Happy 8th Birthday Economic Recovery

6/12/2017

Executive Summary

This month, the United States enters its eighth year of economic expansion. While traditional indicators of state and national economic health have improved, state budgets and revenues, and public sector job growth at the state level have not kept pace with the rest of the economy. This article compares snapshots of national and state economic indicators from the start of the expansion in June 2009 to the most recent available data in April 2017.

National Economic Indicators

This month we celebrate an important birthday! June marks the eighth year of the current U.S. economic recovery. Often referred to as the “slowcovery,” its presence may not always be noticed, but in its 96th month it holds the place as the third-longest economic expansion in history. Birthdays are often a celebration of memories. This month we look back to characterize the condition of national and state economic indicators, and state revenues and budgets at the start of the recovery compared to today. This exercise places the economic recovery in context and provides insights into future state financial conditions.           

The current economic recovery, which began in June 2009, is the third-longest economic expansion in history, according to the National Bureau of Economic Research (NBER). A previous 120-month expansion, which ended with the collapse of the dot-com bubble in March 2001, still holds the record for the longest period of economic expansion. A long expansion does not always indicate an impending downturn. In fact, expansions have been generally longer in the post-World War II era, averaging 35 months in the pre-World War II era, and 58.4 months from 1945 to today.

When gross domestic product (GDP) growth is considered, this expansion cycle is also the weakest on record since before WWII. Real GDP has grown on average 2.1 percent (annualized) per quarter over the course of this recovery, compared to an average of 4.3 percent over the last 10 expansions.  

Source: The Federal Reserve Bank of Philadelphia, State Coincident Indexes, June 2009

National economic indicators continue to show improvement. But what has this recovery looked like at the state level? State level economic indicators, state revenue growth and state budget conditions paint an illustrative picture of the recovery for states.

State Economic Indicators

Coincident indicators track the current state of economic activity by measuring current nonfarm payroll employment, industrial and manufacturing production, real wages and the unemployment rate. The Federal Reserve Bank of Philadelphia produces a monthly coincident index for each of the 50 states, which calculates a three-month change in the state-level indicators. The June 2009 and April 2017 State Coincident Indexes mapped below paint a starkly different image for most U.S. states. The June 2009 map shows that indexes decreased in 47 states, remained unchanged in one, and increased in two. 

The most recently available coincident indexes from April 2017 show that the indexes have increased in 46 states and decreased in four. These maps illustrate that state economies are continuing to improve, whereas at the beginning of the recovery states were still experiencing recessionary pressures.

Map showing April 2017 coincident indexesSource: The Federal Reserve Bank of Philadelphia, State Coincident Indexes, April 2017

The state unemployment rate is another telling indicator of state economic performance. Nationally, the United States is averaging an unemployment rate at or below the Natural Rate of Unemployment (NROU). This is defined as the minimum unemployment rate resulting from voluntary, or frictional, unemployment. This rate accounts for unemployment that naturally occurs as employees leave their current jobs to find better ones, or as recent graduates enter the labor market. The generally accepted average NROU is 5 percent. In April 2017, the United States’ average unemployment rate was 4.4 percent. This reflects a healthy economy absent the unemployment pressures most often associated with a downturn in the business cycle.

Map showing June 2009 Seasonally adjusted U.S. unemployment rateSource: Bureau of Labor Statistics, State Employment and Unemployment Database, June 2009

When current state unemployment data is compared to unemployment levels at the start of the current economic expansion, the comparisons are striking. The Bureau of Labor Statistics (BLS) found that the U.S. average unemployment rate was 9.5 percent in June 2009. The state unemployment rates at the time ranged from a low of 4.2 percent in North Dakota, to a high of 15.2 percent in Michigan.

The BLS unemployment numbers released in April of this year tell a story of recovery. The state unemployment rates ranged from a high of 6.7 percent in New Mexico, to a low of 2.3 percent in Colorado. In the 94 months between June 2009 and April 2017, unemployment dropped an average of 4.5 percent across all 50 states.

Map showing April 2017 seasonally adjusted unemployment rateSource: Bureau of Labor Statistics, State Employment and Unemployment Database, April 2017

However, at the state and local level, public jobs have not experienced the same recovery. The following graph from Moody’s Analytics shows that while state and local government jobs drove job growth during the economic recoveries of the 1950s and 1960s, these jobs experienced a net reduction during the current economic recovery.

 

Bar chart showing job growth after five years of recovery by recession.

 

There are several probable explanations for the reduction of state and local government jobs during this recovery cycle, including political and administrative actions to shrink the size of government, or the weak recovery of state tax revenue relative to previous expansions.

The national and state economic indicators continue to signal a strong and growing economy. However, this expansion period is different than many states have experienced before in terms of the size of government, revenues and spending strains on state budgets.

State Revenues

In contrast to the positive turnaround of state economic indicators, state revenue growth is weaker than any of the previous four expansion cycles. The below graph from the Rockefeller Institute of Government illustrates that while this expansion cycle is longer than previous recessions, recovery of state revenues is much slower. As of December 2015, state revenues only increased 7.9 percent from recessionary lows. This contrasts with 32.1 percent and 15.4 percent after the 1990 and 2001 recessions, respectively.

State Tax Revenue Since the Start of the Recession, Four Quarter Moving Average Adjusted for Inflation

Fever chart showing state tax revenue since start of a recession

Sources: Rockefeller Institute of Government, December 2015
Notes: Four-quarter average of inflation-adjusted tax revenue. Data are shown only until the start of the next recession.

Recent trends show a decreasing rate of state revenue growth as the economic expansion ages. The Rockefeller Institute reported that state tax revenues grew just 1.2 percent during fiscal year 2016, slowing down from 4.7 percent growth in 2015. When this number was adjusted for inflation, it was found that state tax revenue growth declined by 0.1 percent in FY 2016, representing the weakest performance since FY 2010.

Slow revenue growth is being driven by weak personal income and sales tax growth, a decline in corporate income tax revenues and a 40.1 percent decline in severance tax revenues. Severance tax revenues constitute only about 1 percent of state revenues at a national level, but this sharp decline significantly affects the economies and revenues of energy-producing states.

State Budgets

Considering the weak revenue growth experienced by states during the current expansion, how have state budgets fared since the beginning of the recovery in 2009. NCSL’s “State Budget Update” tracks the fiscal condition of states throughout the fiscal year. In April 2009, NCSL reported that 43 states were then in the process of resolving a FY 2009 budget gap. This year, 22 states reported that their state had addressed or would address a budget shortfall before the end of the fiscal year. States are citing an increasing demand for services, increasing fixed costs and slowing revenue growth as reasons for these shortfalls. While states generally describe their fiscal situation as stable in the near term, there are growing fiscal challenges on the horizon, which could be exacerbated from any downturn in the national economy.

Conclusion

A look back as the economic expansion enters its eighth year tells two different stories of recovery. National and economic indicators in 2017 remain positive and point toward a healthy economy. At the same time, state revenues do not appear to be keeping the same pace as the rest of the economy. In this still expanding economy, continued sluggish state revenue performance may pose major a major challenge for state budgets.

Additional Resources