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State Shutdowns and Economic Decline

October 9, 2020

The data is finally in - how did the state shutdowns affect the economy on a state level? Catch our newest TrendsTalk episode with ITR Senior Forecaster Connor Lokar to learn more.



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Transcript by Rev

Hello and welcome this latest TrendsTalk. I'm Connor Lokar, senior forecaster here with ITR Economics, and today I'm really excited. We're talking about state shutdowns and economic decline because up until last week, we were left to speculate on the severity of decline for economies at the state level. Because the Bureau of Economic Analysis, the government entity that prepares GDP data, takes a little longer to curate that data at the state level. So while we've had 2Q US GDP data since late July, we just got the state data, which I quite frankly could not wait to dig into. Because since late July, when we got those 2Q numbers, we were kind of left to speculate. Logically we would think that states that suffered more severe shutdowns, more severe COVID numbers early on in April and May, should have had a commensurately more negative response in their state-level economy. So I know personally I've been waiting weeks for this data, as I felt it would be interesting subscriber fodder for us here at ITR.

So before I jump into some of these states, it's important to recognize that every 2Q GDP number is going to be very important. So we're looking at shades of gray here. It's really in relation to the benchmark that is US GDP, which declined in inflation-adjusted 9.0%. So 9%, that's kind of the watermark. That's what you want it to beat if you were a state in the second quarter. You want it to say, "Did we outperform the trend set by the United States?" So I'm not saying a state, if it contracted by 8%, which is still horrific in the second quarter, but a full percentage point over performance in a series like GDP is not insignificant.

So with the disclaimers out of the way, let's jump into some of these trends. And I did pick these somewhat at random. I tried to pick some relevant states and I'll start with New Hampshire. Now I'm doing that entirely biased. That's where ITR economics, our HQ, is in Manchester, New Hampshire. That's where I'm recording this this morning. So it's topical to me. So, New Hampshire kind of shocked me. It contracted 11.4% versus the 9% national level in the second quarter. And that's interesting because our COVID numbers have been really benign throughout. I mean, they have been very low. Our governor, in my opinion, has done a pretty good job, pretty reasonable in terms of shutdowns. But I think this is a great test case of it not just matters what your state does. It also matters what your neighbors do.

We're very tourism dependent here in New Hampshire, very regionally dependent in particular. So Massachusetts, our neighbor to the south, a huge adjacent economic driver for us in New Hampshire. And a lot of those folks come up, 0% sales tax here in New Hampshire, those folks come up and spend, second homes up here, seeing the leaves, the lakes, the trees, the water, whatever else. We lost that in the second quarter. Massachusetts, difficult COVID numbers, locked away, quarantined. They were not traveling, probably responsibly so. But so it was not necessarily a function of what we were doing here in New Hampshire, but we were affected by what our neighbors could or could not do in terms of their consumption. So our tourism reliance here in New Hampshire hurt us.

Now for the record Vermont did contract 12.1%. So we beat Bernie, which is a big deal for us here in New Hampshire. So I will throw that in there. It makes me feel better anyway.

So, when we talk about Massachusetts looking to the South, they contracted 9.5%. So actually 50 bips worse than the US. Not as bad as New Hampshire because, Mass more of a domestic manufacturing base than New Hampshire. Obviously the tech hub that is Boston, more service sector. So it was hit hard by that initial wave, a little bit worse than the US but on a shades of gray standpoint outperforms say a New Hampshire or a Vermont, that doesn't really have a ton of manufacturing activity, does not have as much domestically or I guess, state-contained consumption activity and is not quite as reliant on tourism as say a Vermont or a New Hampshire.

So let's head west now. Let's look at New York. Yikes. New York, not surprisingly, major decline. 11.9%. Now that is almost five times worse than the worst rate of decline at the depths of the great recession for the state of New York. The state of New York at its worst in the great recession contracted 2.4%. And in this cycle, it was down 11.95. 5X, just about. I mean, that's scary. It's not surprising. I mean, obviously disaster numbers early on in New York, particularly New York City and associated severity of governmental shutdown response.

New Jersey, similar boat, did slightly better at minus 10.3%, but still pretty ugly number relative to the US.

So jumping to the West, when we look at Michigan, I mean, man, oh man, my home state. I was born in Michigan. A lot of my family there. 12% decline. 12%. I mean that is 33% worse than the US level. It was compounded by Michigan had very bad COVID numbers early on, particularly strict state shutdown orders early on, which Governor Whitmer in Michigan earned a certain amount of notoriety for her strictness, I'll call it, in the shutdowns. And that compounds with acute pressure on the automotive sector in the second quarter, which is obviously an important component of the Michigan economy. So from a logical causal standpoint, that number does make sense as bad as it is.

