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Managing the Federal Debt

Regional Financial ReviewFROM MOODY’S ECONOMY.COM / Volume XX, Number 11 / May 2010

The financial crisis and Great Recession prompted major changes in how the U.S. government finances its borrowing. Policymakers will ultimately need to reduce the long-term budget deficit or risk a fiscal crisis. 1

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REGIONAL FINANCIAL REVIEW �� Table of Contents MAY 2010

NATHAN TOPPER & AUGUSTINE FAUCHERThe financial crisis and the Great Recession have led to large changes in the ways the U.S. government finances its borrowing. This article describes both the theoretical and institutional factors that drive the Treasury’s manage-ment of federal debt. It traces shifts in practice over the past two decades as federal deficits have waxed and waned and concludes by outlining risks as the issues of deficit reduction and debt management coincide with potential rises in interest rates.

ANDRES CARBACHO-BURGOSHousing markets are struggling to recover within an environment of diminish-ing policy support and uncertain labor markets. There is no shortage of data series to illustrate house price trends, but it is not always easy to interpret differences among them. This article outlines the details of seven house price indicators and how they may be interpreted to understand the outlook for the housing market.

CHRIS LAFAKIS & STEVEN G. COCHRANEThe cost of living index helps define the comparative economic advantages of metropolitan areas. The correction of the housing market is creating shifts in how the metro areas rank. This article provides the latest update of the Moody’s Analytics cost of living index.

Managing the Federal Debt Across the Business Cycle

A Taxonomy of House Prices

U.S. Metro Area Cost of Living Index Update

Analysis Features

State and Metropolitan Area Forecast Review

Regional Tables

11 1

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Executive SummaryMARK ZANDI

Northeast

U.S. macro and regional forecast tables as well as state and metro area historical tables are available exclusively to subscribers via www.economy.com.

Forecast AssumptionsMARK ZANDI

Midwest

FAQ

South

West

THE REGIONAL FINANCIAL REVIEW IS EDITED BY STEVEN G. COCHRANE

6 MOODY’S ANALYTICS / Regional Financial Review / May 2010

MOODY’S ANALYTICS / Regional Financial Review / May 2010 1

EXECUTIVE SUMMARY

May disappointmentHopes that the expansion was accelerat-

ing were dampened by May’s jobs report. Other than temporary census hiring, job growth last month was too weak to sug-gest businesses are ramping up significantly. May’s job gains were also concentrated in healthcare, manufacturing, distribution and transportation. State and local governments appear to be intensifying layoffs amid severe budgetary pressures and fading financial help from the federal government.

The unemployment rate fell to 9.7% dur-ing the month, but this again was because of more than 400,000 temporary census jobs and will be reversed as those jobs end. The unemployment rate is expected to drift back into double digits this fall as some workers

who dropped out of the job market resume looking for work. The Bureau of Labor Sta-tistics reports that almost 6 million people who did not seek employment during May say they nonetheless want jobs. This is up from fewer than 5 million before the reces-sion began (see Chart 1).

The May report was not entirely nega-tive: Average hours worked per week—a good leading indicator of future job cre-ation—has increased by a sizable half hour since hitting a record low last October. Each tenth of an hour increase in the aver-age workweek is equivalent in productive capacity to the addition of 300,000 jobs. Also encouraging was growth in the num-ber of temporary-help jobs for the ninth straight month. Firms generally hire temps

before making the commitment to hire full-time employees.

Preconditions for stronger hiring are coming into place. Businesses are enjoying much better profits, with earnings growth over the past year about as strong as it gets, and firms have had good success cleaning up their balance sheets. The share of cash flow going to debt payments in nonfinancial busi-nesses is falling fast, both because interest rates are low and because firms are cutting their overall debt loads. As a result, busi-nesses are flush with cash (see Chart 2).

Despite all this, a substantive revival in hiring remains a forecast rather than a reality. Small firms are struggling to obtain credit, and all businesses remain cautious, stung by memories of the recession and the

Hope and FearBY MARK ZANDI — JUNE 15, 2010

FROM MOODY’S ECONOMY.COM 1

Chart 1: Unemployment Rate Will Rise Again

Source: BLS

Not in labor force but want a job, 3-mo MA, mil


Chart 2: Stronger Business Balance Sheets Nonfinancial corporate businesses, %

Sources: Federal Reserve, Moody’s Analytics

Interest-coverage ratio

Quick ratio

One year into the U.S. economic expansion, real GDP is advancing at a nearly 3% annual pace, and monthly job growth—after cutting through the noise in the data—appears to be nearly 125,000. This is a good performance given the recession’s severity, but not good enough. At the current rate, unemploy-

ment will remain stuck near 10% far too long. With the jobless rate painfully high, and with the monetary and fiscal stimulus stretched as far as it can go, the expansion remains vulnerable. There is plenty to be nervous about, and the persistent European debt crisis now tops the list.


fight to survive it. Firms are also uncertain about government policy debates over healthcare, financial regulatory reform, energy policy, immigration law, and taxes. While these are necessary debates, busi-nesses seem loath to make major decisions until they are resolved.

European threatThe mounting European debt crisis is one

more reason for businesses to delay hiring more aggressively. Though the European Union and International Monetary Fund have cobbled together $1 trillion to bail out struggling euro zone economies, and the European Central Bank has already pur-chased close to $50 billion in sovereign debt (mostly from Greece and Portugal), global investors remain unconvinced.

Perhaps most discouraging is that inves-tors seem to be losing faith in the ability of major European governments such as Spain and Italy to navigate their fiscal problems. Interest rates on Spanish and Italian sov-ereign debt are as high as they have been since the crisis began relative to benchmark German securities (see Chart 3). All this puts enormous financial pressure on the European banks and other financial institutions that are these countries’ largest debt holders.

Even if the financial turmoil ends soon, it is difficult to see how Europe will avoid slid-ing back into recession. The European econo-my was barely growing before recent events, and that was mostly because of the tempo-rary policy stimulus and an end to massive inventory liquidation by manufacturers. As

Europe’s strained financial system tightens credit further and governments impose fiscal restraint, the economy will surely backtrack.

European policymakers thus need to do more to settle financial markets and limit the economic damage. Most importantly, nations need to offer credible plans to re-store fiscal stability—and then show they are following through. So far so good; the Greeks, Portuguese and Spaniards appear to be doing just this. Next up is Britain, which was given a brief reprieve during its recent election. A lot will ride on how investors receive the new government’s budget, due later this month.

The ECB and Bank of England will not soon be able to begin normalizing interest rates; thus, both the euro and the British pound will continue their recent slides. It would not be surprising to see the euro approach one-for-one parity with the U.S. dollar by year’s end and for the pound to reach quarter-century lows. There are also meaningful odds that the ECB will have to increase its sovereign debt purchases and not sterilize those purchases as it has been doing, thus allowing interest rates to fall even closer to zero. Further credit easing by the Bank of England is also a possibility.

U.S. falloutAssuming Europe’s policy response is

sufficient to calm financial markets, which is our baseline assumption, fallout on the U.S. economy should be manageable. That is, it will hurt growth, but it will not derail the expansion. Just how badly the U.S. economy

is damaged depends largely on the stock market. Stock prices are off less than 15% since the crisis began—not much more than a garden-variety correction, particularly fol-lowing a year of strong gains. The drop thus far does not make anyone feel good, but it will not change consumers’ spending behav-ior or businesses’ hiring decisions too much.

Yet the market’s recent turmoil shows why the European debt crisis is a threat: Fur-ther stock price declines could do significant damage to both the U.S. psyche and the U.S. economy. Spending by high-income house-holds is particularly sensitive to the markets’ ups and downs. The saving rate for households in the top fifth of the income distribution—a group that accounts for about 60% of con-sumer spending—surged during the recession as higher-income households saw their nest eggs erode. The stock market’s rally over the past year came as huge relief, pushing these households’ saving back to prerecession rates (see Chart 4). The market’s current travails have surely put this group on edge again.

The other way Europe’s debt crisis hits home is via the stronger dollar and its negative effect on U.S. exports. This impact should be small, however, as Europe ac-counts for only about a fifth of total U.S. exports, and exports in turn make up less than a tenth of U.S. GDP. The debt crisis also brings some economic positives for the U.S., including lower prices for oil and other commodities and in particular lower inter-est rates. The Federal Reserve was a long way from raising rates even before Europe’s troubles erupted, but a rate hike now seems

EXECUTIVE SUMMARY �� Hope and Fear


Chart 3: European Debt Crisis Continues

Source: Bloomberg

Yield spread, 10-yr sovereign minus German bund, ppt


Chart 4: High-End Consumers Are More Relaxed


Personal saving rate, families in top 20% of income distribution, %


EXECUTIVE SUMMARY �� Hope and Fear

even further in the future. Long-term rates have also fallen significantly, with fixed mortgage rates now near record lows.

Combining all these cross-currents, the debt crisis is expected to cut about 20 basis points from real U.S. GDP growth during the coming year. Again, this forecast assumes the crisis is now reaching its apex.

OutlookU.S. real GDP growth is expected to end up

near 3% in 2010, 4% in 2011, and 5% in 2012.

Job growth will accelerate from an average of 125,000 per month this year (December to December) to 250,000 in 2011 and 300,000 in 2012. Unemployment will remain near 10% through the end of this year but fall to 8.5% by the end of 2011 and 7% by the end of 2012.

Our optimism is predicated on a range of developments beyond a subsiding debt crisis in Europe. Most important is the expectation that Congress and the Obama administration can make credible changes to the nation’s long-term fiscal outlook early in 2011. While

policymakers will not be able to completely solve the nation’s fiscal challenges, they should be able to convince global investors that the U.S. will meet its fiscal responsibili-ties. Interest rates will increase significantly in 2011-2012 but will not hurt the expansion.

Yet even if our optimism is validated, it will take until early 2013 for employment to return to its level set before the recession began in 2007, and it will take until 2015 for joblessness to return to its full-employment rate of 5.5%.


EXECUTIVE SUMMARY

Monetary policyThe Federal Reserve is not expected to

begin raising interest rates—either the inter-est rate paid on reserves or the federal funds rate—until early 2011. The initial rate hike will coincide with when unemployment be-gins to move definitively lower. Employment has stabilized, but job growth sufficient to bring down unemployment on a consistent basis is not likely until year’s end.

Inflation should also remain low and in-flation expectations well contained through at least the spring of 2011. Core inflation is already below the Fed’s implicit target range and will slow further in coming months giv-en the nearly double-digit unemployment rate, high vacancy rates, and low utilization rates in manufacturing.

It will also take the better part of this year for the financial system to fully normal-ize. The system has stabilized as interbank lending and corporate bond markets have returned to normal, but other parts of the system are not functioning well. Private resi-dential and commercial mortgage-backed

bond issuance is moribund, a steady stream of small banks continue to fail, and most de-pository institutions are reluctant to extend credit except to their most pristine house-hold and corporate borrowers.

With the recent correction in global asset prices, there is also no indication that price bubbles are developing in response to the ag-gressive monetary stance. Even Chinese equity and real estate prices have weakened in re-sponse to various policy efforts. Policymakers are more sensitive to bubbles given the mis-take seemingly made by the Federal Reserve coming out of the tech-stock bust a decade ago. This contributed to the housing bubble, which was at the root of the financial crisis.

The Fed will effectively begin tightening monetary policy well before raising interest rates. It recently ended its purchases of mort-gage securities and is scheduled to complete-ly wind down the TALF program this month. Also, just prior to raising interest rates, poli-cymakers will likely begin draining reserves through reverse repurchase agreements and term deposits. The Treasury has also recently

restarted the Supplemental Financing Pro-gram, in which it sells Treasury bills and then deposits the proceeds at the Fed.

Policymakers will then be prepared to begin raising rates, hiking the interest rate on reserves and the federal funds rate simul-taneously. The interest rate on reserves is likely to become the key target rate until the excess reserves are successfully drained. The funds rate is expected to end 2011 at 2.5% and to have normalized at just over 4% by the end of 2012.

Fiscal policyThe federal government’s fiscal problems

remain enormous. The budget deficit bal-looned to nearly $1.4 trillion in fiscal 2009, up from $475 billion in fiscal 2008. This year’s deficit is expected to also be nearly $1.4 trillion, and the cumulative deficit over the fiscal 2009 to fiscal 2012 period will be nearly $5 trillion.

This very poor fiscal situation reflects the expected ultimate price tag to taxpayers of the financial crisis and Great Recession more

Forecast AssumptionsBY MARK ZANDI — JUNE 15, 2010

FROM MOODY’S ECONOMY.COM 1 FROM MOODY’S ECONOMY.COM 1

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Chart 1: Monetary Policy

Sources: Federal Reserve Board, Moody’s Analytics

Prime rate

Federal funds rate

Discount rate


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Chart 2: Fiscal Policy

Sources: BEA, Moody’s Analytics

Share of GDP (R)

$ bil (L)

Federal budget deficit



1.05 1.10 1.15 1.20 1.25 1.30 1.35 1.40 1.45 1.50 1.55 1.60

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05 06 07 08 09 10 11

Chart 3: U.S. Dollar

Source: Federal Reserve

¥/$ (L)

$/€ (R)


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Chart 4: Oil Prices

Sources: The Wall Street Journal, Moody’s Analytics

Oil price, $ per barrel (L)

Natural gas, $ per mmBTU (R)

than $2 trillion. This is equal to 14% of GDP. For historical context, the savings and loan crisis in the early 1990s cost taxpayers some $350 billion in today’s dollars, equal to al-most 6% of GDP at that time.

Of the over $2 trillion cost of the finan-cial crisis and recession, $1.3 trillion repre-sents the direct cost to the government of its response to the financial crisis. This in-cludes the fiscal stimulus and what has been committed to support the financial system and the auto and housing industries less what eventually will be recouped in future asset sales.

The fiscal stimulus totals $1.1 trillion and includes approximately $800 billion for last year’s Recovery Act, $150 billion for the tax rebate checks provided by President Bush, and $150 billion in additional unemploy-ment insurance, aid to state governments, and temporary tax cuts assumed to be pro-vided this year and next.

The government’s other efforts to stem the crisis and recession, including the $700 billion for the Troubled Asset Relief Program, $400 billion for recapitalizing Fannie Mae and Freddie Mac, and over $2 trillion in Federal Reserve loans to various financial institutions, will have an ultimate net cost of some $250 billion.

The weaker economy and resulting loss of tax revenues and increased transfer pay-ments to support those losing their jobs and other income support programs will cost the Treasury another $700 billion. These are very substantial costs, but the costs of

governmental inaction would have been measurably greater.

The budget outlook remains extraor-dinarily disconcerting even after the costs of the financial crisis abate as the costs of the Medicaid, Medicare and Social Security programs balloon. President Obama’s recent budget proposal does not significantly ad-dress the nation’s long-term fiscal problems. The nation’s federal debt-to-GDP ratio will rise to over 80% a decade from now under the president’s plan. This is double the ap-proximately 40% ratio that prevailed prior to the current financial crisis. This long-term budget outlook will thus remain untenable, which will ultimately force various substan-tial changes to entitlement programs and tax policy.

U.S. dollarThe European debt crisis and global

flight to quality are lifting the U.S. dollar. The euro has fallen below $1.20 to the dol-lar, the lowest it has been in four years. The British pound is also under significant pres-sure. The dollar has even strengthened ver-sus various previously very strong emerging market currencies.

