About the Texas Economy...

It has taken a beating lately from Paul Krugman. First, he says the Texas economy is not so special in terms of handling the recession. He makes this claim based on a comparison of the unemployment rate in Texas with that of New York. Second, he notes its budget problems are well, Texas-sized with a $25 billion budget hole.  Thus, he concludes its conservative-based polices are not a model for other states to follow.  Are his critiques valid?

On the fist point, Ryan Avent points out that Krugman's use of the unemployment rate is misleading because there has been a large migration to Texas where there has been hardly any to New York.  Thus, a significant part of the unemployment rate in Texas during the recession comes from there being so many newcomers while that is not the case in New York.  

Further evidence undermining Krugman's first critique can be seen in the following figure.  It shows that the employment growth rate has been far stronger in Texas than New York in 2010. (Click on figure to enlarge.)

On the second point, Kevin D. Williamson notes that Krugman vastly overstates the Texas' budget problems. First, the real budget shortfall is probably going to be $11-$15 billion, not $25 billlion.  Second, Texas actually has a $10 billion dollar rainy-day fund that could cover much of the budget hole if necessary.  Thus, Texas is not going to have a budget shortfall.

Of course, New York is just one of 49 other states.  Why not compare Texas to the California, the other big state?  Oh yea, that has already been done and it makes Texas look special.

Now all of this does not mean Texas is the model for the rest of the states to follow.  Some of its good fortune is idiosyncratic--oil prices and migration--as noted by Ryan Avent. Some of its success its policy driven too.  It does mean, though, that this mix of indiosyncratic developments and policies works well for Texas.  And for that I, a resident of Texas, am grateful.

More on the Resilient Texas Economy

The comparatively resilient Texas economy continues to draw attention.  Following earlier pieces by The Economist and CNN/Fortune, the Atlantic has a new piece grappling with the economic phenomenon that is Texas. What makes this discussion really interesting is when the Texas numbers are matched up against the other big states, particularly California.  And it is always interesting to see Texas compared to Michigan, which seems to be its mirror opposite on many levels.  Maybe the relatively good economy in Texas explains in part the reluctance of Dallas Fed President Richard Fisher to call for more aggressive monetary policy action  to counter the effective tightening of U.S. monetary policy.

Texas versus California

The regional variation in economic performance during this Great Recession has been fascinating to watch, especially here from Texas where the economic slowdown has been relatively mild. This state's economic performance has been especially remarkable compared to other big states like California. In this case, the contrast can be easily seen by comparing total employment in California and Texas. Below are the employment numbers for the two states along with some added commentary. First up is Texas:

Now California:


These striking differences naturally lead to discussions of why so much regional variation? Awhile back, The Economist magazine tackled this question for the two states of California and Texas. Now, Fortune magazine has joined the discussion. It argues that (1) Texas has a more diversified economy than California, (2) Texas has more business friendly environment, (3) Texas has done better relying on sales tax rather than on income and capital gain taxes found in California, and (4) the power of the people has backfired in California. In addition to these structural differences maybe California needs its own monetary policy.

Update: In the comments Muirego wonders if Texas is a net recipient of federal tax dollars and whether this explains the discrepancy.  According to the Tax Foundation the answer is no: between 1981 and 2005 Texas on average received 90 cents of federal expenditure for every federal tax dollar paid. See here for more.

Night and Day Difference

When I first moved to Texas I was surprised at the intensity of Texan pride. I now think some of it is justified given how well the Texan economy has handled the recession. Texas was one of the last states to start shedding jobs--employment peaked in August 2008--and started adding jobs way back in October 2009 as illustrated in the figure below:

Now compare these developments in Texas to the employment carnage in my previous home state, Michigan:

What a night and day difference. Michigan has had a decade of job destruction. Micheal D. Lafaive argues these developments are due to differences in economic freedom between the two states. Maybe so, but I suspect the lack of industry diversification in Michigan compared to that in Texas plays an important role. One point Lafaive does get right is that Michigan's gift to Texas is people. I am evidence of that. I left Michigan in 2007 and have never looked back.* Apparently a net total of 68,000 Michiganders did the same thing as me between 2000 and 2008. If only the Eurozone had such labor mobility.**

*To be clear, though, I am not a true Michigander like fellow economics blogger Josh Hendrickson. Therefore, leaving Michigan was not hard for me.
**If the Eurozone did have such labor mobility, which country would be Michigan (Greece?) and which one would be Texas (???)?