When I look to the South, Ohio, that's an interesting contrast case because it's similar geographic location, similar microeconomic makeup at the state level, obviously some automotive dependence, but similar case difficulties early on, but a favorable minus 9.9% compared to the minus 12% in Michigan. And we did see that the Ohio governor was slightly more relaxed and trying to opt for a bit more balance in terms of the economy versus public health than Michigan and that seemed to bear some fruit in those state-by-state numbers.

Illinois, which I was worried about, actually posted a pretty respectable minus 9.3%, only modestly worse. Illinois had bad numbers early on, very strict shutdowns in Chicago, so I was pretty impressed with Illinois's number through that lens.

So heading South, Texas posted out performance at 8.4% contraction, I mean, Texas is Texas. What else would we expect? Honestly, better than I thought it was going to be given that the oil pricing woes compounding on the oil patch in the second quarter, in addition to COVID-19. But Texas did stay pretty open early on. So, most of Texas's COVID case surge actually occurred in the second half of June, July, August. So it'll be interesting to see how their 3Q number, that pace of recovery in the third quarter of 2020, how that grades out for Texas relative to the US because most of their COVID dysfunction slid into the third quarter, rather.

Turning Southeast Georgia and Florida both beat the US trend with milder numbers. Georgia contracted 7.8%. Florida was off 8.1%. I highlight that because both of their governors took a pretty bad beating from the mainstream media, for having the gall to try to balance economic needs along with public health. It would appear that they were, relatively speaking, compared to the US, able to preserve some economic activity and likely jobs as well.

So their 3Q COVID numbers were much worse. Again, that second wave affected the Southeast more, so like Texas, that'll be a question of recovery pace in the third quarter, but it appears early on at least, they managed the situation well.

Jumping west now, a couple of huge success stories. Washington state contracted just 5.8%, which quite frankly shocked me because that's awesome. I mean, their numbers blew me away. Seattle was that scary initial hotspot there on the West coast. Compound that with Boeing having their severe issues with obviously the duress that the airline sector was under. I was really impressed with that Washington state number.

So South Dakota a little less west whose governor, she did not like the idea of shutdown. She did not shut down the state at all. She kind of took that Sweden approach and apparently it was rewarded for that. I mean, we saw a nice minus 7.1% contraction there and minimal COVID-19 problems to boot for South Dakota. Now, granted, there's more pheasants than there are people in South Dakota. So nonetheless, I'll give them props for that.

California did fairly well, surprisingly well, because that was another strict shutdown state. It was off just 8.2%. However, like Texas, California's worst COVID numbers, despite their shutdowns early on, their COVID numbers were not that bad in the first wave. It was really the second wave, June, July, August, it hit California like it hit Texas and the Southeast and Arizona. So same story there where it'll be interesting to see how that third quarter recovery pace grades out.

Arizona, like Washington, had a relatively great quarter as well, off just 5.6%. but like California and that laundry list, 3Q was the bad COVID quarter for the state of Arizona. So we'll check out that third quarter number when it comes.

But to wrap up, not to pick on Hawaii or Nevada, but their 2Q numbers were an abject disaster. Hawaii contracted 13.9% quarter over quarter. Nevada was down 12.3%. And those are two of the worst states that I saw when digging into these numbers and it's perfectly explainable. I mean, when we look at the absolutely cratering tourism trends across the globe and across the US I mean, folks weren't flying. They weren't going to Vegas. They weren't going to Maui or Honolulu or wherever else. So I think that's important. When I look at the New Hampshire case, it's not just what your state did, how your state's numbers were. What your neighbors did mattered. What consumers chose to do or not to do mattered. Where they chose to spend their dollars or not mattered in the second quarter numbers. So I think it kind of highlights, well at the state level obviously a lot of things are local, but there are outside forces outside of your state's control that can impact those economic trends.

So I'm going to stop there. If I went through all 50 states, this recording would take an hour. So I'm going to stop there. If I didn't mention your particular state, those of you that are DataCast subscribers, you actually have full access to the state data, not just for state GDP, but for state construction, housing data, home price data, unemployment data. You can see a lot of state level trends with DataCast.

So I think if you're a company listening here that is largely state operating, maybe a more local or regional operator, I think it really would be interesting for you to fire up that DataCast platform and see how your business fared versus some of the rates of decline that we saw at the state level in your state in the second quarter. So I would encourage you to check that out on DataCast. But to wrap up, now here I am, I was waiting so long for these numbers and now already I'm waiting for the third quarter state GDP numbers, which I'm not going to get until late December. But I suppose that's the perfect Christmas present for an economist. So I would expect it myself and ITR, we'll let you know how those look when we get them. So until then, thanks for checking in. I'll see you next time.


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