The dollar is expected to strengthen fur-ther vis-à-vis the euro and pound through much of the remainder of the year. The European economy is expected to slip back into a mild recession later this year due to the recent crisis and resulting fiscal restraint. The European Central Bank and Bank of Eng-land are thus not expected to begin normal-

izing their monetary policies until well into 2011. The ECB is purchasing sovereign debt to help quell the crisis, but it is sterilizing those purchases; if conditions do not soon stabilize, it will likely increase those pur-chases and may even decide not to sterilize, allowing interest rates to fall even further.

Recent events also highlight that the risk of a rapidly depreciating dollar is small, which at various times has been a concern. The dollar accounts for nearly two-thirds of global reserves, which is unlikely to change much any time soon, since the U.S. remains far and away the global economy’s largest and most stable economy and predominant player in global trade. There are also no good alternatives, including the euro, pound and Japanese yen.

The dollar is expected to drift lower be-ginning about this time next year, when the euro and pound stabilize and the Chinese are expected to resume revaluation of their currency. The dollar is some 25% overvalued against the yuan, and while the Chinese will be slow to revalue, the economic logic for doing so is increasingly compelling. There is no more efficient way to address China’s inflation and speculation concerns than al-lowing its currency to appreciate.

Energy pricesOil prices, as measured by the price of

a barrel of West Texas Intermediate, have weakened to below $75 per barrel in response to the European debt crisis and the implica-tions for global growth and energy demand.

EXECUTIVE SUMMARY �� Forecast Assumptions


This decline is despite the mounting disrup-tions to offshore oil drilling because of the BP oil spill in the Gulf of Mexico.

Over the past two years, prices have ranged from well below $50 per barrel at the start of 2009 during the depths of the reces-sion to a record of almost $150 per barrel in the summer of 2008. Retail gasoline prices have declined to $2.70 per gallon, compared with an all-time high of close to $4. Natural gas prices remain low, particularly compared with oil prices at less than $5 per million BTUs.

Oil prices are not expected to slump much further, as the global economic expansion is expected to remain intact and global oil pro-ducers will manage supplies. For all of 2010, oil prices will average $80 per barrel and range as high as $100 per barrel in the next several years, consistent with trend (abstracting from the vagaries of the global business cycle) glob-al supply and demand fundamentals.

Prospects for even higher oil prices are low given the now-significant global excess productive capacity to produce oil, particu-

larly in Saudi Arabia. This supply would likely be brought on line if oil prices were to rise too high too fast.

Natural gas prices will have trouble keep-ing up with oil prices during the next several years, as a very substantial glut of natural gas has developed. Abstracting from the im-pact of weather, demand has weakened with the recession, and supply has increased sub-stantially in response to the previously very high prices. Natural gas prices are expected to average $6 in 2010.

EXECUTIVE SUMMARY �� Forecast Assumptions


EXECUTIVE SUMMARY �� Macro Summary Table

Units 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 12Q1 2010 2011 2012 2013 2014

NIPAGross domestic product %AR 3.0 2.5 2.8 4.0 5.1 5.1 5.3 5.3 3.1 3.9 5.0 3.4 2.6 Consumption %AR 2.7 1.7 1.6 3.0 4.2 4.5 4.6 4.8 2.3 3.1 4.5 3.6 2.8 Durables %AR 12.3 2.8 1.6 3.4 6.1 6.8 6.8 7.7 7.8 4.7 6.4 2.9 1.3 Motor vehicles %AR 18.2 9.8 -1.7 2.8 14.5 18.2 15.9 16.2 3.9 8.5 13.6 3.7 1.0 Nondurables %AR 1.7 1.6 1.9 2.5 3.2 3.2 3.3 3.4 2.4 2.5 3.1 2.5 2.4 Services %AR 1.2 1.5 1.6 3.0 4.1 4.5 4.7 4.7 1.3 2.9 4.6 4.1 3.3 Fixed investment %AR 6.3 6.3 6.8 9.5 11.9 13.0 13.6 13.6 2.3 9.6 12.1 5.6 2.9 Nonresidential %AR 5.4 5.7 5.4 6.2 7.8 8.6 8.7 8.4 2.4 6.7 8.0 5.0 2.9 Structures %AR -0.8 2.2 4.9 8.0 13.1 14.1 15.2 11.8 -10.7 8.3 12.7 8.0 6.2 Equipment %AR 7.7 7.0 5.6 5.5 6.0 6.7 6.3 7.1 9.1 6.1 6.3 3.9 1.5 Residential %AR 9.5 8.5 12.1 21.9 26.9 28.4 30.3 30.7 1.8 19.9 25.3 7.3 2.9 Single-family %AR 24.2 23.4 16.4 23.7 35.4 46.7 65.5 72.2 19.5 30.0 52.0 13.2 1.4 Multifamily %AR 14.5 1.1 18.2 32.5 37.0 41.4 41.9 35.1 -39.5 27.1 30.8 8.6 1.6 Other %AR 1.5 0.9 9.4 20.8 21.8 17.3 9.1 4.4 -1.5 13.8 6.8 1.3 4.8 Exports %AR 9.6 9.5 9.8 10.4 11.6 13.0 13.5 13.0 11.4 10.9 12.5 9.3 7.0 Merchandise %AR 10.9 10.0 9.9 10.6 12.1 14.1 14.5 14.6 14.6 11.4 14.0 11.1 7.7 Services %AR 6.8 8.3 9.4 10.1 10.4 10.6 11.1 9.5 5.0 9.7 9.1 5.1 5.3 Imports %AR 7.4 6.7 5.4 6.1 7.3 9.2 9.0 9.9 9.5 6.9 9.4 8.5 6.9 Merchandise %AR 7.9 7.0 5.4 6.2 7.6 9.9 9.6 10.7 10.8 7.2 10.2 9.0 7.3 Services %AR 5.5 5.5 5.4 5.3 5.6 5.9 6.0 6.2 4.3 5.6 6.1 5.8 5.3 Government %AR 1.4 1.3 1.8 2.1 1.9 0.3 0.3 0.5 0.5 1.5 0.8 1.5 1.6 Defense %AR 1.3 1.4 2.4 1.8 1.6 1.3 1.6 0.9 2.0 1.7 1.3 0.6 -0.8 Nondefense %AR 4.6 4.8 4.9 4.7 1.3 -2.0 -2.0 -0.1 4.9 2.8 -0.7 0.5 1.4 State and local %AR 0.8 0.5 0.8 1.7 2.1 0.4 0.2 0.5 -1.0 1.2 0.8 2.1 2.8 Final sales %AR 2.6 2.4 2.7 4.1 5.2 5.1 5.4 5.4 1.8 3.9 5.1 3.5 2.6 Final domestic sales %AR 2.6 2.2 2.3 3.6 4.7 4.8 5.0 5.1 1.9 3.6 4.8 3.5 2.6

ConsumersPersonal saving rate % 3.7 4.1 4.5 4.5 4.1 3.9 3.9 3.6 3.9 4.1 3.7 4.1 4.6 Retail sales & food services $ tril 4.37 4.40 4.44 4.51 4.58 4.66 4.75 4.85 4.38 4.63 4.96 5.21 5.41 Change %AR 5.4 3.4 3.4 6.6 6.2 7.5 7.9 8.4 6.0 5.7 7.2 5.0 3.9 Total vehicle sales mil 11.49 11.78 12.18 12.95 13.51 14.31 14.91 15.55 11.60 13.92 16.09 16.88 17.06Housing starts mil 0.67 0.68 0.72 0.79 0.89 1.04 1.25 1.47 0.67 0.99 1.67 1.85 1.81 Median house sales price $ ths 173.94 169.77 167.20 166.09 166.47 166.52 166.99 167.98 170.98 166.51 170.45 181.22 195.21 Change %AR 2.2 -9.2 -5.9 -2.6 0.9 0.1 1.1 2.4 -0.9 -2.6 2.4 6.3 7.7

ProducersIndustrial production 1997=100 101.8 102.7 103.7 104.9 106.0 107.1 108.3 109.3 102.4 106.6 110.5 112.5 113.7 Change %AR 1.6 3.8 3.9 4.9 4.3 4.3 4.3 4.0 4.2 4.1 3.7 1.8 1.0 Capacity utilization % 69.9 70.5 71.1 71.9 72.5 73.1 73.7 74.3 70.3 72.8 74.7 74.7 74.1

Labor MarketsTotal employment mil 130.3 130.5 130.8 131.2 131.8 132.6 133.5 134.5 130.3 132.3 136.1 140.4 142.9 Change %AR 2.0 0.6 0.9 1.3 1.8 2.3 2.6 3.0 -0.4 1.5 2.9 3.2 1.7 Unemployment rate % 9.8 10.0 10.1 10.1 9.8 9.3 8.8 8.3 9.9 9.5 7.5 6.1 5.7

PricesConsumer price index 1982=100 218.0 218.7 219.5 220.7 222.0 223.8 225.5 227.4 218.5 223.0 229.9 236.3 241.7 Change %AR 0.8 1.2 1.6 2.1 2.6 3.2 3.1 3.4 1.8 2.1 3.1 2.8 2.3 Producer price index 1982=100 182.9 182.9 183.0 183.9 185.3 186.1 187.2 188.7 182.7 185.6 190.4 194.1 197.5 Change %AR 1.8 0.0 0.3 2.0 3.0 1.8 2.4 3.2 5.7 1.6 2.6 1.9 1.8 West Texas Intermediate $/Bbl 78.1 79.5 81.8 84.3 87.0 88.2 89.6 90.2 79.5 87.3 89.4 90.2 92.3

Financial MarketsFederal funds % 0.16 0.18 0.22 0.69 1.32 1.91 2.50 3.43 0.17 1.60 3.78 4.07 3.98 Prime rate % 3.16 3.18 3.22 3.69 4.32 4.91 5.50 6.43 3.20 4.60 6.78 7.07 6.98 10-yr Treasury % 3.50 3.65 4.00 4.37 4.72 5.01 5.36 5.75 3.72 4.87 5.57 4.88 4.60 FRB 10-country index Jan97=100 102.0 102.6 103.0 102.5 102.5 102.3 101.9 101.3 102.4 102.3 100.9 101.7 102.8 Change %AR -0.5 2.3 1.4 -1.9 0.1 -0.7 -1.5 -2.4 -3.0 -0.1 -1.4 0.8 1.1

Government Balance NIPA basis $ bil -1,359.6 -1,391.9 -1,450.5 -1,464.3 -1,438.4 -1,387.2 -1,331.8 -1,238.3 -1,388.6 -1,405.4 -1,140.7 -865.9 -730.3 Unified budget $ bil -323.4 -314.5 -347.5 -367.0 -113.7 -266.9 -313.4 -315.0 -1,314.3 -1,060.9 -845.1 -825.8 -799.1


NONFARM EMPLOYMENT, ANNUALIZED % CHANGE

EXECUTIVE SUMMARY �� State Summary Table

10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 2010 2011 2012 2013 2014New England

Connecticut 1.4 0.7 0.4 0.3 0.9 1.5 1.7 2.4 -0.6 0.8 2.2 2.6 1.1Maine 1.9 -0.1 0.2 0.8 1.2 1.6 2.1 2.3 -0.4 0.9 2.3 2.6 1.3Massachusetts 2.5 0.3 0.3 0.7 1.0 1.5 1.8 2.2 -0.5 0.9 2.2 2.6 1.0New Hampshire 1.6 1.1 1.5 1.7 2.2 2.8 3.0 3.2 1.2 1.9 3.2 3.1 1.6Rhode Island -2.3 1.4 2.7 1.6 2.4 2.4 3.6 2.8 -1.5 1.9 3.2 3.4 2.0Vermont 1.2 -0.3 -0.0 0.1 0.5 1.2 1.6 1.9 0.1 0.4 1.9 2.5 1.2

Middle AtlanticNew Jersey 1.3 -0.2 0.3 -0.1 0.9 1.5 1.9 2.0 -0.8 0.5 2.2 2.8 1.3New York 1.9 0.0 0.3 0.6 1.1 1.9 2.4 2.5 -0.4 0.9 2.6 3.0 1.7Pennsylvania 1.9 0.1 0.3 0.6 0.9 1.2 1.4 1.6 -0.5 0.7 1.8 2.7 1.3

South AtlanticDelaware 1.5 0.6 1.0 1.1 1.9 2.7 3.1 3.7 -1.0 1.5 3.6 4.1 2.4District of Columbia 6.6 -2.4 -1.2 0.5 1.4 1.7 1.6 1.2 1.5 0.6 1.4 1.7 1.1Florida 0.9 -0.2 1.7 3.3 4.3 4.5 4.2 4.0 -1.0 2.8 4.3 4.3 3.1Georgia 0.4 0.3 0.6 1.2 2.2 3.1 3.5 4.0 -1.6 1.5 3.9 4.7 3.0Maryland 3.8 -0.7 0.1 1.1 1.7 2.1 2.1 1.8 -0.5 1.1 1.9 2.3 1.8North Carolina 2.6 0.7 0.9 1.4 2.0 2.7 2.7 2.7 -0.0 1.7 2.9 3.2 2.0South Carolina 1.7 0.6 1.0 1.5 2.2 2.8 3.1 3.3 0.2 1.7 3.2 2.8 1.9Virginia 3.2 0.4 0.7 1.3 2.0 2.5 2.9 3.0 -0.3 1.6 3.1 3.3 1.8West Virginia 1.2 -0.6 -0.2 1.0 2.1 3.1 3.7 3.7 -1.3 1.2 3.8 3.8 1.5

East North CentralIllinois 1.3 0.4 0.6 0.6 1.3 1.9 2.3 2.5 -1.0 1.0 2.5 2.7 1.3Indiana 3.1 -0.5 0.7 0.7 1.5 2.1 2.5 2.6 -0.2 1.1 2.5 2.7 1.3Michigan 0.4 0.1 0.0 0.6 1.2 1.7 2.2 2.5 -0.9 0.8 2.3 2.5 1.1Ohio 1.7 0.6 0.6 1.1 1.7 2.5 2.5 2.7 -1.0 1.4 2.8 3.1 1.5Wisconsin 0.5 -0.5 -0.0 0.3 1.0 1.5 1.8 2.1 -1.3 0.5 2.2 2.4 1.4

East South CentralAlabama 3.8 0.2 1.0 1.6 2.3 3.1 3.4 3.5 -0.9 1.9 3.5 3.6 2.2Kentucky 2.9 0.5 1.4 2.2 2.8 2.6 3.2 3.4 -0.1 2.1 3.3 3.2 1.8Mississippi 0.9 -0.5 0.1 0.7 1.5 2.1 2.6 3.1 -1.0 0.9 2.8 3.0 1.9Tennessee 1.5 0.5 0.8 1.3 1.9 2.6 2.7 3.0 -0.6 1.5 2.8 2.9 1.5