Update: The Dallas Fed takes thinks it sees a recovery under way in Texas.

Update II: I inadvertently put up financial sector employment in the original post for Michigan. It is now corrected to reflect total non-farm payroll employment.

There is Nothing Mild About Winters and Recessions in Michigan

Winters in Michigan are not for the light of heart. Neither are the recessions. Below is a figure showing the year-on-year % change in the coincident indicator for the United States and Michigan from January 1980 to April 2009. (Click on figure to enlarge.)


If the movement of economic activity in Michigan could be made into a roller coaster it would be one thrilling ride!

The Latest State Employment Numbers

I noted earlier that the state of Texas--where I am employed--had seen hardly any of the employment losses taking place throughout the rest of the United States. I now can no longer make that claim. Nonfarm payroll employment numbers for December showed that Texas lost 37,000 jobs during past two months. Still, Texas did gain 153,700 jobs overall in 2008. Here is the figure for employment in Texas: (Click on figure to enlarge.)

By way of comparison, here is employment in California and Florida:



Below is a table for employment changes over 2008 for all states:

A Question for Paul Krugman, Tyler Cowen, and Felix Salmon

Paul Krugman, Tyler Cowen, and Felix Salmon are discussing the implications of the claim that "the worst of the crisis is hitting states that largely didn’t experience a housing bubble." This claim, however, is based only on recent changes in unemployment rates. If one looks at changes in NFP employment at the state level since the beginning of the recession then there is a closer connection between the housing bubble and the states being hit the hardest by the crisis. There also emerges from this data a clear geographical part of the country that appears to be relatively unscathed by the crisis.

First, take a look at the change in the BLS state-level NFP employment for the period of December 2007 - November 2007 (See here for more on the data).

Note that the two hardest-hit states in terms of employment also happened to be ones with some of the biggest increases in home prices: FL and CA. The two states who have gained the most jobs over this time also happened to miss most of the run up in home prices: OK and TX. Now these are only the extreme cases, but they do indicate that there is some relationship between regional house prices and the regional impact of the economic crisis.

Now, if one were to map out these changes in NFP employment at the state level over the last year (Nov. '07 to Nov. '08) and categorize states by those with any employment gain versus those with any employment losses you would get the following map (click to enlarge):

This map (source: St. Louis Fed GeoFred) indicates that the energy belt seems to be weathering this crisis far better than the rest of the country. This observation needs explaining. So Paul, Tyler, and Felix what is your story for this observations and does it have any implications for policy?

Michigan's Eight Year Recession

As a follow up to my last posting on employment conditions at the state level, I thought a look at Michigan might be of interest to some readers given the debate surrounding the state's auto industry. Take a look at this striking figure of Michigan's NFP employment, where the numbers in the vertical column are in the thousands:

In terms of employment, the recession did not start in 2007 for Michigan but in 2000. Now that has to be some kind of record.

Employment Conditions at the State Level

We all know had bad employment conditions have become in the United States: 533,000 jobs lost in November and 1,911,000 jobs lost since December 2007. While these numbers are ominous--the United States needs about 100,000 jobs a month just to keep up with the growth in the working age population--they mask some interesting employment patterns at the state level that help shed light on what Robert Reich calls the "new Civil War":

There's a new Civil War going on when it comes to automaking in America. Japanese, Korean, and German automakers are now building 18 auto assembly plants in the United States, none of which is unionized. Kentucky (Senate Republican Leader Mitch McConnell) already has Toyota's biggest auto assembly plant outside Japan. Tennessee (Senate Rep. Bob Corker, who came up with the "chapter 11" bailout amendment) houses Nissan's North American headquarters. Alabama (Senate Rep. Richard Shelby) hosts Mercedez Benz and several other foreign automakers.

