Revenue and Spending

Report: 11 States Emerging From Recession

By: David Harrison - November 5, 2009 12:00 am

As the national economy starts its slow recovery, 11 states and the District of Columbia are showing signs of emerging from the recession, according to a new report .

Alaska, Idaho, Indiana, Iowa, Louisiana, Mississippi, Missouri, Montana, Nebraska, North Dakota, South Dakota and Washington, D.C., are in recovery, according to Moody’s Economy.com , an economic forecasting firm. It determines where a state is in the recession based on employment rates, home prices, residential construction and manufacturing production figures. Some or all of these indicators were stable or improving in these states.

The firm also reported that, as of September 2009, Nevada remains firmly gripped by the worst recession because these indicators are still dropping significantly due to the plunging tourism, gambling and construction industries. The rest of the states, while still in recession, have seen the pace of their decline slow down, or moderate.

Moody’s also estimated that the national recession ended in August, although the National Bureau of Economic Research , a private research firm that calculates the official dates of recessions, has yet to declare the end of the current downturn.

“If the U.S. economic recession ended in August, then some of the states had to have ended by then or slightly before,” said Steven Cochrane, managing director of Moody’s Economy.com.

Another index developed by the Federal Reserve Bank of Philadelphia found that seven states -Vermont, Ohio, Indiana, Tennessee, Montana and the Dakotas – were faring better economically in September than three months before, although a Fed spokeswoman cautioned that the index was not meant to predict a state’s future performance. The index is based on unemployment rates, payroll information, hours worked in manufacturing and salary information.

Despite these signs that suggest the recession might be easing, most states’ recovery will lag. Cochrane said that although a state can be technically out of recession when it starts producing more goods and services, managers often wait to hire new workers until they are on firmer financial footing. So it’s not uncommon for high unemployment rates to linger even as the economy recovers.

“We could see unemployment rise right through the first half of next year,” Cochrane said.

And the end of the federal stimulus program could make things worse, he said. Most states have dumped billions of federal stimulus dollars into shoring up gaping shortfalls in their 2009 and 2010 budgets, but their recovery could backslide when almost all of the federal money is gone at the end of 2010. Since it takes several years for state budgets to recover from a downturn, it’s likely that states will be grappling with shortfalls even as the overall economy recovers.

Even with the federal help, some states, including California, Kentucky, Nevada, New York and Washington, struggled with the largest deficits in modern history and will continue to struggle when the money is gone and deep spending cuts have already been made.

Many of the 11 states identified as recovering were spared the worst of the downturn because their housing prices stayed relatively stable, Cochrane said. None saw the spike in foreclosures that ravaged Nevada, Arizona, California and Florida. Also, their unemployment rates, while high, have mostly stayed below the national average and have started to stabilize.

By contrast, the states slammed by the housing crisis likely have another six to nine months of recession to go, Cochrane said. Industrial states, such as Michigan and Ohio, could also lag in the recovery. Both of those states rely heavily on the auto industry, which is struggling to reinvent itself, a transition that will likely take some time and keep unemployment levels high.

The latest jobs figures from the Bureau of Labor Statistics found that Michigan still suffers the country’s highest unemployment rate, at 15.3 percent in September, where it has been hovering for the past four months. Michigan is no stranger to downturns, having never pulled out of the 2001 recession.

In Wyoming, the recession didn’t start until early this year, when natural gas prices tumbled. Employment took a nosedive. “Our unemployment rate increase in the last couple of months was the fastest in the nation,” said Wenlin Liu, senior economist at the Wyoming Economic Analysis Division. “We’ll probably not have much of a recovery until 2012, maybe 2011.”

Wyoming, like Oklahoma, New Mexico and Colorado, depends on natural gas for a significant part of its economy. Until prices rise, those states will slump, Liu said.

Besides having relatively stable housing prices, the states on Moody’s list benefited from their own particular strengths. Energy production revenues helped states such as Alaska, Louisiana, Montana and North Dakota to stay afloat. Louisiana also boasts low business costs, ports that connect it to foreign markets, health care centers and military installations, all of which were well-positioned to weather the downturn.