West North CentralIowa 2.2 0.2 0.4 0.1 0.9 1.5 2.1 2.2 -0.2 0.8 2.3 2.7 1.4Kansas 3.3 0.1 0.9 1.3 1.9 2.5 2.8 3.2 -1.1 1.6 3.0 2.7 1.4Minnesota 2.3 0.8 1.2 1.1 1.8 2.5 2.9 3.2 -0.0 1.6 3.0 3.2 1.7Missouri 1.6 0.7 1.0 1.0 1.6 2.1 2.2 2.6 -0.9 1.3 2.6 2.8 1.2Nebraska 2.3 0.9 0.9 1.4 2.0 2.4 2.5 2.8 -0.5 1.6 2.8 3.1 1.8North Dakota 3.6 0.3 1.1 1.5 1.9 2.1 1.7 1.6 0.8 1.6 1.7 2.0 1.2South Dakota 1.9 -0.2 0.6 1.0 1.7 1.9 2.2 2.1 -0.6 1.2 2.2 2.5 1.5

West South CentralArkansas 1.8 0.5 1.0 1.4 2.0 2.4 2.7 2.9 -0.4 1.5 2.9 3.2 1.8Louisiana 2.2 0.1 0.9 1.5 1.4 2.6 2.7 2.9 -0.3 1.5 2.9 3.0 1.7Oklahoma 1.8 -0.8 -0.1 0.4 1.0 1.5 1.7 1.9 -1.2 0.6 1.9 2.2 1.6Texas 2.9 2.0 2.3 2.5 2.5 3.1 3.5 3.7 0.3 2.5 3.6 3.8 2.8

MountainArizona 1.7 -0.1 0.2 0.8 1.8 2.1 3.0 3.4 -1.3 1.1 3.4 4.5 3.4Colorado 3.1 1.2 1.6 1.8 2.4 2.9 3.2 3.5 -0.9 2.1 3.4 3.5 2.0Idaho 2.6 1.3 1.5 1.8 2.3 2.8 3.0 3.3 -0.3 2.0 3.2 3.3 2.0Montana 1.2 -0.5 0.0 0.6 0.9 1.3 1.5 1.5 -0.7 0.6 1.6 2.2 1.5Nevada -0.8 -0.7 0.1 2.5 3.1 3.3 3.2 3.1 -2.8 1.7 3.6 4.8 3.9New Mexico 2.1 0.8 1.9 3.1 3.7 3.9 4.1 4.5 -0.6 2.8 4.3 4.3 2.9Utah 2.1 -0.0 0.4 0.7 1.3 1.8 2.2 2.3 -0.6 1.0 2.4 3.0 1.9Wyoming 3.5 1.2 1.1 1.3 1.5 2.3 2.4 2.5 -1.1 1.6 2.5 2.5 1.4

PacificAlaska 4.2 -0.0 0.8 1.7 2.3 2.5 2.8 3.1 2.5 1.7 3.0 3.1 2.0California 1.4 0.4 0.8 1.0 1.7 2.2 2.6 3.0 -1.4 1.3 2.8 3.0 1.7Hawaii 3.6 -0.4 0.2 0.9 1.3 1.9 2.4 3.0 -0.3 1.1 2.8 3.1 1.4Oregon 2.3 0.9 1.2 1.4 2.1 2.7 3.0 3.0 -0.8 1.7 3.1 3.3 2.1Washington 2.4 0.8 1.4 1.7 2.4 2.7 2.9 3.0 -0.6 1.9 3.1 3.3 2.0

United States 2.0 0.6 0.9 1.3 1.8 2.3 2.6 3.0 -0.4 1.5 2.9 3.2 1.7


EXECUTIVE SUMMARY �� Metro Summary Table

NONFARM EMPLOYMENT, ANNUALIZED % CHANGE

10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 2010 2011 2012 2013 2014New England

Boston 1.6 0.0 0.8 1.0 1.4 2.1 2.3 2.7 -0.5 1.2 2.6 2.2 1.1Bridgeport-Stamford-Norwalk 1.3 1.4 0.7 0.1 0.8 1.7 1.5 2.3 -0.9 0.9 2.2 2.1 1.0Cambridge 1.4 0.4 0.5 1.0 1.2 1.9 1.9 2.5 -0.9 1.1 2.5 2.3 1.2Hartford 0.3 0.3 0.5 0.3 1.1 2.2 1.8 2.6 -1.2 0.8 2.4 1.9 0.9

Middle AtlanticAlbany 5.0 -0.7 -0.5 0.2 1.5 2.2 2.8 2.1 -0.1 0.9 2.7 3.0 2.1Camden 0.4 -0.4 0.3 -0.1 0.8 1.4 1.5 1.7 -1.7 0.4 2.0 2.7 1.4Edison 0.8 0.3 0.7 0.1 0.9 1.4 1.5 1.6 -1.8 0.7 1.9 2.3 1.6Nassau-Suffolk 4.2 0.2 0.4 0.6 1.2 1.9 2.3 2.4 0.9 1.1 2.5 2.4 1.8New York 2.7 0.7 0.4 0.6 1.1 1.6 2.8 2.2 -0.3 1.1 2.6 2.5 1.9Newark -0.1 -0.1 0.5 0.5 1.1 1.7 2.1 1.9 -1.6 0.7 2.2 2.7 1.4Philadelphia 1.7 0.7 0.9 1.0 1.3 1.8 2.2 2.3 -0.9 1.2 2.4 2.7 1.5Pittsburgh 1.5 0.9 0.9 1.1 1.5 1.9 2.3 2.4 -0.3 1.3 2.5 2.6 1.5Rochester 4.0 2.3 2.3 1.7 2.1 2.8 2.9 3.3 1.3 2.3 3.2 3.3 2.2

South AtlanticAtlanta 0.2 0.3 0.6 0.7 1.0 1.9 2.8 3.2 -1.6 0.9 3.4 5.3 4.8Baltimore 0.3 -1.1 -1.2 0.4 1.0 1.8 1.7 1.5 -1.5 0.2 1.6 1.9 1.7Charlotte 3.6 1.6 1.7 2.1 2.7 3.3 3.2 3.1 0.1 2.4 3.4 3.4 2.3Fort Lauderdale 2.1 0.1 2.1 2.7 3.9 3.7 3.5 3.5 -1.3 2.6 3.8 3.2 2.3Miami 2.9 -0.6 -0.2 1.3 2.9 4.1 4.2 3.8 -0.7 1.7 3.9 3.1 1.8Orlando 3.2 0.8 1.8 2.3 3.6 3.7 3.5 3.4 -0.9 2.6 3.6 3.5 2.9Raleigh 3.9 1.3 1.5 2.3 2.9 3.5 3.4 3.2 0.4 2.4 3.6 3.5 2.8Tampa 0.7 -0.6 2.3 3.4 4.9 4.9 3.7 3.5 -1.2 3.0 4.0 3.3 2.1Virginia Beach 0.6 0.7 0.8 0.8 1.8 2.3 2.6 2.7 -0.2 1.3 2.7 2.8 1.5Washington DC 2.3 -1.7 -0.3 1.0 1.8 2.4 2.5 2.5 -0.3 0.9 2.7 2.8 1.7

East North CentralChicago 2.9 1.7 1.7 1.2 2.0 2.6 2.9 2.9 -0.8 1.9 3.0 2.3 1.5Cincinnati 5.3 1.4 1.1 1.6 1.6 2.5 2.1 2.1 -0.2 1.8 2.3 2.3 1.5Cleveland 3.7 0.7 0.6 0.7 1.3 2.0 2.0 2.1 -0.5 1.2 2.3 2.5 1.4Columbus 3.6 0.7 0.6 1.0 1.7 2.6 2.8 2.4 -0.5 1.5 2.8 2.7 1.5Detroit -0.2 -0.2 -0.6 0.7 1.7 2.1 2.4 2.2 -2.3 0.7 2.3 1.8 0.4Indianapolis 2.1 -0.3 0.7 0.6 1.1 1.9 2.4 2.3 -1.3 1.0 2.3 2.5 1.8Milwaukee 2.4 -0.5 0.0 0.5 1.4 2.0 2.3 2.8 -1.3 0.9 2.7 2.1 1.3Warren -0.7 0.4 0.2 0.8 1.1 1.7 2.0 2.2 -2.6 0.8 2.2 1.9 1.1

East South CentralMemphis 2.3 0.6 0.8 1.3 2.2 2.5 3.2 3.2 -1.6 1.6 3.1 2.9 1.4Nashville 3.5 2.0 1.7 2.0 2.3 2.9 2.8 3.1 -0.1 2.3 3.0 3.0 1.6

West North CentralKansas City 0.5 1.0 1.5 1.0 1.9 2.4 2.9 3.2 -1.5 1.5 3.1 2.5 1.3Minneapolis 4.4 1.3 1.6 1.1 1.6 2.4 2.5 2.7 -0.3 1.7 2.7 3.0 1.7St. Louis -0.7 1.5 1.7 1.6 2.3 2.8 3.1 3.3 -0.8 1.8 3.3 2.5 1.4

West South CentralAustin 1.9 2.0 1.8 2.2 2.1 2.8 3.3 3.7 0.9 2.2 3.6 4.5 3.7Dallas 2.4 2.1 2.2 2.7 2.4 2.9 3.2 3.3 0.4 2.5 3.4 3.9 3.0Ft. Worth 2.5 1.8 2.4 2.8 3.2 3.6 3.8 3.9 0.3 2.8 3.9 3.8 3.0Houston 1.7 1.3 1.9 3.0 2.9 3.4 3.6 4.0 -0.7 2.6 3.9 3.9 2.7New Orleans 0.7 -0.8 -0.1 1.8 2.3 3.5 4.2 4.5 0.1 1.5 4.1 2.7 1.4Oklahoma City 0.6 -2.0 -1.2 -0.1 0.8 1.3 1.7 1.6 -1.1 -0.0 1.7 2.1 2.4San Antonio 3.0 1.6 2.3 3.1 2.9 3.2 3.7 3.8 -0.1 2.8 3.8 4.0 3.2

MountainDenver 0.1 1.0 1.3 1.6 2.4 2.9 3.2 3.4 -1.6 1.8 3.4 2.6 1.6Las Vegas 1.5 -0.5 1.0 1.8 2.9 3.4 3.4 3.1 -3.0 1.9 3.6 4.6 3.5Phoenix 1.6 -0.5 -0.2 0.2 1.3 1.4 2.5 2.9 -1.4 0.6 2.9 3.8 2.8Salt Lake City 1.2 1.0 1.7 2.1 2.8 3.1 3.7 3.8 -1.9 2.2 3.5 2.8 1.7

PacificLos Angeles 1.7 0.3 0.8 1.0 1.8 2.3 2.9 3.4 -1.1 1.3 3.1 2.9 1.3Oakland 0.6 -0.1 0.5 1.1 1.6 2.5 3.0 3.2 -2.1 1.2 3.1 2.8 1.3Portland 2.9 1.0 1.3 1.5 2.3 2.9 3.1 3.1 -0.9 1.9 3.2 2.7 1.9Riverside 0.2 0.0 0.7 1.0 1.7 2.1 2.7 2.7 -2.2 1.1 2.8 3.2 2.3Sacramento 0.3 -0.2 0.1 0.9 1.6 2.1 2.4 2.9 -1.9 0.9 2.8 2.8 1.9San Diego 0.3 -0.1 0.4 1.1 1.8 2.3 2.7 3.3 -1.1 1.1 3.0 2.9 1.5San Francisco 0.5 -0.1 0.7 1.0 1.9 2.6 3.2 3.4 -2.2 1.3 3.3 3.1 1.6San Jose 0.6 0.2 0.8 1.1 1.8 2.5 2.9 3.0 -1.3 1.3 3.0 2.8 1.3Santa Ana-Anaheim 1.2 0.8 1.1 1.3 1.8 2.5 3.0 3.3 -0.7 1.5 3.1 2.9 1.5Seattle 1.8 1.5 2.2 2.2 2.5 2.7 2.7 2.8 -0.8 2.2 3.0 2.9 2.0


EXECUTIVE SUMMARY �� International Summary Table

REAL GROSS DOMESTIC PRODUCT, % CHANGE YR AGO

10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 2009 2010 2011 2012 2013Europe

Austria -0.4 1.3 2.3 0.3 1.2 3.0 2.4 2.5 -3.6 0.9 1.8 1.8 2.2Belgium 1.6 1.5 1.5 1.6 1.0 0.4 0.5 0.3 -3.0 1.4 0.9 0.7 0.9Czech Republic 3.0 3.9 3.2 3.4 3.0 2.5 3.4 3.8 -4.1 2.8 3.1 3.3 2.9Denmark 1.3 1.0 0.5 0.0 -0.3 -0.0 0.9 2.1 -5.1 0.5 0.2 3.3 3.5Euro zone 0.8 0.2 0.1 -0.2 -0.1 0.4 1.1 1.7 -4.1 0.4 0.3 2.0 2.1Finland 0.6 0.4 0.3 0.0 -0.1 0.1 0.5 1.0 -7.8 0.4 0.2 1.6 2.0France 1.3 1.2 0.5 0.3 0.3 1.1 2.2 2.8 -2.5 1.0 0.9 2.4 2.1Germany 1.1 0.3 0.2 -0.1 0.0 0.5 1.3 2.2 -4.9 0.7 0.4 2.7 2.7Greece -4.1 -5.0 -5.2 -4.8 -3.0 -1.4 -0.2 0.2 -2.0 -4.1 -2.4 1.0 1.9Hungary -1.7 -2.5 1.6 2.1 4.3 3.6 -1.7 -4.9 -6.3 -1.1 2.0 -1.6 3.8Ireland -2.3 -2.4 -0.2 -0.3 1.0 2.5 4.0 4.8 -7.1 -2.0 1.8 3.3 2.5Italy 1.0 0.6 0.8 0.2 0.0 0.1 0.5 1.0 -5.1 0.6 0.2 1.4 1.2Netherlands 1.0 0.5 0.1 -0.2 -0.4 -0.2 0.1 0.6 -4.0 0.3 -0.2 1.0 1.1Norway 1.9 1.9 2.0 1.3 1.5 1.7 2.1 2.7 -1.4 1.6 1.7 2.8 2.7Poland 3.0 2.9 2.8 2.7 2.8 3.0 3.3 3.7 1.7 2.9 3.0 3.7 3.7Portugal 0.9 0.3 0.1 -0.9 -0.8 -0.6 0.5 1.6 -2.7 0.7 -0.5 2.0 2.0Russian Federation 8.7 6.2 -2.6 -1.9 1.3 7.4 15.7 15.0 -7.9 5.1 5.6 6.0 5.3South Africa 2.9 3.5 3.5 3.3 3.7 4.1 3.7 4.6 -1.8 2.8 3.7 4.5 4.5Spain -0.3 -0.3 -0.7 -1.2 -1.6 -1.1 -0.2 0.6 -3.6 -0.7 -1.0 1.7 3.4Sweden 3.3 2.2 1.9 1.3 2.7 2.8 3.4 5.1 -4.9 1.9 2.6 4.5 3.3Switzerland 2.0 1.7 1.0 0.8 1.3 1.9 2.8 3.6 -1.5 1.6 1.7 3.2 2.2Turkey 4.1 4.3 4.3 6.3 6.7 5.3 4.8 2.7 -4.7 4.5 5.7 5.4 5.1United Kingdom 0.9 1.3 0.8 0.7 0.6 0.9 1.7 2.2 -4.9 0.7 1.0 2.6 2.3