So there's no reason to suppose the good citizens of Kentucky, Tennessee, or Alabama are particularly excited at the prospect of handing over their taxpayer money to competing firms and their workforces.

While Reich focuses on the auto industry, I show below with employment data that more broadly speaking there is no doubt that some Southern and Central states will be subsidizing other parts of the country receiving bailout money, whether for the financial or auto industry, and this may strike some taxpayers in these regions as troubling.

So what does the data show? Let's start with the two states hit hardest by the recession in terms of employment. (They also happen to be the two states with the biggest run up in house prices.) First up is Florida. The numbers on the vertical column are in thousands (Click on figure to enlarge):


Florida has lost 216,200 jobs since December 2007. Next up is California:



California has lost 147,000 jobs over the same time. So far, this story is consistent with the national view. Let's now look at the two states that have fared the best in terms of employment since December 2007. First up is Texas:


Amazingly, Texas has added 198,000 jobs over this period. Even November saw employment go up by 7,300 jobs. Next up is Oklahoma:


Oklahoma has added 16,300 jobs over this time. In fact, there are a number of states where jobs have been added during the recession. These states, therefore, with stronger economies will be paying taxes for subsidies going to other states. These so called 'fiscal transfers' are important to the smooth function of an optimum currency area, but can still be irritating to those regions paying out more in taxes than they receive in government benefits.

Here are the employment numbers for the rest of the states (Source: BLS):

(Note: state level NFP employment is estimated separately from than the national measure,)

Where People Are Moving

I came across this interesting report by Mark J. Perry of the U.S. Census Bureau on domestic net migration in the United States for the years 2000-2004. There were no surprises in the report, but rather a continuation of migration patterns from earlier years. From the summary:

Domestic migration continues to redistribute the country’s population. The longstanding pattern of net outmigration from the Northeast and the Midwest and net inmigrationto the South and the West continued between 2000 and 2004 with modest change from the regional patterns in the 1990s.

So my move from Michigan to Texas last summer was not exceptional, just part of a long-term trend. Still, it interesting to put my personal experience into the context of larger migration patterns in the United States.

Below are some of the interesting images from the report (click on images to enlarge):

Net Domestic Migration for 1990-2000 & 2000-2004

How Low Will Home Prices Go?

This is a question I keep asking myself, not as an economist but as a potential homebuyer. As I have discussed previously on this blog, I recently moved to Texas from Michigan and am now looking to buy a home. A few weeks ago my wife and I aided and abetted the housing recession. Yes, we are guilty as charged of withdrawing an offer we had on a home under the assumption that the housing market has not hit bottom (there were some other factors as well). It is almost surreal to think I am a part of a downward deflationary spiral in the housing market where expectations play an important role. Of course, the Texas housing market is not the same as the Michigan housing market--where I had to bring money to the table to sale my home--and so I need to be careful in assessing how far home prices will fall here.

Still, I ask how far will home prices fall? The S&P/Case-Shiller house price index for select metropolitan areas and the OFHEO national house price index just came out for the end of 2007 and both show on-going declines across the nation. Below is a graph of the these two (nominal) series in year-on-year growth rate form through the end of 2007.

While this graph is interesting, it does not really provide any insight into my question of how low will house prices go. If we look at the series in the levels we get the following graph:

This figure shows in nominal terms that the home prices reached a peak in late 2006 (Case-Shiller) or early 2007 (OFHEO). The figure also indicates there is much more correction needed for nominal house prices to return to pre-2003 trend levels. This simple 'eyeball' analysis is consistent with what Calculated Risk has reported about futures data on housing prices:

... futures data is forecasting a price drop of 11% over the next year, and close to 25% over the next 3 years for the 25 largest MSAs.

