readership comes from, Ohio. Ranking 7th in the country in terms of Gross Domestic Product, the Ohio economy produced just shy of $600 billion in economic activity in 2015. The Coincident Economic Index tells us where the economy stands today using changes in employment, hours worked, and wages/salary growth.
This index grew at 3.2% over the last year, down from the cycle peak of 4.9% in 2012, but still a fairly healthy clip. Given Ohio’s diverse economic engines from manufacturing, healthcare, financial services, energy, and education – it is a nice gauge and currently shows expansion.
States with economies reliant upon the energy sector are feeling the pinch from lower commodity prices, but if oil keeps going up or holds steady, this will help. Otherwise, most states are chugging along nicely.
This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.