Latin AmericaArgentina 5.6 5.4 4.4 4.2 4.3 3.9 3.9 4.4 0.9 5.1 4.1 4.7 4.8Brazil 7.0 5.5 4.9 4.1 3.5 5.4 6.8 4.9 -0.2 6.4 5.0 5.5 5.7Chile -0.7 5.2 6.5 5.2 7.7 6.2 3.0 6.0 -1.5 3.0 5.5 5.7 5.5Colombia 3.9 4.1 4.3 4.3 4.6 4.6 4.8 5.2 0.8 3.5 4.7 4.3 4.7Mexico 5.8 4.7 3.4 3.4 3.8 3.7 3.2 4.1 -6.5 4.5 3.5 4.6 3.5Peru 6.1 6.5 5.8 5.8 5.3 5.3 5.4 4.8 4.3 4.6 5.5 5.5 5.3Venezuela -6.8 -4.5 2.5 2.6 3.1 3.6 4.0 4.2 -3.3 -4.0 3.4 4.4 4.8

Asia/PacificAustralia 3.1 3.6 3.6 3.5 3.6 3.8 3.9 4.0 1.3 3.3 3.7 3.8 3.4China 9.2 9.4 9.5 9.6 9.6 10.0 9.4 9.6 8.4 10.0 9.6 9.6 9.5Hong Kong na na na na na na na na -4.5 4.6 5.8 6.2 5.5India 8.6 8.3 7.7 7.6 7.5 8.5 9.3 8.7 5.8 8.3 8.2 8.7 8.3Indonesia na na na na na na na na 4.5 5.6 6.8 6.8 6.9Japan 1.5 1.9 1.1 1.0 1.2 1.5 1.8 1.8 -5.2 1.8 1.4 1.6 0.9Malaysia na na na na na na na na -1.7 5.5 5.7 6.2 4.9New Zealand 2.0 2.0 2.0 2.5 3.6 4.5 4.8 4.6 -0.6 2.0 3.9 4.9 4.6Philippines na na na na na na na na 0.9 3.8 5.0 5.6 5.0Singapore na na na na na na na na -2.4 4.2 6.4 5.2 5.2South Korea 7.0 4.4 5.1 4.4 4.1 4.8 5.4 5.5 0.2 6.0 4.7 4.6 3.7Taiwan na na na na na na na na -1.9 4.7 4.3 4.4 4.5Thailand na na na na na na na na -3.0 4.3 5.2 5.5 4.2

North AmericaUnited States 3.5 3.5 2.8 3.1 3.6 4.2 4.9 5.2 -2.4 3.1 3.9 5.0 3.4Canada 3.6 4.2 3.9 3.3 3.4 3.7 3.6 3.5 -2.6 3.4 3.5 3.1 2.2


As a result, federal borrowing needs to increase during recessions. The U.S. Treasury Department typically issues more short-term debt during the deepest part of a recession, as this is when demand peaks for the least-risky securities and short-term interest rates are low (see Chart 1). The Treasury then rolls this debt over into longer-dated maturities as investors’ preferences shift with the re-covery. The federal government’s debt man-agement has been responsive to the large fluctuations in demand that occur during and preceding recessions.

The mix of issuance of short-term Trea-sury bills (maturity of one year or less), and long-term Treasury notes (maturity of one year to 10 years) and bonds (maturity of more than 10 years), is a tool for managing interest rates. Supply and demand determine the price and yield of debt instruments, which move inversely.

For example, while holding supply con-stant, an increase in demand for Treasury bills will raise prices and lower yields. A surge in demand for Treasury bills because of inves-tor desire to hold extremely safe assets drove short-term interest rates essentially to 0% in the fall of 2008 at the worst of the finan-

cial crisis. Similarly, boosting the supply of Treasury bills, say because of a larger budget deficit, while holding demand constant will lower prices and raise yields. The doubling of the supply of Treasury bills from $1 trillion to $2 trillion outstanding over the course of 2008 is one factor that prevented interest rates from falling even further, although they were also approaching the zero bound.

This article will discuss some of the eco-nomic theories behind the determination of interest rates on U.S. government debt and how these different factors play out over the business cycle. It will then look at how the Treasury Department structures its debt is-suance and how this structure has changed over time. It will look specifically at issuance during the Great Recession and its likely fu-ture path, including the implications for the federal budget.

Interest rates in theoryThere are three competing theories de-

signed to explain fluctuations in the yield curve, which represents the difference in interest rates across government securities of varying maturities: market expectations, liquidity preference and market segmenta-tion theories. They are not mutually exclu-sive, and each can explain certain behaviors better than the others.

Market expectations theory assumes that investors are indifferent about the maturity of the debt securities that they purchase. This may be a reasonable assumption for Treasuries, as the markets for all maturities are extremely liquid; given minimal trans-action costs, there is very little difference between purchasing a five-year Treasury and holding it to maturity and buying a 10-year Treasury and selling it in five years. Given the assumption that different maturi-ties are perfect substitutes for one another, investors can predict the future selling price of a security. Investors will bid on Treasury securities of different maturities until the yield curve measures expectations of future interest rates.

For example, under the market expecta-tions theory, the difference in current yields between five-year and 10-year Treasury notes is an accurate prediction of the yield on the five-year Treasury five years from now, so that the yield on the 10-year Trea-sury is equal to the yield on the two cor-responding five-year Treasuries. During the expansions in the mid-1990s, this theory did a good job in predicting future interest rates (see Chart 2).

However, the statistically significant nega-tive sign on the constant term in the regres-sion described above implies that there is a

ANALYSIS

In the United States, federal fiscal policy is generally countercyclical: The budget deficit increases during reces-sions and contracts during expansions. In part, this is because of explicit expansionary fiscal policy, with legisla-tion during recessions to cut taxes or increase spending or both. But a more important factor is automatic sta-

bilizers. Because of the way taxes and social programs are designed, federal revenues decline automatically during recessions, while federal outlays increase, providing countercyclical fiscal policy even without legislative action.1

Managing the Federal Debt Across the Business CycleBY NATHAN TOPPER & AUGUSTINE FAUCHER

1 Augustine Faucher and Mark McMullen, “Fiscal Policy, Recession, and State and Local Governments,” Regional Financial Review, December 2008, p. 24-29.


ANALYSIS �� Managing the Federal Debt Across the Business Cycle

bias for longer-term maturities to have yields in excess of what the market expectations theory would predict (see Table 1). The liquid-ity preference theory attempts to explain this phenomenon. According to this theory, investors purchasing longer-dated securities demand a higher return, or liquidity premium, to compensate them for the extra risk they are exposed to, in terms of fluctuations in prices and yields, as well as the greater risk of default over a longer period of time.

The liquidity premium provides an expla-nation as to why the yield curve is upward sloping under normal economic conditions: It is to compensate investors for the greater risk of longer-term securities. However, if investors expect short-term interest rates to decline in the near term, likely because of a re-cession, the yield curve will invert, with short-term interest rates above long-term rates.

The market segmentation theory at-tempts to explain why the previous two theories may temporarily break down. In this view, securities of different maturities are not substitutes for one another. They are instead different markets, where supply and demand are determined independently from other securities. During recessions, investors’ risk aversion increases; this was particularly true during the recently ended Great Recession. Greater risk aversion in-creases demand for safer short-term Trea-suries and reduces demand for longer-term Treasuries. Therefore, short-term interest rates fall much more sharply than long-term rates during recessions, even if long-term

Treasuries look more attractive strictly from a risk-reward perspective.

There is some truth to all three of these theories, and in actuality, the yield curve is determined by a combination of the market expectations, liquidity premium and segmented markets theories. The rela-tive weights vary across the business cycle, with the market expectations theory more important during periods of stability, the liquidity premium theory during periods of uncertainty, and the market segmentation theory during periods of extreme stress in the economy and financial markets.

Institutional factorsThe Treasury Department, unlike private

corporations, cannot look simply at borrow-ing costs when deciding how to structure its borrowing. U.S. Treasuries are the bench-mark assets for the domestic and global economies, and federal borrowing policies must take this into account.

Borrowing policy is run by the Treasury Department’s Office of Domestic Finance. According to the office’s web site, the “pri-mary goal in debt management is to finance government borrowing needs at the lowest cost over time. We believe the best way to meet this objective is to issue debt in a regu-lar and predictable pattern, provide trans-parency in our decision-making process, and seek continuous improvements in the auction process.” Therefore, compared with other borrowers, the Treasury Department is much more concerned about making sure that it communicates its borrowing policy openly and discusses possible changes well in advance.

The Treasury generally announces its funding needs on a quarterly schedule. The Office of Domestic Finance regularly meets with and surveys primary dealers, those that trade directly with the Federal Reserve, to discuss market conditions. After this is complete, department officials meet with


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Chart 1: More Short-Term Debt in Recessions

Source: Bureau of the Public Debt

Treasury bills as % of marketable debt outstanding, 3-mo MA


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Chart 2: Rate Predictions Miss at Turning Points Residual of predicted 5-yr Treasury yield and lagged actual, ppt


TABLE 1

Ordinary Least Squares RegressionDate range: January 1985 - May 2005Dependent variable: 5-yr Treasury note yield, %Independent variable: 5-yr / 5-yr forward implied yield, %

Coefficient Standard Error T-value

Constant -0.658 0.266 -2.475

Independent variable 0.807 0.036 22.133

R-squared 0.668

Adjusted R-squared 0.667



the Treasury Borrowing Advisory Council, a group of private sector financial industry officials that provides advice on borrowing policy. However, this policy is ultimately the responsibility of the Treasury Department. The department announces its borrowing needs in quarterly press releases. Adminis-tration officials may also speak about major policy discussions and decisions in speeches.

One of the key goals in formulating fed-eral borrowing policy is ensuring liquidity across markets. The Treasury Department wants to ensure that there is an adequate supply of securities for each maturity. For example, in 2001, with the federal govern-ment running surpluses and the level of debt held by the public falling, the Treasury an-nounced that it would stop issuing 30-year bonds in order to ensure an adequate supply of 10- and 20-year bonds. As the budget returned to deficit and borrowing needs increased, the Treasury Department again started to issue 30-year bonds in 2006.

In general, the U.S. government does not refinance its debt. Unlike some private-sector and state and local government debt, federal debt is not callable; the Treasury Department cannot force its owners to redeem it. There-fore, the federal government cannot borrow at low rates to pay off older, higher interest rate debt. However, the Treasury Department does roll over debt as it matures.

Security issuance over timeOver the past 20 years, there have been

four major developments in U.S. Treasury issuance. One was the introduction of Trea-sury Inflation-Protected Securities in 1997. TIPS pay a nominal rate of return, deter-mined at auction, in addition to the rate of inflation over the maturity of the security, as measured by the consumer price index for urban consumers. Therefore, unlike regular, nominal bonds, TIPS offer protection against inflation. The United Kingdom introduced inflation-indexed bonds in the 1980s, and the U.S., under the leadership of then Dep-uty Treasury Secretary Lawrence Summers, followed during the Clinton administration.

TIPS are a useful tool for investors con-cerned about the potential for inflation to erode the value of their assets over time.

In addition, they provide economists with a useful tool for measuring market-based expected inflation, based on differences in yields between nominal Treasuries and TIPS. They also may reduce the govern-ment’s willingness to tolerate inflation. Higher inflation erodes the value of nominal securities, and governments can, at least somewhat, inflate away their liabilities. That is not possible with inflation-indexed securi-ties. In recent years, TIPS have made up 7% to 9% of marketable debt outstanding.

The second development was smaller budget deficits, and then budget surpluses, in the 1990s and early 2000s. As a result of tax increases and spending cuts under Presi-dents George H. W. Bush and Bill Clinton, the budget deficit began to shrink in the early 1990s, turning to surpluses from fiscal 1998 to 2001. This created something of a dilemma for the Treasury Department: What to do with the extra funds, as the govern-ment did not need to borrow?

At first the department simply did not roll over maturing debt and reduced is-suance of new debt, resulting in a decline of debt held by the public. That proved inadequate, however. And since Treasury debt is not callable, the department could not unilaterally repurchase it. Therefore, in 2000, the Treasury Department began debt buybacks through reverse auctions. The department would announce what issues it would be purchasing, and investors would bid to sell their debt back to the govern-ment. The investors offering the lowest price would win the auction, and the Treasury De-partment would purchase their securities. To make sure that there was adequate liquid-ity in shorter-term Treasuries and to make sure that the average maturity of Treasury debt did not increase too quickly, buybacks focused on longer-term issues. This also had the effect of lowering the government’s in-terest expenses, as much of this longer-term debt was issued during periods of high infla-tion and high interest rates in the late 1970s and early 1980s. Also, as noted previously, the government stopped issuance of the 30-year bond as financing needs diminished.

The third development was the return to large budget deficits in the 2000s. These

were a result of the recession in 2001, the large personal income tax cuts and domestic spending increases enacted under President George W. Bush, and the costs of the wars in Iraq and Afghanistan. As the government’s borrowing needs increased, and with inter-est rates low in part because of expansion-ary monetary policy, the Treasury Depart-ment reinstituted the 30-year bond, and the share of financing in notes and bonds increased relative to Treasury bills.

The Great RecessionThe fourth development was the com-

bination of monetary and fiscal policy re-sponses to the financial crisis and the Great Recession. The federal government’s bor-rowing needs increased in 2008 as the U.S. economy entered recession (see Charts 3, 4 and 5). The budget deficit widened in 2008 as a result of automatic stabilizers, as well as the personal income tax rebates that were part of the federal fiscal stimulus package.

At the same time, demand for short-term Treasury securities increased sharply. With global financial markets in disarray in the fall of 2008 and grave concerns about the stabil-ity of the largest financial institutions, there was a “flight to quality” as investors around the world rushed to purchase the safest asset available, short-term U.S. Treasury securities. While some of this was at the expense of pur-chases of private assets, there appeared to be movement away from longer-term Treasuries toward short-term instruments (see Chart 6). Also, domestic saving increased as households cut back on spending during the recession and worked to rebuild their balance sheets follow-ing large declines in home prices and equities.

Also, the Federal Reserve and other cen-tral banks were aggressively cutting their tar-get interest rates in order to avoid economic calamity. This, too, pushed down interest rates, and the yield on the one-month Trea-sury was 10 basis points or lower from No-vember 12 to December 29, including 0 basis points for four of those days (see Chart 7).

At the same time, long-term interest rates plunged as well due to decreased concerns about inflation in the face of the global downturn and extremely aggressive monetary policy.




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Federal Financing Bank Inflation-protected Bonds Notes Bills

Deficits

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Chart 3: Very Strong T-Bill Demand in 2008… Marketable securities outstanding by type, $ tril


Surpluses


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Chart 5: Publicly Held Debt Jumps in Recession Marketable securities outstanding by type, % of GDP


Surpluses Deficits

Great Recession


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Chart 4: …At Expense of Longer Maturities Marketable securities outstanding by type, %


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Chart 6: Flight to Quality in Late 2008

Source: Treasury Department

Net change in foreign holdings of Treasuries, $ bil

Further, the Federal Reserve was si-multaneously drastically expanding and rearranging its balance sheet in response to the financial crisis (see Chart 8). The central bank used its ability to create money elec-tronically to vastly expand its balance sheet. It also reduced its holdings of Treasury bills—its standard tool to influence short-term interest rates—and shifted its balance sheet toward other assets. At the depth of the crisis, these assets included emergency loans to troubled financial institutions and support for troubled markets such as com-mercial paper and asset-backed securities. These extraordinary efforts were either ex-plicitly temporary and have ended or have greatly receded in importance.