As a home buyer, though, I am also sensitive to mortgage rates and recently they have been going up (see this picture over at the Big Picture). The Wall Street Journal explains why this is happening despite ongoing policy rat cuts:

There are two reasons mortgage rates haven't responded more to the Fed's rate cuts. One is that long-term Treasury yields, which are the benchmark for most mortgage rates, have risen recently, perhaps because of increased concern about inflation as the prices of oil and other commodities soar. The other is that the spread between mortgage rates and Treasury rates has widened as investors and banks become increasingly reluctant to make home loans.

The only way for long-term rates to fall now is for there to be more bad economic news. That would help with the inflation concerns, but it would not eliminate the mortgage-Treasury spread. If the Nouriel Roubini's of the world are correct, and if the mortgage-Treasury spread does not dramatically change, then lower mortgage rates await me in the near future.

So, patiently I wait for further housing price declines and more bad economic news.

Update

James Hamilton discusses the latest housing price data over at Econbrowser.

Recession at the State Level

The Economist recently did an interesting article that examined where the U.S. economy was getting hit the hardest. The article found that economic "misery has been concentrated... in two set of states: the industrial Midwest and those states that was the biggest housing bubble, particularly California, Nevada, Arizona, and Florida." Much of the analysis, however, appears to have been based on unemployment rates in each state. While this is a useful metric, it may not be capturing the full extent of the economic distress given its known shortcomings. Consequently, I went to see what the Philadelphia Fed's state coincident indicator series are saying about regional economic activity. The data is on a monthly basis and the available observations run through December 2007. The fist bit of analysis I did was to simply look at the annualized growth rate for each state in December:

The above table reveals 27 states were contracting, while 23 were expanding. Next, I took the data and plugged it into some mapping software to get the following figure, where black = decline of 3% or greater, dark grey = decline of less than 3%, and light grey = expansion. In short, the darker the shading the greater the economic distress:

A few observations are in order. First, the hardest hit states are not the ones were the housing boom was the most pronounced. Thus, California, Nevada, Arizona, and Florida while experiencing a contraction in their economies are not being hammered as hard as the states in black. Second, while The Economist article showed the Northern Plain states to be doing relatively well, these information indicates otherwise--they are contracting. Third, Wyoming is doing so well relative to the other states and I assume it is because of higher commodity prices. If so, then why why is Kansas and Idaho dosing so poorly?

It will be interesting to see if January's data will show similar patterns.

The Asymmetric Effects of Monetary Policy: Texas vs. Michigan

In several previous postings (here, here, and here) I have commented on the stark contrasts between the economies of Michigan and Texas. Part of my motivation for making these posts was personal. I was trying to sell a home in the depressed Michigan economy after moving to a new job in the vibrant Texas economy. Another motivation, though, is that a colleague and I have been working on a paper (for the SEA meetings in New Orleans) on the asymmetric effects of monetary policy. Specifically, we are looking at the differential impacts of monetary policy shocks across the contiguous 48 states for the period 1979-2001. We follow some previous work done on this topic--see Ted Crone's survey--but add some innovations along the way.

One of our findings, consistent with that of the earlier research, is that monetary policy shocks have a non-uniform impact across the state economies. Monetary policy shocks are particularly poignant in the Great Lakes region while they largely uneventful in the Southwest regions. Of course, my previous Texas-Michigan discussions fall nicely into these two camps. So from our paper, I have posted below graphs that show the typical response--the solid lines--of real economic growth on a monthly basis for these two economies from a typical monetary policy shock. I have also included the typical U.S. response as a benchmark. Standard error bands, which help provide a sense of precision of these estimates, are shown by the dashed lines. (Technically these graphs show the impulse response function from a near-vector autoregression of the growth rate for each state economy, as measured by the coincident indicator, to a standard deviation shock to the federal funds rate.)