Mississippi is in a similar position to Louisiana, according to Moody’s. That has allowed it to lure major investment, such as a Toyota plant in the northeastern part of the state.

Both those states are still seeing the effect of money that flowed in following Hurricane Katrina in 2005, said Sujit CanagaRetna, senior fiscal analyst in the southern office of the Council of State Governments. As that money dries up, however, those two states are in for some “rough sledding,” he predicted.

Indiana has been buoyed by a growing medical research industry focused around the state’s universities. The state’s auto industry also got a boost during the Cash-for-Clunkers program.

Meanwhile, some of the other Midwestern states, such as Nebraska and Iowa, benefited from agriculture prices, which have remained relatively high, according to the report.

In Nebraska, the downturn started later and was shallower than in the nation as a whole, said Eric Thompson, director of the Bureau of Business Research at the University of Nebraska-Lincoln. Job losses may have slowed in March, he said, but hiring still hasn’t picked up.

Agriculture plays a major role in Missouri’s economy as well, but the state’s low housing prices and diverse economy, which includes biotech research centers as well as metropolitan hubs in Kansas City and St. Louis, have kept it afloat, according to Moody’s.

Idaho’s high-tech sector continued to attract skilled workers, while its amenities and scenery draw retirees, the report said. Also, the tourism industry there hasn’t been as hard hit as in the U.S. as a whole.

In Montana, the service sector has continued to grow as has the state’s population. Low business costs have also helped weather the downturn, as has the fact that the state was one of only two to avoid a budget deficit last year.

Montana’s slump may also be over but “it still feels very much like a recession,” said Patrick Barkey, director of the Bureau of Business and Economic Research at the University of Montana. The housing bust hurt the state’s huge wood products industry and the decline in consumer spending also means the state is drawing fewer tourists. As a result, when the state’s economy starts to grow again, it will be at an anemic rate, Barkey said.

North Dakota, meanwhile, continues to hum along. The state’s unemployment rate – the lowest in the nation – crossed the 4 percent mark in January of this year and has held relatively steady since then. North Dakota was the only state, along with Montana, to avoid a budget deficit this year.

“Things have been going really well for us,” said Pam Sharp, the director of the state’s Office of Management and Budget. “We don’t feel like we’re in a recession, but we have lost some jobs.”

Elsewhere, in the states where the recession in moderating, according to Moody’s, state-level researchers, waiting for signs of hiring, have been wary of celebrating too soon.

“We called the bottom to the recession in Oklahoma about three months ago,” said Russell Evans, director of the Center for Applied Economic Research at Oklahoma State University. “We’re just hovering along the bottom, waiting for a recovery. It doesn’t make people feel all that much better.”

In South Carolina, the unemployment rate has dropped slightly from its June peak of 12.1 percent. It stood at 11.4 percent in August and 11.6 percent in September, according to preliminary numbers from the Bureau of Labor Statistics. That’s mostly due to discouraged workers giving up, said Sam McClary, a labor market analyst for the state’s Employment Security Commission.

“We’re trying to determine whether we’ve bottomed out or not,” he said. Although buoyed by the slight drop in unemployment, McClary was not ready to declare South Carolina’s recession over. “We’re not ready to jump on the bandwagon.”

States that have invested in high-tech industries or green energy could find themselves in an enviable position, said CanagaRetna. He singled out wind energy in Oklahoma, solar energy in Tennessee and biotech firms in North Carolina as industries that could drag states out of the doldrums. South Carolina could also benefit from a new Boeing plant that the company said it plans to open near Charleston.

“Those states that have a foothold in the area of these new emerging industries will I think be better positioned,” he said.

Russell, of Oklahoma State University, was less sanguine about his state’s wind energy prospects. “I’m probably not overly optimistic that there’s enough to create a big short-term bump,” he said.