But other assets remain firmly entrenched on the central bank’s balance sheet, such as Fannie Mae and Freddie Mac debt and mortgage-backed securities. In addition, even

though Federal Reserve holdings of Treasur-ies are close to where they were before the crisis, the composition has shifted dramati-cally away from shorter-term securities and toward longer-term ones. With so much demand for short-term Treasuries, the Federal Reserve does not need to hold as many to keep short-term rates near zero. At the same time, Fed purchases of longer-term Treasuries have brought down rates at the other end of the yield curve, keeping borrowing costs low, supporting demand for the housing market and encouraging business investment.

The flight to quality and unprecedented Federal Reserve policy efforts have kept yields on both short-term and long-term Treasuries extremely low despite massive federal borrowing to finance the budget deficit. Normally, a federal budget deficit of 10% of GDP, as occurred in fiscal 2009, would be expected to drive up interest

rates, as the federal government would be competing against other borrowers. Instead, with investors looking for the safety of Trea-suries, the government has been able to bor-row cheaply to finance the budget deficit, including the stimulus package that helped restart economic growth.2 In fact, net inter-est costs to the federal government have been falling until recently, despite massive federal deficits, because of much lower bor-rowing costs (see Chart 9). And the effective interest rate on federal debt outstanding continues to decline as maturing long-term debt is rolled over at lower interest rates; as of May, the average interest rate on Treasury bonds was 6.8%, compared with 3.3% on notes and 0.5% on bills.3

2 Mark Zandi, “U.S. Economic Outlook,” Regional Financial Review, January 2010, p. 13-20.

3 http://www.treasurydirect.gov/govt/ rates/pd/avg/2010/2010_05.htm




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Chart 7: T-Bill Rates Fell to Zero in Late 2008


Yield, 1-mo Treasury bill, %


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Chart 9: Very Low Federal Borrowing Costs

Sources: Treasury Department, Bureau of the Public Debt

Average interest rate on marketable federal debt, % (R)

Federal net interest outlays 12-mo moving sum, $ tril (L)


Chart 8: Fed Moves Away From T-Bills Composition of Federal Reserve’s balance sheet, $ bil


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Chart 10: Deficit Will Shrink but Remain Large

Sources: Treasury Department, BEA, Moody’s Analytics forecast

Federal budget deficit, fiscal year

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OutlookHowever, that decline will not last much

longer. The same factors that have com-bined to keep yields low on Treasuries will start to reverse themselves in the months and years ahead, leading to higher interest rates and borrowing costs for the federal government across the yield curve.

The flight to quality reversed in late 2009 and early 2010 as foreign investors sold short-term Treasuries on net, although some of these funds moved into longer-term Treasuries. The flight to quality has resumed with the sovereign debt crisis in Europe, but eventually the global recovery will lead investors to look for higher yields at the expense of stability, and demand for short-term Treasuries will weaken.

Also, the Federal Reserve will eventu-ally need to normalize monetary policy as

the recovery turns into a self-sustaining expansion. The central bank will need to withdraw the excess liquidity it has in-jected into financial markets, reduce the size of its balance sheet, reorient its asset holdings toward a more traditional mix, and raise short-term rates. The timing of these steps remains uncertain, but they will occur, and they will eventually lead to higher yields on long-term and short-term Treasuries.4

Meanwhile, the federal government will continue to run large budget deficits for at least the next few years, although they will be smaller than the deficit in fiscal 2009 of 10% of GDP (see Chart 10). The deficit will shrink over the next few years as an

4 Ryan Sweet, “Fed’s Exit Will Take It Through New Doors,” Regional Financial Review, February 2010, p. 26-31.

expanding economy drives revenue growth, the demand for income transfers fades with the improving labor market, and stimulus spending runs its course. Still, there is a structural imbalance between taxes and spending that will persist without large tax increases and spending cuts, which appear unlikely at the present time. As the econo-my picks up and risk appetite strengthens, federal borrowing will begin to compete more closely with private borrowing, con-tributing to rising rates.

Because of lower interest rates, net interest payments on the federal debt fell in 2008 and 2009, whether measured in nominal dollars, as a share of total federal outlays, or as a share of GDP, even as the federal debt held by the public increased dramatically. However, rates will head high-er, and this, combined with continued large


deficits, will lead to rapid growth in federal interest payments over the next few years, adding to longer-term budget pressures.

The Congressional Budget Office ex-pects net interest payments to increase to 2.6% of GDP by 2020, about double their current share. This is based on an assump-tion that budget deficits gradually decline to less than 3% of GDP over the next de-cade. If this proves too optimistic, as could well be the case, net interest payments could rise to as much as 4% of GDP by the end of the decade, creating a spiral of

higher and higher spending and larger and larger budget deficits.

ConclusionThe financial crisis and Great Recession

have led to large changes in the ways the U.S. government finances its borrowing. The largest budget deficits since World War II, extraordinarily low interest rates, and extremely aggressive monetary policy have combined to mitigate the severity of the recession and contribute to recovery. In addition, the financial crisis led to much

stronger demand for Treasuries, particu-larly bills.

Demand for Treasuries will fade as finan-cial markets improve, putting upward pres-sure on borrowing costs and increasing the fiscal pressure on the federal budget. This, combined with structural budget deficits and the large amount of debt accumulated over the past three years, will make it increasingly important for the federal government to re-duce the budget deficit. If the U.S. does not act decisively to reduce the long-term budget deficit, the nation could face a fiscal crisis.



The growing interest is a direct result of most economists having previously un-derestimated the importance of the hous-ing market for the health of the financial system, as well as the resulting macroeco-nomic feedback on the housing market. In particular, the largest share of household wealth was in home equity, so that the U.S. financial system was vulnerable not to poor credit quality itself—though nonperforming subprime loans may well have triggered the crisis—but to the deleterious effect on home equity that falling house prices would have and to the subsequent reduction in house-hold spending and increase in mortgage defaults caused by the buildup of so-called underwater homes.

Since home equity proved to be so im-portant for the health of the economy, it is all the more vital to properly measure house price values. This article provides a brief look at house price measures, including a tax-onomy of various house price indices. Given the effects of the current business cycle, this article also looks more closely at the relationship between foreclosure and unem-ployment rates with home prices, focusing mainly on the aggregate Case-Shiller House Price Index as well as the Case-Shiller tier indices in selected metro areas.

Nine sources of existing single-family

house price data are available for the nation and many metropolitan areas. The five most prominent are the National Association of Realtors’ median home price, the all-trans-actions and purchase-only indices from the Federal Housing Finance Agency (formerly OFHEO), the repeat-sales house price index from CoreLogic (formerly First American CoreLogic), and the repeat-sales Case-Shiller house price index provided by Fiserv. Several newer providers of house price data have also entered the spotlight: Standard and Poor’s Case-Shiller Index, Altos Research, Radar Logic, and Zillow Real Estate. All of these price measures have their advantages and limitations.

NARThe simplest house price measure is the

NAR median home price, which is a transac-tions-based measure where the transactions data are collected by local real estate asso-ciations and multiple listing services. These entities conduct monthly surveys that take in 30% to 40% of all sales transactions. Cover-age is limited to 159 metro areas, though Moody’s Analytics constructs estimates for the remaining metro areas based on other housing indicators. The resulting estimate captures actual home purchases across the house price spectrum. However, the result-ing median home price estimate can suffer short-term bias from the mix of houses put up for sale during a particular period.

For example, in the first stage of the house price correction up to mid-2007, a larger share of houses sold were in the lower price tiers that were more vulnerable to poor quality mortgage financing, which may have caused the U.S. median home price to de-cline faster than other house price measures. Although house mix bias does not tend to be systematic, it does make the median home price more volatile relative to other price indices such as the Fiserv Case-Shiller index (see Chart 1).

FHFAIn contrast with the NAR, the FHFA

house price indices use a repeat-purchase methodology that eliminates bias from the mix of sales, albeit by reducing the corre-sponding number of transactions—repeat-purchase methodologies usually require at least two sales for each home, separated by at least six months, and also require transac-tions to be arm’s-length, that is, not through sales between family members or through inheritance.2 Also, repeat-purchase meth-odologies do not completely correct for improvements or additions to a home made between sales in the way that a hedonic price index would.

The FHFA all-transactions index has the widest geographical coverage, covering all

2 See Charles A. Calhoun, “OFHEO House Price Indexes: HPI Technical Description,” OFHEO, March 1996.

A Taxonomy of House PricesBY ANDRES CARBACHO-BURGOS

The three-year-long house price correction and the resulting financial crisis have naturally created an abid-ing interest in properly valuating residential real estate. The number of firms that produce and sell house price measures at the national and regional levels has proliferated. The number of closely followed house

price indices has more than doubled since 2004, when Moody’s Economy.com last analyzed the advantages and disadvantages of different house price measures.1

1 See Celia Chen, “House Price Taxonomy,” Regional Financial Review, February 2004.

ANALYSIS


384 metropolitan areas—comprised of all metro divisions and all MSAs not divided into divisions—as well as having U.S., state and regional indices. However, the portion of the housing market examined by this index is limited by the FHFA’s use of data from the government-sponsored enterprises Fannie Mae and Freddie Mac, which only contain prices for houses purchased with conforming mortgage loans. This limitation results in two important parts of the hous-ing market being left out. The first is trans-actions that are financed with jumbo loans. The second is transactions that are financed with government-backed loans such as FHA, VA, and Community Reinvestment Act loans, which mainly finance the purchase of lower-priced homes. Also, the number of re-corded transactions is dependent on Fannie and Freddie underwriting standards—tight-ening or loosening underwriting standards affects the number of measured transac-tions and therefore makes the house price sample more variable.

The omission of jumbo mortgage transac-tions has the largest effect on higher-priced markets in California and the East Coast. Although the conforming loan limits were increased in these areas in early 2008, this increase is relatively recent and has thus resulted in the omission of many transac-tions—for many sales pairs, the initial sale might well have preceded 2008 and would not have been recorded by the GSEs if the mortgage loan was not conforming. But because higher-priced homes tend to ap-

preciate at a slower rate than lower-priced homes, the omission of such higher tier transactions might give a slight upward bias to the FHFA index in more expensive metro areas such as San Francisco or New York City.

In addition, the FHFA indices unders-ample homes purchased using subprime mortgages, as only a small share of this submarket can be owned or securitized by the GSEs. The FHFA indices have thus had a smaller proportional decline during the house price correction because lower-priced homes financed with subprime mortgages experienced the largest proportional de-clines but were also underrepresented in the transaction samples.

The FHFA all-transactions index also in-cludes refinancing transactions, which add some biases to the index. Refinancing ap-praisals are not subject to sales pressure and will usually be larger than actual purchase transaction prices during buyers’ markets. Also, refinancing appraisals often depend on historical price data that go out of date more quickly during periods of rapidly changing house prices; not surprisingly, the FHFA all-transactions index has been much less vola-tile than other indices in the past six years.

More recently, the FHFA has published a purchase-only index that excludes refinanc-ing appraisals, but only data for the states and regions, not metro areas, are publicly available. A comparison of the two indices for the U.S. shows that refinancing bias, though not huge, has been significant since the housing bubble years (see Chart 2).

Finally, FHFA data have a longer publica-tion lag than NAR prices, due in part to the 30- to 45-day lag between origination and Freddie/Fannie funding. The FHFA receives data on new funding for one additional month following the last month of each quarter. This funding contains many loans originating in that most recent quarter and especially the last month of the quarter. Al-though this is not a significant problem in a more stable housing market, it is does add to data inertia in a more fast-changing market.

CoreLogicThe CoreLogic house price indices also

rely on a repeat-purchase methodology but are much broader in coverage than the FHFA indices. The data for these indices are derived from county deeds offices, provided that local or state laws do not prohibit dis-closure. As such, the CoreLogic data include houses purchased with nonconforming loans, subprime loans and even cash. This source of data is extensive enough that the time series of the indices go back to 1976 and are monthly in frequency. The data also allow CoreLogic to derive median home prices in 10 categories: homes whose prices were established less than or more than five years from the previous valuation; those bought with conforming and nonconforming loans; single-family detached or attached units; and those priced at 0% to 75% of the median house price, 75% to 100% of the median, 100% to 125% of the median, and greater than 125% of the median. CoreLogic

ANALYSIS �� A Taxonomy of House Prices


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NAR median home price Case-Shiller House Price Index

Chart 1: Normally, Median Price Is More Volatile U.S. house price indices, % change annualized

Sources: NAR, Fiserv, Moody’s Analytics

Standard deviations NAR=32.1 CSI=24.1


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Chart 2: Refi Bias Started With Housing Bubble FHFA house price indices for U.S., index: 2001Q1=100

Source: FHFA

All-transactions


also has a relatively rapid update method such that all data are revised in a maximum of five weeks after the end of each month.

The CoreLogic house price indices’ pri-mary drawback, which they share with the Fiserv Case-Shiller indices, is that the com-bination of a repeat-sales methodology and the use of public records for data results in a small sample size for smaller metro areas and in metro areas where local jurisdictions prohibit disclosure.3 To make up for this drawback, CoreLogic in effect creates a hybrid data set by splicing in data from the FHFA for metro areas with insufficient data for public records—a minority of metro area and county indices, mainly in smaller metros, are derived in this manner. This procedure allows Core-Logic to cover all MSAs and metro divisions in addition to 519 core-based statistical areas, 898 counties, and 6,070 zip codes.

Fiserv and S&P/Case-ShillerThe Case-Shiller house price indices are

similar in methodology and data sources to those of CoreLogic and also filter for reno-vations close to the date of transactions, thereby more accurately representing the price movements of homes in 125 of the largest metro areas. Like CoreLogic, Fiserv fills in the remaining metro areas with data from the FHFA in order to derive a “square” dataset that covers all metropolitan divi-sions and nondivided MSAs. In those metro areas where they can rely on public trans-action records, both CoreLogic and Fiserv exclude refinancing transactions, avoiding that source of bias. The CSI is also available for over 400 counties and 3,000+ zip codes, and Fiserv also provides three house price tier indices and a condo index for the largest metro areas. One point of difference with CoreLogic is that whereas the CoreLogic U.S. index is constructed from the ground up, the U.S. CSI index is a housing stock value-weighted average of the CSI indices for the nine census divisions.

The main drawback to the Fiserv Case-Shiller index comes from the thoroughness

3 Nondisclosure laws affect mainly Texas and some West North Central census division states such as Missouri. Since both CoreLogic and Fiserv depend on public records data, it is more difficult for them to cover the central regions of the U.S.

with which the data are filtered in order to remove brief-duration (less than six month) sales pairs, non-arm’s-length transactions, and above all, transactions where prices are distorted by substantial physical improve-ments. Whereas CoreLogic can update its data every five weeks, Fiserv CSI data have a publication lag of three months and is there-fore not the best choice if one is looking for the timeliest price data.

The S&P Case-Shiller indices use the same data sources and repeat-sales algo-rithms as Fiserv but are limited to the 20 largest metro areas in order to come up with monthly frequency 10- and 20-metro composite and individual metro area indices, as well as a quarterly U.S. price index. The narrower focus allows S&P to publish these indices monthly and with a two-month as opposed to a three-month lag. S&P also pro-vides indices for three price tiers in 17 metro areas and condo indices for five metro areas.