The differential responses of these two states to the same monetary policy shock are striking. Texas is hardly affected relative to the steep downturn in Michigan. As noted above, these patterns fall more broadly into the regions of the United States with different sensitivities to the federal funds rate shocks. Our research confirms early studies that show these regional differences can be partly explained by the composition of output: those states with a relatively high share in manufacturing get hammered by a monetary policy shock while those states with relatively high shares in extractive industries fare much better. We also find that states with a relatively high share in the financial sector fare better as well. Finally, we find that states that have (1) a relatively high share of labor income compared to capital income and (2) a relatively high rate of unionization also get hammered by monetary policy shocks.

Here is the rest of the paper.

Regional Economic Activity in the USA

I have made several postings to this blog (here and here) about my recent move from the depressed Michigan economy to the vibrant Texas economy. This move really was an eye-opener for me on the amount of variation in regional economic activity. Below is a graph of the year-on-year growth rate of real economic activity (measured by the Philadelphia Fed's state coincident indicator series) in Michigan, Texas, and the USA. Notice how Texas over the past few years has been doing better than the USA while Michigan has been doing worse.

Gene Epstein picks up on this theme in his interesting article on regional economic differences in Barrons. I have excerpted the first part of his piece below:

Fifty States, Fifty Job Rates
By GENE EPSTEIN

"IF A RECESSION IS WHEN YOUR NEIGHBOR loses his job, and a depression is when you do, then our neighbors in Michigan have been suffering a recession for some time. But if, to put a new spin on the time-worn quip, an expansion is when your neighbor gets a better job, and a boom is when you do, then if you live in Texas, you're probably enjoying a boom.

That a boom and a bust could be happening at the same time, in the same country, only highlights an underappreciated fact: While the U.S. economy is a useful abstraction, it consists of many different economies, each with its own special story. State and regional data are not as timely as national data. But the recently issued Bureau of Labor Statistics release for September 2007 on regional, state, and certain local labor markets provides a reasonably timely update.

Nationally, the U.S. unemployment rate stood at 4.7% in September '07 (the October reading is due out this Friday), up marginally from 4.6% in September '06. While that technically qualifies as a growth recession -- economic growth accompanied by a rise in joblessness -- it's at rates of joblessness that are still historically low.

Now, unravel what that 4.7% is derived from, and we find widely different stories state by state, although not quite as widely different as in previous periods in history. Michigan, to begin with, is surely suffering a full-blown recession. The Great Lakes state's unemployment rate hit a 14-year high of 7.5% in September, up from 7.1% in September '06, giving it the dubious honor of having the highest jobless rate by far of any of the 50 states. (The runner-up: Mississippi, with a jobless rate of 6.4%.)

The unemployment rate in the Detroit area is one of the highest in Michigan, at 7.9% in September, up from 7.3% 12 months ago. And that, of course, is another way of saying that the main cause of Michigan's bust is the hemorrhaging auto industry, with woes in real estate only a supporting player. While the national economy has had substantial gains in jobs of around 6% since the last peak in the business cycle in early-2001, Michigan's employment tally is down around 6% from that peak.

Texas, by contrast, seems to be enjoying a boom. The second-most-populous state in the union has seen its unemployment rate fall from 4.8% in September '06 to 4.3% in September '07, close to a seven-year low. And at 10%-plus since early 2001, job growth has been much higher than the national rate."

(Read the Rest)

Another Look at the Depressed Michigan Economy

In a previous posting I mentioned how the depressed economy in Michigan was making it difficult to sell my home. I posted a graph that showed how the Michigan housing market never benefited from the U.S. housing boom of 2003-2005, yet it is now feeling the pain of the U.S. housing bust. Poor, poor Michigan.

