Some states’ economies cool even as the nation’s sizzles

Tim Henderson - Stateline - A still-roaring national economy grew at an unexpectedly robust 5.2% annual rate in the third quarter of this year, but early indicators show a more mixed picture for many states heading into the holidays.

The preliminary unemployment rate rose in 38 states and economic output slowed in 32 states in October, according to a Stateline analysis of preliminary federal economic data. Yet states where the economy is still humming — such as Arizona, Florida, North Carolina, Texas and Virginia — have added hundreds of thousands of jobs since 2020 and are helping to keep national output strong.

Economists note that the uptick in the jobless rate may be the result of long-inactive workers seeking jobs; those job-searchers are included in the unemployment rate.

Most economists surveyed by Stateline said the states with elevated unemployment rates and lagging production were experiencing growing pains as they continue to recover from the pandemic. A modest slowdown might even be a good thing if it cools interest rates and inflation, they said.

“We’re not falling off the top of a flight of stairs, we’re only falling off the first step,” said EJ Antoni, an economist at the conservative Heritage Foundation. Unemployment is bound to tick up as more workers sidelined by the pandemic start looking for work, he added.

“One of the reasons why unemployment is so low is that there are something like 5 million people missing from the labor force,” Antoni said. “The labor market never returned to its pre-pandemic trend.”

The labor force has shrunk since 2020 in 19 states — with especially dramatic drops in California, Maryland, New York, Ohio and Massachusetts, according to the Bureau of Labor Statistics. Meanwhile, manufacturing employment, often used as an indicator of economic health, dipped in October because some autoworkers were on strike.

State’s Tax Revenues

A slowdown in the economy could be bad news for states that have already suffered declining tax revenue for more than a year. Many legislatures cut taxes this year in response to robust tax revenue growth in fiscal years 2021 and 2022; those lawmakers now may need to trim spending agendas informed by rosier forecasts.

California, for example, had to cut $8 billion in spending in this year’s budget and delay other programs to cover a $32 billion deficit; Maryland recently announced across-the-board transportation budget cuts because of ballooning deficits.

Meanwhile, still-booming states are reacting differently: Virginia embarked on new tax cuts combined with major spending in September as part of a bipartisan budget compromise. In November, Texas Republicans proposed spending a $2.7 billion tax windfall on border security and education.

Nationally, state tax revenue has been declining for 14 straight months and was down 5.6% in September compared with the year before, according to data compiled by the left-leaning Urban-Brookings Tax Policy Center. Early October reports show “continued weakness” for most states, though a recent stock market turnaround may help states for the rest of the year, said Lucy Dadayan, principal research associate at the center.

“The stock market improved a bit in the months of October and November and that might improve income tax revenues,” Dadayan wrote in an email. “A lot depends on the stock market performance in December.”

But Dadayan also pointed to other signs of trouble for state economies and tax revenue: Home price growth is slowing, corporate profits are falling, and there are fewer public offerings to lift stock prices.

As of October, California’s unemployment rate was 4.8%, compared with 4.1% in October 2022. That is the third highest in the country, behind only Nevada and the District of Columbia.

Chas Alamo, a fiscal and policy analyst for the California Legislative Analyst’s Office, called California’s unemployment increases a danger sign for other states.

“There were 26 states with significant changes and all of them were increases in the unemployment rate — not a single decrease. That struck me as an unambiguous signal,” Alamo said in an email.

California’s year-over-year monthly unemployment rate has been up by at least half a point for eight months in a row. There have been similar spikes in New Jersey (also eight months in a row) and the District of Columbia (nine months) through October.

Despite a higher unemployment rate in New Jersey, “there are still more job openings than unemployed New Jersey residents,” said state labor department spokesperson Angela Delli Santi. More people seeking work is a sign of optimism, she said, and more people are returning to the state labor force.

Nationally, the number of people who are neither working nor looking for work is still about 4.8 million more than in early 2020, according to federal data.

Fifteen states, including California, Illinois and New York, have fewer jobs than they did in early 2020.

State-by-state GDP figures

New state-by-state estimates of gross domestic product for the first half of the year, released Dec. 5, were good news for some states — California’s economy, for example, continued to expand despite recession fears. And Georgia, Hawaii, Massachusetts, New Hampshire, New Jersey, New Mexico, Ohio and West Virginia bounced back from first-quarter losses to second-quarter gains. Only Delaware, Mississippi and Wisconsin suffered inflation-adjusted drops in GDP through June of this year.

However, state economic indexes maintained by the Federal Reserve Bank of Philadelphia showed 32 states with lower economic output expected in October than September, though those numbers could change as data is revised. (For instance, in October 2022, the initial data showed 27 states in decline, but after two revisions only 12 states showed a decrease that month, according to the Stateline analysis.)

Many of the country’s largest states are not among the 32 states where GDP is thought to have declined in October. The economy expanded in California, Florida, Georgia, North Carolina, Pennsylvania and Texas that month.

However, Arizona, Illinois, Massachusetts, Michigan, New Jersey, New York, Ohio and Virginia were among those where the economy contracted.

Individual state economies can be significantly affected by local industries.

In California, a state report co-written by Alamo in October said the state appeared to have had a “mild recession” from the last quarter of 2022 to the first quarter of 2023, noting that there’s no formal definition for a state-level recession. The report cited a drop-off in tech investment, fewer home sales and regional bank failures as factors.

“The slowdown is suggestive of the importance of the technology and housing sectors to the vitality of the state’s economy,” the report concluded.

Washington state, another technology center hosting giants such as Microsoft and Amazon, has fared better than California, recovering jobs lost in the pandemic more quickly and seeing lower unemployment this year. Washington’s jobless rate is 3.8%, down from 4.6% in October 2022.

Rural areas of Washington state recovered more quickly than Seattle, said Anneliese Vance-Sherman, the state’s chief labor economist. There are more industries deemed “essential” such as health care and agriculture in those communities, while Seattle suffered from more tech layoffs and declines in businesses that depend on commuters, such as restaurants.

A slight increase in unemployment in recent months for Washington state could be a healthy development if it means some workers are coming back to the job market, Vance-Sherman said.

“For Washington state, much of the recent rise in the unemployment rate stems not from people losing their jobs but from new people entering or reentering the workforce,” she said.

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