The Fiserv and S&P Case-Shiller indices are not interchangeable. There are differenc-es in the way the geographies are defined, with S&P using larger geographical boundar-ies for its metro areas.4 Also, the two indices are updated on different schedules, so trans-actions for specific dates will make their way into each type of index at different times. The relative weighting of transactions may also be slightly different for individual trans-actions within each type of index calculation. Consequently, the two indices may evolve over slightly different paths as new transac-tion data become available and the indices are updated.

ZillowZillow’s house price index relies on a

methodology that is somewhat different than repeat sales. Rather, house prices for different homes are derived by comparing the most recent selling price for a home with the valuation of similar homes in the same geographic area. Local residents also have the option of self-reporting the

4 For example, the S&P index for New York includes the Bridgeport and New Haven CT metro areas as well as the New York, Nassau-Suffolk, Newark and Edison metro divi-sions. However, the quarterly U.S. indices are identical between Fiserv and S&P once both have been updated.

valuation of their homes. The price is then adjusted using a proprietary formula, about which little is known other than that self-reported valuation estimates can affect the value of the home, though Zillow reduces their weight in the computed average. Zil-low then reports the median price estimate for each geographic area, so its estimates are comparable to the NAR’s median sales price, though more carefully adjusted.

Like the repeat-sales methodology, how-ever, Zillow’s house price index depends on the number of transactions for a metro area, which limits the availability of estimates for metro areas with smaller populations. Zil-low house price indices are available for 163 metro areas, more than the NAR but less than FHFA- and public records-derived data.

Because Zillow’s methodology does not result in the need to screen most sales pairs, its major advantage is the timeliness of the data. Estimates for houses are continuously updated as soon as new sales prices or valu-ations are reported. Because of the recent derivation of Zillow’s methodology, howev-er, its price estimates only go back to 1997.

Radar LogicRadar Logic uses a methodology that is

radically different from either repeat-sales indices or Zillow’s method. Rather than screening out transactions that do not fulfill the repeat-sales requirements, Radar Logic uses the largest proportion of transactions of all the price measures, including for new homes and condos. It then uses a propri-etary econometric model to come up with a hedonic price in terms of dollars per square foot. Because the Radar Logic index is a he-donic price measure, it attempts to control for physical differences in properties includ-ing renovations, improvements, views, and the external neighborhood.

The delay in publishing prices is almost nonexistent. The Radar Logic prices for each metro area are updated daily but are still subject to delay in reporting, as it relies on the same county-level public record data that the Case-Shiller and CoreLogic price in-dices use. Because prices are updated daily, they are subject to a good deal of volatility; Radar Logic compensates for this problem



by also reporting seven- and 28-day prices that aggregate transactions for each period.

Because one of Radar Logic’s main ad-vantages is its daily update frequency, its geographical coverage is limited to 25 large metro areas that can generate sufficient sales data for this approach to be feasible. Radar Logic also calculates a 25-metro area composite price and an index for the New York condo market.

Altos ResearchAltos Research also takes the approach

of using real-time data, though with weekly rather than daily updates. However, instead of using transactions data from public re-cords, Altos uses the combined pool of Real-tor and MLS surveys and data to create its own median house price estimates. In order to obtain a sufficiently large data sample from this source, Altos uses the real estate list price rather than the actual transactions price. Coverage includes over 100 metro areas and their counties, as well as over 15,000 zip codes.

Altos is aware that under contemporary market conditions, the sale price might be significantly discounted from the list price, so in addition, it has also started tracking prices for absorbed listings and new listings, though the geographical coverage of these price indices is unclear. Altos publishes 10- and 20-metro area composite indices with the same geographical coverage as the S&P Case-Shiller indices. Altos also breaks down its data into quartile price tiers.

Downturn and price fluctuationsIt is not practical to do a comparative

analysis of all nine of the price indices de-scribed above, not only because Moody’s Analytics lacks the data for several of these indices but also because detail differences in the methodologies are too numerous to analyze in a single article. The focus will be on important differences between the NAR, FHFA and Case-Shiller indices that would account for their different variability and overall decline during the previous downturn (see Chart 3), in particular their reaction to local mortgage market conditions.

Refinancing biasAlthough not of overriding importance,

the inclusion of refinancing appraisals in the FHFA index has resulted in more inertia for this index and has thus led to criticism that influenced the FHFA’s decision to publish a purchase-only index. In the current house price correction at least, higher refinancing transactions have led to a stronger upward bias in the FHFA all-transactions index (see Chart 4).5 Reasons given for the upward pressure of refinancing appraisals on house prices include greater reliance on previous purchase prices even when the market has deteriorated and possibly the belief by ap-

5 The all-transactions and purchase-only FHFA indices are not 100% comparable because the all-transactions index is not seasonally adjusted while the purchase-only index is. However, the presence of refinancing transactions in the all-transactions index makes its seasonal component negligible, so its lack of seasonal adjustment does not seriously affect comparisons with seasonally adjusted indices.

praisers that the conditions leading to cur-rent price declines are strictly temporary and may soon give way to rising prices.

The regional prevalence of refinancing bias is shown in Chart 5. The states with the most bias include not only those with the largest house price corrections and the most speculative mortgage lending before the downturn but also some nearby that were less heavily affected such as Alabama, Mis-sissippi and Utah. In addition to the incen-tive for borrowers to refinance when faced with falling prices, these states may also have had greater competition in the mort-gage industry, which tends to lead to more refinancing opportunities.

Sales mix biasThe NAR median home price is the only

index out of the nine previously described that does not attempt to compensate for the changing mix of home sales. During normal periods of house price growth, the changing mix of homes for sale would not lead to a systematic bias; indeed, the main effect of sales mix bias is to make the NAR median home price considerably more vola-tile than similar indices, as shown in Chart 1. However, the past three years have not been a normal period, and in fact, a price index such as the U.S. Case-Shiller index has fallen by a substantially larger degree than the NAR median home price (Chart 3).

While initially confusing, the source of this gap is actually straightforward: the qualitative differences in financing


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NAR median home price FHFA, all-transactions FHFA, purchase-only Case-Shiller House Price Index

Chart 3: Case-Shiller Index Has Fallen by More U.S. house price indices, % of peak

Sources: NAR, FHFA, S&P, Moody’s Analytics


Chart 4: Refi Bias Gets Larger With Volume

Sources: FHFA, MBA

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MBA refinance applications index % change (R)



for houses in different tiers of the market. Subprime, Alt-A, and other poor-quality credit was predominantly concentrated in purchases of lower-priced homes. When these sources of financing shut down in the second half of 2007, demand for lower-priced homes by lower-income families fell substantially. As a result, there have been fewer sales of lower-priced homes starting in 2008 than in previous years, and this has tended to bias the sales mix in favor of medium- and higher-priced homes. The main exception to this trend would be in those metro areas where foreclosures have played a large role, as foreclosures have also tended to be concentrated in the lower tiers of the housing market.

Consequently, there is no clear regional pattern for sales mix bias during the house price correction, at least when comparing NAR to Fiserv Case-Shiller price indices. Chart 6, for example, where green metro ar-eas indicate faster CSI decline and red metro areas indicate faster NAR median home price decline, does not indicate a regional pattern. Indeed, there is no clear relation-ship between the difference in price index growth rates and the increase in foreclosures per household for each metro area, in large part because of the different timing and intensity of house price trends. In the areas with the most speculative mortgage lending, credit shut down quickly after prices started falling, resulting in fewer transactions for low-priced homes. Eventually though, fore-closures and the homebuyer tax credits may

have helped prop up such sales, depending on how low they had fallen in the local area.

Impact of foreclosuresThe relationship between foreclosure

sales and house prices is not as direct as would appear at first sight and can be sub-ject to destabilizing vicious cycle effects. It is certainly true that the auction process that normally accompanies foreclosure sales leads to a substantial reduction in house prices, and often this effect tends to pre-dominate. However, there is also space for a reverse feedback process—to the extent that foreclosures act to push down house prices, they also reduce home equity and therefore increase incentives for strategic default, especially for households whose homes are significantly under water. Also, to the extent that mortgage credit quality is poor, falling home prices reduce the likelihood of distressed loans being refinanced and so make foreclosures more likely in the short term. Thus, not only is there a clear negative relationship between foreclosures and house price declines (see Chart 7), but this nega-tive relationship can accelerate the rate of decline of house prices as happened clearly in 2008 for many metro areas. This negative correlation also is more apparent for those price indices that cover the full range of house price transactions (for example, the CSI) as opposed to those that cover a subset of transactions or are subject to sales mix bias (for example, the FHFA or NAR indices).

Still, the negative effect of foreclosures

does not seem to discriminate between the choice of different price indices. Table 1 presents the results of three simple cross-sectional regressions that compare the correlation between the four-year change in the foreclosure-household ratio from the fourth quarter of 2005 to the fourth quar-ter of 2009 and the percentage change in the corresponding price index for the same time period.6 In all three regressions, the ef-fect of foreclosures is significantly negative, although the more inclusive Case-Shiller indices have a larger statistical significance, accentuating their better accuracy.7

The question of whether foreclosures preceded price declines or vice versa is not one that can be concluded in a straightfor-ward manner and in a single study. In par-ticular, metro area-level foreclosure data are relatively recent—going back only to 2005 in the case of RealtyTrac. Further, foreclo-sure data that existed prior to 2005 tended to vary little, making it hard to determine any particular causation. Charts 8 and 9 show two typical cases. In the case of Miami (Chart 8), the upward trend in foreclosures became significant only after house price growth stalled, most likely because refinanc-

6 For the FHFA all-transactions index, the time period was the second quarter of 2007 to the fourth quarter of 2009, given that the index for the U.S. did not peak until the sec-ond quarter of 2007. For the other indices, the fourth quar-ter of 2005 approximated their peak values more closely.

7 Also, the coefficient for foreclosures in the FHFA index regression is substantially larger because of the smaller change in foreclosures that took place over the more narrow time period.


Chart 5: West and South Have Highest Refi Bias Diff. between all-transactions and purchase-only index growth rates

Source: FHFA

-8.3 to 0

0 to 2

2 to 4

4 to 7.8

U.S.=2.4

Ppts, 2007Q1 to 2010Q1


Chart 6: Sales Mix Bias Is Not Systematic Diff. between NAR median home price and CSI growth rates

Sources: NAR, Fiserv, Moody’s Analytics

-29.5 to -5.5

-5.5 to 0

0 to 4

4 to 31

U.S.=3.5

Ppts, 2005Q4 to 2009Q4



ing options for speculative mortgages were slammed shut after prices started falling. By contrast, home prices in San Francisco (Chart 9) started falling only after a year and a half of steadily rising foreclosures.

In short, the relationship between mort-gage credit quality, mortgage debt servicing, and short-term price trends is complex and is unlikely to be fully captured by one-way regressions or by Granger tests in the sense of causality. While a clear negative relation-ship between foreclosures and house prices is indisputable, the numerical magnitude of this correlation is difficult to grasp, given that it depends on the local situation with respect to financing, foreclosure resolution and government policy.

Impact of unemploymentThe exact relationship of labor market

trends and house prices is clearly nega-

tive—higher unemployment rates correlate with lower home prices (see Chart 10)—but it is also particularly dependent on regional conditions as to which way the relation-ship runs. Several regions, especially in the industrial Midwest, had been suffering from recession before the rest of the U.S., and so poor economic performance contributed to low demand and to a subsequent house price decline. By contrast, metro areas that had a large degree of speculative mortgage lending saw house prices fall and foreclosures rise before joblessness increased—indeed, higher joblessness in these metro areas was partly the result of the decline in residential con-struction, real estate, mortgage banking, and other housing-related industries.

It should also be kept in mind that unemployment, like credit quality, tends to have the most impact on lower-priced homes. Higher unemployment has less of

an impact in the upper and middle house price tiers, where households can draw upon substantial savings and are employed in industries such as healthcare that are less vulnerable to the business cycle. As with foreclosures, the overall correlation between unemployment rates is stronger for house price indices such as the CSI that offer broader coverage of all types of hous-ing market transactions—the correlation will be less evident with indices that under-represent the lower price tiers.

Movement of price tiersThe Case-Shiller index and some of the

other new indices such as Altos and Core-Logic have the advantage of being able to separate housing transactions into price tiers, which are subject to more accurate forecasting based on different factors that can influence demand for lower- and higher-


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Cha

nge

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SI,

%

Change in foreclosures per 1,000 households

Chart 7: A Clear Negative Relationship Change in metro area CSI and foreclosures, 2005Q4 to 2009Q4

Sources: Fiserv, RealtyTrac


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Foreclosures per 1,000 households, 3-mo MA (L)

S&P Case-Shiller Index, % change annualized (R)

Chart 9: San Francisco Reacts to Foreclosures

Sources: Fiserv, S&P, RealtyTrac

Prices begin falling


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Foreclosures per 1,000 households, 3-mo MA (L) S&P Case-Shiller Index, % change annualized (R)

Chart 8: Miami Foreclosures Reacted to Prices

Sources: Fiserv, S&P, RealtyTrac

Prices begin falling


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Chart 10: Joblessness Is Another Price Killer Change in metro CSI and unemployment, 2005Q4 to 2009Q4

Sources: Fiserv, BLS



priced homes. In particular, the movement of the aggregate index may not be a good indication of the impact of economic and credit conditions on the housing situation of lower-income households. Here, we pres-ent a simple set of regressions that Moody’s Analytics uses to forecast the Fiserv Case-Shiller price tier indices.

The regressions used to forecast the indices are shown in Tables 2 through 4. The main assumption used to simplify the regressions is that the Case-Shiller price tier indices will move parallel to the aggregate index except when influenced by a narrow set of independent variables.8 It is assumed that the middle tier behaves the most like the aggregate index, and so its forecast is es-sentially a share-down, varying with metro fixed effects, of movements in the aggregate CSI, as shown in Table 3. The low-tier index shows more independence. First, there will be some persistence between the previous relative sizes of the low-tier and aggregate indices, which are captured in the percentage difference variable. Also, low-income home purchasers are particularly vulnerable to in-

8 A discussion of the full forecast model for the aggregate price index is beyond the scope of this article. See Mark Zandi, Celia Chen, Cristian, DeRitis, and Andres Carbacho-Burgos, Housing in Crisis: When Will Markets Recover, Febru-ary 2009 for a full description of the model.

creases in interest rates, proxied by the FHFB effective composite interest rate, and also to the unemployment rate, given that an increase in monthly payments or a reduction in wage income may prevent many potential purchasers from receiving a mortgage.

The forecast for the higher tier index is also straightforward. As before, there tends to be persistence in the movement of each index, which is captured by the lagged per-centage difference between the high-tier and aggregate indices. Also, the distribution of income in a metro area, proxied by the ratio of average to median household income, tends to push up home prices—no surprise to anyone who has shopped for a home in the higher-priced divisions of the New York and San Francisco metro areas. It should be noted that though these regressions have been regularly re-estimated with new data over the last five years, the coefficients for each inde-pendent variable have remained quite stable.