Over the past few days there has been added attention given to the depressed Michigan economy because of the Republican debate that was held there last night. For example, the New York Times reports on "Michigan's economic Woes" and the Arizona Republic reports "Michigan's plight backdrop of GOP debate on economy." Here is an excerpt from the latter article:

"We're an economic basket case, and it's dominating everything here," said Bill Ballenger, editor and publisher of the influential nonpartisan newsletter Inside Michigan Politics. "Our unemployment rate is 7.4 percent, the highest in the country. We've lost 400,000 manufacturing jobs, which is the heart of our economy here in Michigan. We've just never really recovered from the 2001 recession, and that has affected state revenues and has led to a budget crisis here that has been largely averted now, but there are still a lot of problems. Michigan is the worst, probably, in the entire country."

I find it interesting that Bill Ballenger says the Michigan economy never really recovered from the 2001 recession. This lack of recovery is evident in the my housing graph from this previous posting. Following its report on the debate last night, NPR also chimed in on the depressed Michigan economy with this discussion. By far, however, the most interesting piece I saw on the Michigan economy is the video clip below from CNBC. Among other things, it discusses how the foreclosure rate in Michigan is one of the highest in the nation and how home prices in Detroit have fallen 32% over the past year. (Thanks to Brian Arner for helping me make the video clip work.)

CNBC's Diana Olick reports on the Michigan housing market.

Update:

Paul asks about the housing market in Ann Arbor in the comments sections. I turned to the OFHEO housing price index for insight. Here is a figure constructed from the OFHEO index that shows the year-on-year housing price growth rate in current dollar terms.

The Housing Recession Hits Home

Readers of my blog know I have taken a hard line against Fed interventions during the past few months. For example, in "Sound Policy or Liquidity Addicts" I took the Jim Cramer's of the world to task for their calls for a Fed bailout of financial markets. Some readers may read postings like that and conclude that I am just another out-of-touch academic spouting painful policy prescriptions from the comfort and safety of my ivory tower. If this thought has crossed your mind then this posting is especially for you.

Yes, I have been prescribing painful economic medicine, but this advice has not been in my own self-interest. This past summer I moved from Southwestern Michigan to Central Texas. As part of this move, I put my home on the worst national housing market in the past 40 years. What made my life even more interesting is that my house was placed on one of the worst state housing markets as well. Consequently, my home has been getting few bites and I have been making two home payments. Two home payments for our one-income family have been painful. Questions about this arrangement persisting for some time--some observers are predicting the housing recession will continue through 2009--has also been troubling. To add some perspective to this discussion consider the two figures below. These figures show the growth rates of the OFHEO housing price index for the nation, the state of Michigan, and South Bend, Indiana. The latter one is included because my home was not too far from South Bend, Indiana. The first figure shows the growth rates of housing prices unadjusted for inflation:

This figure shows the Michigan housing has had some big swings in the past and currently is declining in current dollar terms. Moreover, the figure indicates that Michigan and South Bend housing markets never really were part of the housing boom during the 2003-2005 period. The bottom line from this figure is that I bought a home in a particularly weak housing market... not very promising. But wait, there is more to this story. The above figure does not adjust for inflation. What has been the real return for houses in Michigan over this time? The next figure, which takes the OFHEO index and deflates it with the PCE deflator, answers this question:

This figure is striking: the growth rate of real home prices in Michigan has been declining since 2001 and turned negative in 2005. The South Bend, Indiana housing market is slightly better than the Michigan housing market, but still is relatively flat compared to the national average. Some caution should be taken in evaluating this figure: the regional housing price indices were deflated with a national price index. I am not sure, though, that the outcome would be much different if a regional price index were used.

Now back to my world. This week my wife and I finally received an offer on our home. We gave a counter offer and the prospective buyers accepted. Our counter offer requires us to bring money to table. We are glad to be paying this amount just to unload our home. So, we too have been hit by this housing recession. I would like to think that makes me an academic who has not lost touch with the real world

Update
I redid the second figure with the PCE deflator. The results seem more reasonable than what they were using the CPI as the deflator.