Ohio’s Economic Momentum
In recent remarks, Federal Reserve Bank Chairman Ben Bernanke has stated that “from a technical perspective, the recession is very likely over at this point.” The data that lead him to that conclusion are unfortunately not produced at the state level, so it’s not possible to tell what they would show about the degree of recovery in individual states. But another source can give us an idea, the Federal Reserve Bank of Philadelphia’s state coincident indexes, which measure real-time changes in state economic activity.
While the NBER has yet to officially pinpoint the trough, a growing consensus among economists puts the “technical” end of the recession at some time during the summer of 2009. As we pointed out in an earlier article on Ohio’s Business Cycle, Ohio typically enters recessions earlier than the nation and stays in them longer. In particular, data from 1979 to the present show that “On average, Ohio’s economic activity slowed 5.5 months prior to the typical national recession and recovered 1.3 months later.” Even though this has not been your “average” recession, Ohio may already be recovering.
The Philadelphia Fed’s state indexes show that economic activity in Ohio was stagnant though much of 2007 and into the early part of 2008. It began to fall off sharply in late 2008, decreasing 10.9 percent from its peak in May 2007. But in recent months, declines have been gradually slowing, and in September and October, economic activity began to post small increases.
Across the 50 states, economic activity has varied markedly over this recession, ranging from −22.1 percent (Nevada) to +2.3 percent (North Dakota). The Fourth District states of Pennsylvania, West Virginia, Kentucky, and Ohio all have fared worse than the nation. Each saw larger declines than the nation’s −3.7 percent: Pennsylvania, −14.2 percent, West Virginia, −13.5 percent, Kentucky, −11.3 percent. Surprisingly, Nevada and Arizona are the only “housing bust” states to see declines in economic activity in excess of 10 percent, while declines in the manufacturing-intensive states of Michigan, Oregon, and Washington have exceeded −15 percent.
For a simple visual interpretation of the data, coincident indexes can be translated into “momentum tracks.” A momentum-tracks chart is a scatter plot of the year-over-year percent change in the index (X axis) and the three-month annualized percent change (Y axis), with sequential data points connected by a line. The chart is divided into four quadrants, each representing a stage of the business cycle: The upper right quadrant, where both measures are positive, represents “expanding” activity. The lower right represents “slipping” activity, as the year-over-year percent change is positive, but the three-month change is negative. The lower left shows “contracting” activity since both measures are negative, and the upper left shows “improving” activity since the year-over-year percent change is negative, but the three-month measure is positive.
After having spent the past 19 months in the “contracting” quadrant, Ohio’s economic-activity momentum changed to “improving” in October. Ohio’s momentum looked dire for a brief period, but that started to change in March 2009. At that point, it made a distinct turn toward “improving,” signaling that the worst of this recession had passed and that better times lay ahead.
Momentum tracks from previous business cycles show a similar yet less pronounced pattern. Economic activity takes a sharp fall into the lower two quadrants and is then followed by a distinct turn toward “improving.” Once in the “improving” quadrant, it takes an average of six months for economic activity to move into “expanding” territory again. However, given the severity of this downturn, it is unlikely that economic activity will return to “expanding” within six months.
Research conducted by the Philadelphia Federal Reserve Bank finds that states experience downturns at different times and to varying degrees. Comparing the October 2009 momentum data points across states also confirms this observation. Ohio is one of 12 states in the “improving” quadrant. The rest of the states and the nation are still “contracting,” although most have made the noticeable turn toward “improving.”
After having experienced what was arguably its worst downturn in the postwar period, Ohio appears to be on the road to recovery—and it appears to be ahead of many other states. Given the economic troubles (population loss, low educational attainment, dwindling manufacturing employment, and so on) that have plagued the state over the past decade, this is perhaps unexpected good news.