Viewing Recessions at the State Level

I've been invited to give the keynote lecture at the Society for Nonlinear Dynamics and Econometrics Annual Symposium next week at the Federal Reserve Bank of San Francisco. I plan on presenting results of some ongoing research with Mike Owyang of the Federal Reserve Bank of St. Louis on regional propagation of business cycles. This is the first of two posts that describe some of our findings about how recessions differ and seem to propagate across different states and regions.

The building block for this research is the same basic framework used to characterize expansions and contractions by the Econbrowser recession probability index. While that index is based on quarterly national GDP growth, Mike and I are looking instead at the quarterly growth rate of employment at the level of individual states. Our starting point was to replicate and update the results from an earlier paper, Business Cycle Phases in U.S. States, which Mike published with Jeremy Piger and Howard Wall in the Review of Economics and Statistics in 2005. The original Owyang, Piger and Wall piece essentially just implemented for state-level employment growth the same algorithm that I apply to quarterly GDP to get the regularly reported Econbrowser recession probability index. They conducted this analysis on each state individually, one at a time, without trying to use information from other states.

What one finds in that exercise is that recessions and individual states can look pretty different from each other. For example, the graph below displays the recession probabilities for individual states around the time of the most recent recession. Dark blue indicates strong evidence of expansion, while the brighter the shade of green, the stronger is the statistical confidence that the indicated state was in recession at that time. The figure dynamically displays the changes between 1999:Q3 and 2001:Q4 (and yes, I'm proud of myself for figuring out how to create these pictures).

What one sees in that episode is some initial weakness in the lower Mississippi basin, which had spread throughout the southeast and much of the upper Mississippi by 2000:Q4. Remember that, according to the NBER, the recession did not begin at the national level until 2001:Q1. As 2001 progressed it came to affect almost every state, though a few states in the Midwest and Rocky Mountains seem to have avoided it, even at the 2001:Q3 trough.

On the other hand, there are other interesting episodes such as 1985, when the collapse in world oil prices produced a boom for most of the U.S., but shows up as a regional recession in the key oil-producing states (such as Louisiana, Oklahoma, North Dakota, Texas, and Montana) which later spread to their immediate neighbors.

The intriguing thing about these pictures is that they seem to suggest some clear patterns and relations between the states, even though there was no assumption of any such structure in the estimation, which ignored everything about Louisiana in forming an inference about Texas. Mike and I have been looking at a broader statistical characterization of how the recessions in different states appear to interact with each other, using the full panel of data from all 48 contiguous states to form an inference about what is going in any given state at any given date. Next week I'll describe how we did that and some of what we found.

Comments

[fabian]

I don't have your technical expertise but on intuition I was asking myself the other day if this centralization of the monetary policy is not becoming more a burden than an asset. Each state has its own economic cycle and that one fits all policy in my opinion could exacerbate problems in certain states whilst not be good enough for other states.
To be the only financial block in the world was certainly an advantage but now, with other blocks emerging (the Euro, China, commodity countries) that will have a more and more influence, I wonder if a more elusive policy would not grant better results. Of course, that would imply dramatic changes ...

[whidbey]

Is the regional economics literature supportive of this "state" view? I am surprised that it is considered a worthwile piece of research for any meeting of economist: who would believe that economic activity is contained or usefully analyized with state lines? Your methods are not intuitively appealing or maybe its your presentation. Hope you can get it published so we can see what you did to reach your conclusions which seem doubtful.

[cheesecake]

intriguing, you seem to be saying that a recession in even one state is contagious and spreads across the region and then maybe nationally. could be possible.