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America's Lopsided Economic Downturn

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The Tampa Tribune

Published: February 24, 2008

You won't hear the R-word much in the modest governor's mansion in Helena, Mont.

The occupant, Brian Schweitzer, insists that Montana's economy is in better shape than it has ever been. It has had one of the fastest rates of job growth in the country. The state is prospering on the back of booms in mining and farming, as well as steady growth in tourism.
Paul Polzin of the University of Montana forecasts that the state's economy will grow by 4.1 percent this year, the fifth consecutive year of growth above 4 percent. "We've been searching for realistic doomsday scenarios," he says, "and we just can't find any."

Go to Michigan, by contrast, and it is hard to find anything but gloom. The collapse of America's car industry, coupled with a nasty subprime mortgage bust, has left the state reeling.

It has the highest unemployment rate in the country (7.6 percent) and the third-highest foreclosure rate, and was the only state to lose a large number of jobs in 2007. In the run-up to the state's Republican primary (which he won) Mitt Romney traversed Michigan, promising to save voters from a "one-state recession."

Montana and Michigan mark the divergence that lies behind America's aggregate economic figures. National statistics suggest that the country may have already tipped into a formal recession. Output rose by only 0.6 percent at an annual rate in the last three months of 2007, a figure that could easily be revised down to a fall.
Residential construction is plunging, house prices are dropping, consumer spending is slowing and the economy shed 17,000 jobs in January, the first such decline since 2003. A monthly gauge of services activity, published on Feb. 5, has fallen dramatically and now suggests recessionary conditions.

The big question - particularly for those on the presidential campaign trail - is where will the pain be felt most acutely, and how far it will spread.

So far, much of the misery has been concentrated in one sector - housing - and in two distinct sets of states: the industrial Midwest and those states that saw the biggest housing bubble, particularly California, Nevada, Arizona and Florida.

These two groups are disproportionately important politically. They include many states that voted early in the primary races. Several of them (such as Michigan and Florida) are traditionally swing states in the general election.

The situation is still grimmest in Michigan, Ohio and other erstwhile manufacturing strongholds, where the subprime bust came on top of the secular loss of factory jobs.

But the most dramatic weakening has been in bubble states. Economies that were buoyed by booming construction and soaring house prices are now being dragged down.

California's mighty economy is visibly wobbling. In some cities, house prices are falling at double-digit rates and the unemployment rate has jumped from 4.8 percent to 6.1 percent in the past year, an increase twice as steep as the national trend.

This downturn is not as gut-wrenching as those in the early 1990s or 2001, when core industries such as defense and technology suffered badly. But it is steep enough to have thrown the state's budget into disarray and derailed Gov. Arnold Schwarzenegger's ambitious plans for health-care reform.

In Florida, Nevada and Arizona the story is similar: plunging house prices, rising foreclosures and disproportionate increases in unemployment.

Not all is gloomy: in these states, as in the rest of America, strong global growth and the weak dollar have buoyed export industries and boosted tourism. (Orlando International Airport, the gateway to Disney World, saw a record number of passengers last year.)

But these positives have failed to counter the drag from housing and weaker consumer spending. Mark Zandi, chief economist at Moody's Economy.com, reckons that all four bubble states, along with Michigan, are already in recession. Together, he points out, they make up 25 percent of America's GDP.

Move inland from the coasts and away from the industrial Midwest, however, and the picture, for now, looks less grim. A belt running from Texas northwest across the Great Plains and the Rocky Mountains has been doing particularly well, thanks to soaring exports and high commodity prices.

Ethanol subsidies and "agflation" have brought a bonanza to the farm states. Agricultural exports are up almost 20 percent compared with 2006, while farm incomes are growing smartly.

Extractive industries are booming. Miners find it worthwhile to dig for copper in Butte, Mont., even though the operators say it is the worst-grade ore in the world. These states now have some of the lowest unemployment rates in the country. With far less of a housing boom, they have also avoided the worst of the subprime bust.

For politicians from Butte to Topeka, the question now is whether this good fortune will continue. Regional disparities, both in good times and bad, are no surprise in a vast continental economy.

During the 1991 recession California and New England suffered disproportionately, thanks to banking crises and defense cutbacks. The 2001 downturn hit states with high-tech hubs hardest at first, while its hangover lasted longest in the industrial Midwest.

This time a lot depends on the rest of the world. If emerging economies remain resistant to an American recession and commodity prices stay strong, America's exporting regions will benefit.

That fillip aside, several factors suggest that even America's strongest states face tougher times ahead. The housing market is already weakening well beyond the bubble states.

A downturn centered on housing will have pernicious effects, even on the regions it hits least. That is because it constrains one of the biggest safety valves in America's economy: people's ability to move.

Previous downturns spawned sizeable migrations from recessionary states to booming ones. In the early 1990s, for instance, people flocked from New England to Southern states. This time, that mobility is hampered by people's inability to sell their homes. Unemployment may go on rising in California, even though Montana cannot get the workers it needs.

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