ConclusionsThe experience of the past four years has

put a substantial focus on how house prices react to credit market and other local eco-nomic conditions and how the local econ-omy is in turn dependent on house prices. Though there are many difficulties involved in comparing the broad array of indices that

can now measure house prices, at least one firm conclusion can be drawn: Regardless of methodology, a house price index should be based on data sources that allow it to cover the broadest spectrum of house purchase transactions—no section of the local hous-ing market should be left out.9 Similarly, an index should attempt to compensate for the changing mix of homes sold at any particu-lar period in order to reduce volatility.

Although they have shortcomings, the non-NAR and non-FHFA indices described in this article tend to avoid these problems and are usually preferred, especially when they also produce price tier data for differ-ent metro areas. Moody’s Analytics bases its house price forecasts around the CSI because of its good combination of broad geographical coverage as well as its more rigorous screening of transactions, but this does not imply any superiority to the other indices. Of course, given the complexity of interaction between the mortgage market and local economic performance, a fully ac-curate house price index is only a starting point toward both understanding the main drivers of the current housing correction and forecasting future price movements.

9 Local transactions coverage, of course, is a different issue than the extent of national geographical coverage.

TABLE 1

Cross-Sectional Regressions on Foreclosure EffectsDependent variable: % change, 2005Q4-2009Q4 for CSI, and NAR median home price indices, % change in FHFA all-transactions index, 2007Q2-2009Q4

CSI NAR median home price FHFA all-transactions

Intercept -3.81 -8.42 -6.06

-3.02 -6.45 -6.45

Change in foreclosures per 1,000 households, 2007Q2-2009Q4 -5.12

-17.65

Change in foreclosures per 1,000 households, 2005Q4-2009Q4 -0.47 -0.43

-20.81 -18.33

Adjusted R square 0.78 0.73 0.71

Standard error 9.80 10.16 7.83

Observations 125 125 125

F-statistic 432.93 335.82 311.58

t-statistics are in italicsSources: FHFA, Fiserv, NAR, RealtyTrac, Moody’s Analytics




TABLE 2

Regression for Case-Shiller Low-Price Tier IndexDependent variable: % change in real CSI low-tier indexMethod: Pooled Least SquaresDate: 04/09/10 Time: 11:32Sample (adjusted): 1976Q2-2009Q4Included observations: 135 after adjustmentsCross-sections included: 52Total pool (unbalanced) observations: 4,248

Fixed effects not shown

Variable Coefficient Std. Error t-Statistic Prob.

Intercept 0.74 0.27 2.76 0.006

% change in real CSI aggregate index 1.09 0.01 93.16 0.000

Lagged % difference between low-tier and aggregate index -0.03 0.00 -7.66 0.000

Effective interest rate (composite) -0.11 0.03 -3.91 0.000

Unemployment rate lagged one quarter 0.06 0.02 2.69 0.007

R-squared 0.71


S.E. of regression 1.93

Sum squared resid 15,603.01

Log likelihood -8,791.01

F-statistic 188.37

Prob (F-statistic) 0.00

Durbin-Watson statistic 1.71

TABLE 3

Regression for Case-Shiller Middle-Price Tier IndexDependent variable: % change in real CSI mid-tier indexMethod: Pooled Least SquaresDate: 04/09/10 Time: 11:36Sample (adjusted): 1975Q2-2009Q4Included observations: 139 after adjustmentsCross-sections included: 52Total pool (balanced) observations: 7,228



Intercept 0.10 0.01 7.00 0.000


R-squared 0.86





F-statistic 829.60


Durbin-Watson stat 2.20


TABLE 4

Regression for Case-Shiller High-Price Tier IndexDependent variable: % change real CSI high-tier indexMethod: Pooled Least SquaresDate: 06/21/10 Time: 12:45Sample (adjusted): 1979Q1-2009Q4Included observations: 124 after adjustmentsCross-sections included: 52Total pool (balanced) observations: 6,448



Intercept -0.65 0.15 -4.30 0.000


Ratio of average to median household income 0.00 0.00 4.33 0.000

% difference between high-tier and aggregate index, lagged two quarters -0.02 0.00 -5.42 0.000

R-squared 0.71





F-statistic 188.37


Durbin-Watson statistic 1.71



Higher living costs discourage people from migrating to a given area while si-multaneously encouraging residents to leave. Empirical evidence suggests there is a negative correlation between population growth, of which migration flows are the key determinant, and living costs (see Chart 1). Los Angeles and New York have experienced persistent net domestic migration outflows even during expanding business cycles. On the other hand, southern areas with low living costs have benefited from substantial migration inflows. Along with labor force productivity growth, population growth de-termines an area’s economic potential. Thus, an area’s cost structure is critically impor-tant to its long-term performance.

This article presents the most recent update of the Moody’s Analytics metro area cost of living index, which considers the costs of energy, retail goods, housing, insur-ance and transportation. The article also ex-amines alternate measures of living costs.

Methodology The Moody’s Analytics cost of living

index is a nationally indexed composite av-erage of five key cost of living components. The weight of each component of the index varies depending on the metropolitan area, and in various metro areas, some compo-nents make up a larger portion of the total cost of living. For example, housing costs constitute 42% of the overall cost of liv-

ing in Victoria TX as compared with 65% in San Jose CA. Energy costs constitute 3% of the overall cost of living in San Francisco as compared with 15% in Laredo TX.

Annual expenditures are calculated for each of the five index components in every metro area and subsequently indexed to their respective national benchmark. These ratios are applied to the various compo-nents of U.S. living costs. The results are summed and indexed to the annual national expenditure average. The cost of living index does not incorporate a moving average, a technique used to reduce volatility. By using unadjusted and unbiased data, the cost of living index accurately depicts living costs in any given metro area at a specific point in time. National expenditure patterns are derived from the Bureau of Labor Statistics’ annual consumer expenditure survey.

One of the largest inputs into living costs is retail expenditure. This category includes expenditures on a wide variety of goods such as food, apparel, entertainment and household furnishings. The cost index for this expenditure category is equal to na-tional expenditures on these items adjusted for the difference between retail wages and salaries per employee in the metro area and in the nation. If wages and salaries per em-ployee are higher and rising more quickly in a metro area than in the rest of the nation, producers must pass through price increases to compensate for elevated unit labor costs.

Retail expenditures constitute between 20% and 34% of a metro area’s living costs, de-pending on the area.

Notwithstanding the recent severe down-turn in house prices, housing expenditures are the single greatest component of household expenditure and are represented as such in the cost of living index. On average, the cost of housing accounts for 52% of total living costs as estimated in the Moody’s Analyt-ics cost of living index. Because of its large weight, the cost of housing is the cause of most of the annual variation in the cost of living index. Housing costs are also the most volatile component of the cost of living index, varying widely depending on region.

Housing costs are estimated by consid-ering both mortgage payments and rent outlays. Monthly mortgage payments are estimated for each metro area using house price data from the National Association of Realtors. This house price metric is preferred because, unlike other price measures, it re-flects actual prices paid. A five-year average of the house price data is used to counteract price biases that might arise from the mix of homes sold in any one year. The base value is extended using price growth in the Federal Housing Finance Authority’s repeat-sales house price index, which, unlike the NAR data, is not subject to a mix bias. Annual homeowner expenditures are also calculated by assuming a 30-year mortgage with an 80% loan-to-value ratio.

ANALYSIS

Regional living costs are closely related to quality of life, migration patterns, and, by extension, long-term economic potential. For example, both Ames IA and Wichita Falls TX have per capita incomes that are be-low the U.S. average. After adjusting for living costs, however, both metro areas have above-average living

standards, at least as measured by relative cost. By contrast, the Santa Rosa and San Diego metro areas in Califor-nia have above-average per capita income, yet relative living costs remain high.

U.S. Metro Area Cost of Living Index UpdateBY CHRIS LAFAKIS & STEVEN G. COCHRANE


ANALYSIS �� U.S. Metro Area Cost of Living Index

Rental expenditures are estimated by ex-tending monthly rental payments reported in the decennial census with the growth in the FHFA home price indices. Over sufficiently long periods of time, there exists a strong correlation between rental rates and house prices, which underpins the rental expen-diture estimation methodology. The rental price for New York incorporates data from the Census Bureau’s New York City housing and vacancy survey as well; since the decennial census value covers only a small portion of the market, it does not meaningfully repre-sent the rental market in New York.

Moody’s Analytics estimates of metro area homeownership rates are then used to reconcile the costs of owning and renting. The composite average is compared with the national average.

The third component of the cost of living index is household utility expenditure. Util-ity expenditures cover outlays on electricity and heating fuels. Expenditures are calcu-lated by multiplying demand for a particular energy fuel by the price of that fuel. Data from the Department of Energy’s Energy Information Administration is used to calcu-late the specific demand for each fuel type in a metro area. This approach is taken because calculating utility costs based on a fixed amount of electricity and other fuels would bias the cost of living index for this compo-nent, since demand for heating and cooling varies considerably by region, as do the type of fuels used.

For natural gas and heating oil, the ap-propriate state-level prices were used at the metro area level, as the primary variation in these prices is due to state-level taxes. For electricity, however, the price per kilowatt-hour for each metro area was obtained from the EIA, which publishes prices for specific energy providers. Metro areas are mapped every year to their primary energy provider to determine the cost of electricity in each area. Price data from the primary cooperative or publicly owned utility are used for those few areas not served by a privately owned utility. Household utility expenditures account for approximately 8% of the cost of living index.

Automobile insurance expenditures are a small portion of living costs, accounting for

just 6% of the cost of living index. The ex-penditure data come from the National As-sociation of Insurance Commissioners, which estimates a policy-adjusted average expendi-ture for each state. The state average is used for all metro areas within a state, as no finer regional breakdown of the data is available.

Public transportation expenditures are generally not an appreciable portion of overall living expenses in most regions, ac-counting for only 1% of total consumer ex-penditures nationally. In those areas where it is important, public transportation is a substitute for private transportation. Thus, no separate estimate of public transporta-tion expenditures is included in the cost of living index. The relative cost of private transportation is used as a proxy for all commuting-related costs.

Transportation expenditures are the smallest and most consistent component of the cost of living index across metro ar-eas. This component uses gasoline outlays to determine the variable-cost portion of consumer transportation spending. Vehicle prices are not used because they vary little across regions. To accurately estimate gasoline consumption at the metro level, commuting distance, traffic congestion, and retail gasoline prices must be considered. Metro area transportation costs are esti-mated by multiplying local retail gasoline prices, which are obtained from the Oil Price Information Service, by an estimate of the necessary number of gallons purchased per household for work and normal travel. The number of gallons purchased is determined by dividing the estimated number of miles driven by the estimated vehicle efficiency in each census division. This census division es-timate of gallons per household is adjusted to the metro area level by incorporating actual metro area and census division com-muting times obtained from the decennial census. The use of actual commuting times allows Moody’s Analytics to more accurately reflect the varied traffic conditions faced by residents within each metro area.

ResultsConsistent with prior years’ results, areas

with the highest housing costs are also the

areas with the most expensive living costs (see Table 1). These areas include the North-east Corridor, southern Florida and coastal California (see Chart 2). For the third con-secutive year, San Jose has the nation’s high-est cost of living, with costs 50% greater than the national average. This, however, is an improvement from 64% greater in 2007 and is back in line with its relative costs of the earlier years of this past decade. All five metropolitan areas and divisions with the highest living costs are in California.

Housing costs, which were the primary catalyst for rises in the cost of living index for many metro areas through much of the past decade, have now become the primary reason for relative costs to falter in 2008, narrowing some of the historical differences (see Chart 3). The national house price correction began in early 2006 and was in full swing by 2008, particularly in Arizona, California, Florida, Nevada, and parts of the Northeast (see Chart 4). Housing costs in 2008 accounted for 51.8% of total living costs as estimated by the Moody’s Analytics cost of living index, compared with a peak of 53.0% in 2006. Housing costs have ac-counted for an average of 52.1% of total liv-ing costs since 2000.

California still has the highest-cost metropolitan areas, with San Jose and San Francisco ranking first and second. Similarly, two New York metro divisions—Bridgeport CT and Nassau-Suffolk NY—still rank among the top 10.

But some changes are appearing in the rankings. First, California metro areas are now less dominant among the top 10 high-cost areas. Whereas nine of the top 10 were in California in 2005—Bridgeport was the only exception—only five of the top 10 were California metro areas in 2008, largely reflecting rapidly falling house prices at that time. Honolulu HI, Naples FL and Newark NJ now are among the high-est ranking. Naples ultimately faced house price declines of similar magnitude to the California metro areas, but its price decline was slower to appear.

Aside from California metro areas, the top quintile among the 384 metro areas and divisions in the U.S. is dominated by



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85 95 105 115 125 135 145 155

Chart 1: Costs, Growth Negatively Correlated Based on top 50 metro areas

Sources: Moody’s Analytics, Census Bureau

Average annual population growth, % 1998-2008

Cost of living, 2008, U.S.=100


Chart 4: …Occurred in Housing Bust Areas Change in housing costs, %, 2007-2008

Source: Moody’s Analytics

Greater than 5% decline 0% to 5% decline

0% to 7% increase

Greater than 7% increase

U.S. metro average=2.6% increase


Chart 2: Living Costs Are Highest on the Coasts Living cost by metro area


Low, below 90

Average, 90 to 100

High, 100 to 110

Very high, above 115 U.S. metro average=95


Chart 3: The Largest Declines in Living Costs… Change in relative living costs, 2007-2008


Decrease Modest increase, 0 to 1.8 Large increase, above 1.8

Average=-0.7

areas in Connecticut, Florida, Massachu-setts, New Jersey, the New York City area, and the coastal metro areas of Washington State. Within this quintile, costs have fallen over the past 10 years in the California and Massachusetts metro areas. Massachusetts house prices were among the first to falter at middecade, followed closely by many of the southern California metro areas. In all others that make up this top 20%, relative living costs rose over this period, no more so than in Honolulu and Naples. Rising costs through 2008 in Florida are also exemplified by a shift into the top quintile of Jacksonville and Orlando since 2002. Among others, Dallas, Fort Worth, Austin and Salt Lake City can be found in the top 20%. Salt Lake City is a newcomer to this top ranking because of its rise in house prices and because it was among the last of the major metro areas to suffer a downturn in prices.

The lowest quintile of metro areas re-mains dominated by the Midwest, mostly concentrated in Illinois (excluding Chicago), Indiana, Michigan, Ohio and Wisconsin. These are joined by areas of western Penn-sylvania and upstate New York. Other small areas in the mid-South and Southeast are among these lowest-cost areas. Danville IL is holding firm to its bottom ranking among all metro areas with costs 22% below aver-age. Significantly, every metro area in the lowest quintile saw its relative costs con-tinue to fall from 2002 to 2008. Thus, their comparative cost advantage continued to improve. Many of these areas, particularly in the industrial Midwest, have suffered from the deindustrialization of their economies, and their ever-falling relative costs offer them some potential for revitalization as the U.S. economy strives to become more cost competitive within the global economy.

The distribution of the cost of living across metro areas has changed since the early years of this past decade with a slightly more even distribution around the U.S. index today (see Table 2). In 2008, 101 of the 384 metro areas had a COLI greater than 100, or above the U.S. norm. In 2005 this figure was 96; in 2002 it was 82. As during the years following the 2001 recession, two factors led to this change. First, through the expan-sion that ended in late 2007, many midsize metro areas experienced rapid growth, particularly if they were peripheral to large metro areas. Much of this growth was fu-eled by homebuilding and the rapid rise in housing values. Also, businesses followed the population movement outward from the metro area centers, often to be closer to their workforces.

