There is much talk of how the Europe is falling into recession, whereas the US may avoid it. That statement may be broadly accurate, but neither region is homogeneous and here we examine: (1) which specific US states are experiencing the greatest economic improvement and (2) if there are ways to gain well targeted exposure to those states through the equity markets.
Economic Improvement By State
1. Unemployment Change
Though the US unemployment rate is falling overall, the picture at the state level is quite diverse. Interestingly, according to US government statisticians, only 14 states have experienced a statistically significant unemployment decline over the past year (Nov '10 - Nov '11). The key term is statistical significant, that means a decline large enough that it is unlikely to have been caused just by random variation in the data.
These 14 states are:
|State||Unemployment Change November 2010-November 2011 (note: decline is good)|
2. House Price Changes
The second major component of the economic picture for individuals at the state level is house prices. We now cross-tab the change in unemployment together with house prices to see which of the states with significant declines in unemployment are fairing best from a house price perspective. Note this table is a little confusing as a decline in unemployment is good, whereas a decline in house prices is bad, from an economic health perspective. States are ranked by the simple average of house price and unemployment changes over the past year.
|State||Unemployment Change Nov 2010-Nov 2011||House Price Change Nov 2010-Nov 2011|
Sanity Checking The Numbers
So, based on this analysis, our three top states are Colorado, Michigan and Massachusetts. However, even though Michigan is improving, the absolute numbers are terrible. For example unemployment may have declined, but it is still at 10% and house price falls may be tapering off, but they are still down almost 24% on a 5 year basis. For Colorado and Massachusetts, the rate of change picture is generally reliable, overall unemployment is at 8% and 7% respectively and 5 year house price declines are at 5.5% and 12% respectively. So these two states are improving faster than average, but are also at levels that don't represent major economic distress.
Finding Investable Opportunities in CO and MA
If you agree that the economic improvement in Colorado and Massachusetts is relatively appealing, the challenge now is to find equity investments that are centered in those states. This is a harder challenge than it first appears because consolidation in many sectors creates national, if not international businesses, and just because a business is based in Colorado or Massachusetts doesn't mean a that the majority of its customers are there.
Though there are some municipal bond funds that invest specifically in Colorado projects, and might benefit from improvements in the tax base as Colorado improves, the relatively high fees on these funds mean I would not recommend them.
Zions Bancorp (ZION) owns Vectra Bank, which is a significant bank in Colorado, however ZION is sufficiently large that Vectra is a relatively small proportion of the total entity.
Brookline Bank (BRKL) is a good way to get exposure to the Massachusetts economy. Although the company also owns a bank in Rhode Island, a significant proportion of its business is done in Massachusetts and improvements in the state should be reflected in the performance of the bank. BRKL has a market cap of just under $550M and a P/E of 20x and P/B of 1.1x according to Google Finance data.
Bear in mind this analysis is based on lagging government data up to November 2011, the most recent available at the time of writing.
The US economy has significant divergence at the state level, and currently Colorado and Massachusetts are ahead of the curve in terms of rate of improvement in unemployment and slowing decline in house prices. Consider BRKL as a way to gain exposure to the Massachusetts economy. Colorado is also performing well, but I am not aware of a viable investment to take advantage of that trend.
If you have other ideas to gain meaningful exposure to these states through equity investment, please add them to comments.