But within this trend, the average and median of the COLIs across all the metro




TABLE 1

2008 Cost of Living IndexIndex: U.S. = 100

2002 2005 2008 2002-2008

Index Rank Index Rank Index Rank Change in living costNew England

Bangor ME 87.7 315 88.6 247 90.1 231 2.4Barnstable Town MA 115.8 21 118.2 27 117.9 23 2.1Boston MA 120.8 14 118.4 26 118.2 22 -2.6Bridgeport CT 133.2 5 131.2 8 136.7 5 3.5Burlington VT 97.4 109 97.9 106 101 91 3.6Cambridge MA 122.0 11 119 25 119.3 20 -2.7Hartford CT 105.2 46 105.6 58 109.7 37 4.5Lewiston ME 89.3 274 90.1 203 91.8 197 2.5Manchester NH 105.8 41 107.4 48 107.5 46 1.7New Haven CT 107.0 36 107.3 49 112.6 32 5.6Norwich CT 102.7 60 104.6 62 107.7 44 5.0Peabody MA 113.0 25 112.1 38 111.6 35 -1.4Pittsfield MA 95.6 129 95.3 135 99.2 109 3.6Portland ME 98.9 93 100.3 94 101.5 86 2.6Providence RI 101.2 71 103.4 70 103.7 68 2.5Rockingham County NH 105.2 45 105.9 54 105.1 61 -0.1Springfield MA 95.2 137 96.7 118 99 113 3.8Worcester MA 105.3 44 105.8 55 103.5 70 -1.8

Middle AtlanticAlbany NY 93.8 160 93.4 153 97.3 127 3.5Allentown PA 97.4 107 99.1 100 101.8 83 4.4Altoona PA 85.4 362 84.2 347 84 348 -1.4Atlantic City NJ 105.7 42 108.8 42 111.7 34 6.0Binghamton NY 85.9 356 83.3 358 85 325 -0.8Buffalo NY 87.5 322 83.7 352 84.9 327 -2.6Camden NJ 100.4 78 103.8 66 107.8 43 7.4Edison NJ 115.7 22 119.5 24 124 13 8.3Elmira NY 84.8 371 81.9 372 81.5 374 -3.3Erie PA 86.5 346 83.5 355 83.4 357 -3.1Glens Falls NY 89.9 255 89.6 216 92.2 192 2.3Harrisburg PA 90.3 243 89.4 220 91.3 207 1.0Ithaca NY 90.0 253 89.1 230 91.1 209 1.1Johnstown PA 83.4 379 82 369 82 371 -1.3Kingston NY 98.3 99 101.2 81 104 67 5.7Lancaster PA 91.8 202 91.8 175 93.8 173 2.0Lebanon PA 88.9 285 87.5 269 89.8 237 1.0Nassau NY 124.4 10 127.7 14 130.1 9 5.7New York NY 118.5 17 121.7 20 126.8 12 8.3Newark NJ 121.9 12 122.6 18 127.8 10 5.9Ocean City NJ 101.3 70 107.6 46 109.7 37 8.4Philadelphia PA 101.4 67 102.3 76 106.2 57 4.8Pittsburgh PA 91.1 229 88.5 251 90.6 222 -0.5Poughkeepsie NY 100.4 80 103.9 64 104.9 62 4.6Reading PA 91.3 221 92.3 165 95.2 152 3.9Rochester NY 89.0 281 85.2 318 86 309 -3.0Scranton PA 86.4 350 85.4 305 87.5 278 1.1State College PA 89.2 279 87.4 271 89.9 235 0.7Syracuse NY 88.3 295 85.4 305 87.3 281 -1.0Trenton NJ 104.7 50 106.9 50 113.3 29 8.6


Utica NY 86.8 335 84.9 325 86.4 305 -0.4Vineland NJ 95.4 134 97.4 110 99.4 107 4.0Williamsport PA 85.1 366 83.8 350 84.6 332 -0.5York PA 89.6 267 90.4 199 92.7 184 3.1

East North CentralAkron OH 92.7 176 88.8 244 86.7 294 -6.0Anderson IN 85.9 354 83.5 355 82.4 367 -3.5Ann Arbor MI 101.7 66 97.5 109 95.7 146 -6.0Appleton WI 88.9 284 85.3 312 86.1 308 -2.8Battle Creek MI 87.2 329 84.3 346 84.5 338 -2.7Bay City MI 88.0 307 84.6 335 84.3 342 -3.7Bloomington IL 89.6 266 85.9 301 87.9 265 -1.7Bloomington IN 86.5 345 84.6 335 85.7 316 -0.8Canton OH 88.2 300 84.5 340 83.4 357 -4.8Champaign IL 86.4 349 83.3 358 85.4 321 -1.0Chicago IL 103.1 57 101.3 80 103.6 69 0.5Cincinnati OH 92.9 173 88.6 247 89.1 242 -3.8Cleveland OH 95.4 134 90.1 203 87 288 -8.4Columbus IN 87.6 320 84.6 335 84.9 327 -2.7Columbus OH 95.2 137 90.7 191 90.3 226 -4.9Danville IL 79.6 384 78 384 77.7 384 -1.9Davenport IL 85.5 360 83 363 81.1 377 -4.4Dayton OH 88.7 288 85.1 321 84.2 345 -4.5Decatur IL 83.8 376 79.8 383 81.7 373 -2.1Detroit MI 94.0 155 89.3 225 87 288 -7.0Eau Claire WI 86.7 338 83.8 350 84.3 342 -2.4Elkhart IN 91.7 206 88.6 247 88.3 254 -3.4Evansville IN 88.0 308 85.4 305 84.8 329 -3.2Flint MI 89.4 272 86.8 284 85.8 313 -3.6Fond du Lac WI 86.6 342 85.3 312 85.7 316 -0.9Fort Wayne IN 87.3 326 83.7 352 82.5 366 -4.8Gary IN 93.5 164 91.2 183 91.6 201 -1.9Grand Rapids MI 93.9 157 90.3 200 88.2 257 -5.7Green Bay WI 91.1 226 87.4 271 87.7 271 -3.4Holland MI 94.9 146 90.6 194 90.6 222 -4.3Indianapolis IN 92.4 187 88.9 239 87.9 265 -4.5Jackson MI 91.0 232 87 280 86.3 307 -4.7Janesville WI 88.3 297 88.1 259 87.6 275 -0.7Kalamazoo MI 93.5 165 88.2 256 88.5 249 -5.0Kankakee IL 87.6 319 85.4 305 87.2 284 -0.4Kokomo IN 86.5 346 83.1 361 81.8 372 -4.7La Crosse WI 85.2 363 83.5 355 84.2 345 -1.0Lafayette IN 87.2 330 84 349 84 348 -3.2Lake County IL 109.0 32 104.9 60 107.6 45 -1.4Lansing MI 92.2 194 88.7 245 86.5 301 -5.7Lima OH 83.5 378 81.2 379 80.3 381 -3.2Madison WI 99.6 87 97.3 112 100.5 94 0.9Mansfield OH 85.1 367 81.6 376 80.9 378 -4.2Michigan City IN 86.7 339 84.7 332 85.3 323 -1.4Milwaukee WI 96.9 114 95.6 132 95.8 143 -1.0


TABLE 1 (cont.)


2002 2005 2008 2002-2008

Index Rank Index Rank Index Rank Change in living cost


Monroe MI 95.5 131 91.9 171 90 233 -5.5Muncie IN 83.3 380 80.8 380 79.4 383 -3.8Muskegon MI 88.6 293 84.7 332 84.2 345 -4.4Niles MI 87.4 324 85.4 305 86 309 -1.4Oshkosh WI 86.0 352 84.4 342 84.8 329 -1.2Peoria IL 85.0 368 82.5 367 85 325 -0.0Racine WI 89.9 257 89.5 219 88.9 247 -1.0Rockford IL 86.3 351 85.1 321 86.6 297 0.3Saginaw MI 87.0 333 85.3 312 81.2 375 -5.8Sandusky OH 90.3 242 86.1 298 84.3 342 -6.0Sheboygan WI 87.2 327 86.2 295 86.6 297 -0.6South Bend IN 87.7 315 84.8 327 83.1 362 -4.6Springfield IL 85.6 359 82 369 83.2 361 -2.4Springfield OH 87.8 314 84.8 327 82.9 363 -4.9Steubenville OH 82.3 382 80 381 80.7 379 -1.6Terre Haute IN 84.1 374 81.9 372 81.2 375 -2.9Toledo OH 91.2 225 86.7 285 84.8 329 -6.4Warren MI 104.5 52 97.3 112 95.2 152 -9.3Wausau WI 87.6 321 84.5 340 85.8 313 -1.8Youngstown OH 88.7 289 84.4 342 82.4 367 -6.3

West North CentralAmes IA 89.1 280 87.9 265 87.7 271 -1.4Bismarck ND 88.3 299 86.9 283 91 211 2.8Cape Girardeau MO 86.6 341 81.9 372 84 348 -2.6Cedar Rapids IA 91.7 205 89.9 208 90.3 226 -1.4Columbia MO 89.8 262 85 323 87.3 281 -2.5Des Moines IA 94.3 150 89.8 210 90.4 225 -3.9Dubuque IA 86.8 336 85.2 318 84.6 332 -2.2Duluth MN 85.9 355 84.6 335 84.6 332 -1.3Fargo ND 89.7 264 89.3 225 91.4 205 1.7Grand Forks ND 85.8 357 85.9 301 87.8 269 2.0Iowa City IA 90.5 238 89.2 228 89.7 238 -0.8Jefferson City MO 88.0 305 83.1 361 84.5 338 -3.5Joplin MO 85.7 358 84.1 348 84.6 332 -1.1Kansas City MO 96.5 119 92.3 165 93 181 -3.5Lawrence KS 88.2 303 85.3 312 86.9 291 -1.3Lincoln NE 89.5 270 86.5 290 86.5 301 -3.0Manhattan KS 83.8 377 81.4 378 85.8 313 2.0Mankato MN 88.0 310 85.3 312 85.4 321 -2.5Minneapolis MN 103.2 56 99.7 97 99.3 108 -3.9Omaha NE 91.3 223 88.3 254 88.6 248 -2.7Rapid City SD 89.5 268 86.7 285 87.6 275 -1.9Rochester MN 91.0 231 86.6 289 86.6 297 -4.4Sioux City IA 85.2 364 83.7 352 83.4 357 -1.8Sioux Falls SD 92.2 193 88.9 239 91 211 -1.2Springfield MO 89.3 276 88.2 256 89.1 242 -0.2St. Cloud MN 90.5 237 87.8 266 87.4 279 -3.1St. Joseph MO 86.5 344 86.7 285 86 309 -0.5St. Louis MO 93.2 168 88.6 247 90.1 231 -3.1Topeka KS 88.0 309 82.7 366 84.4 341 -3.6


TABLE 1 (cont.)


2002 2005 2008 2002-2008



Waterloo IA 84.9 370 84.4 342 84.6 332 -0.3Wichita KS 88.1 304 84.7 332 86.5 301 -1.6

South AtlanticAlbany GA 87.7 317 86.2 295 86.5 301 -1.2Anderson SC 91.4 218 89.4 220 89.1 242 -2.3Asheville NC 95.6 128 93.6 151 95.5 148 -0.1Athens GA 93.0 170 90.6 194 91.4 205 -1.6Atlanta GA 101.3 69 99.2 99 99.2 109 -2.1Augusta GA 91.5 212 89 234 90.3 226 -1.2Baltimore MD 99.6 85 105 59 113 30 13.4Bethesda MD 117.9 19 124.9 16 122.9 15 5.0Blacksburg VA 87.0 331 85.2 318 87.1 286 0.1Brunswick GA 91.8 202 91.3 180 94 170 2.2Burlington NC 92.6 178 88 261 85.7 316 -6.9Cape Coral FL 100.7 76 110.3 41 101.7 85 1.0Charleston SC 99.6 86 100.3 94 104.5 64 4.9Charleston WV 89.9 254 86 299 88.5 249 -1.4Charlotte NC 98.8 95 96.4 124 98.7 114 -0.0Charlottesville VA 99.3 89 101.1 82 102.7 76 3.4Columbia SC 96.1 122 94.8 140 97 130 0.9Columbus GA 89.5 268 88 261 88.2 257 -1.3Crestview FL 96.0 123 102.5 75 101.3 88 5.3Cumberland MD 82.1 383 81.5 377 82.6 365 0.5Dalton GA 92.4 188 90.5 196 89.7 238 -2.7Danville VA 86.9 334 85 323 83.8 354 -3.1Deltona FL 93.4 166 100.9 84 99.8 105 6.4Dover DE 95.0 144 97.1 116 103.5 70 8.5Durham NC 96.5 120 93.3 156 95.4 149 -1.1Fayetteville NC 91.5 215 88.5 251 88.4 252 -3.1Florence SC 94.2 151 91.1 185 90.5 224 -3.7Fort Lauderdale FL 109.3 31 120 23 116.4 27 7.1Gainesville FL 95.0 144 97.3 112 100.3 95 5.3Gainesville GA 98.6 96 96.2 125 96.8 131 -1.8Goldsboro NC 87.8 312 84.8 327 84 348 -3.8Greensboro NC 96.6 116 93.8 148 93 181 -3.6Greenville NC 89.9 259 87.5 269 86.7 294 -3.2Greenville SC 94.7 148 93 158 94.3 166 -0.4Hagerstown MD 91.2 224 96.1 127 95 157 3.8Harrisonburg VA 92.5 183 92.6 161 93.9 172 1.4Hickory NC 91.9 200 88.5 251 86.9 291 -5.0Hinesville GA 86.4 348 86.5 290 88 263 1.6Huntington WV 84.3 373 82 369 83.4 357 -0.9Jacksonville FL 97.2 110 101 83 103.2 74 6.0Jacksonville NC 88.8 287 87.8 266 88.1 262 -0.7Lakeland FL 91.6 209 96.6 121 97.2 128 5.6Lynchburg VA 87.6 318 86 299 88.2 257 0.6Macon GA 89.9 257 87.6 268 87.7 271 -2.2Miami FL 105.0 47 115.9 31 116.6 26 11.6Morgantown WV 89.4 271 86.7 285 86.6 297 -2.8Myrtle Beach SC 98.1 102 96.5 122 98.6 115 0.5

TABLE 1 (cont.)


2002 2005 2008 2002-2008




Naples FL 115.2 24 129.7 11 131.2 8 16.0North Port FL 106.0 40 117.2 28 108.4 40 2.4Ocala FL 91.7 207 96 128 96.2 138 4.5Orlando FL 99.9 83 106.7 51 106.6 53 6.7Palm Bay FL 94.1 154 102.7 73 97.8 122 3.7Palm Coast FL 98.0 103 104.3 63 100.2 98 2.2Panama City FL 92.9 175 99.7 97 99.9 103 7.0Parkersburg WV 86.0 353 81.8 375 80.7 379 -5.3Pensacola FL 92.3 190 95.9 129 96.8 131 4.5Port St. Lucie FL 97.5 106 108.7 44 100.7 93 3.2Punta Gorda FL 95.2 139 103.5 69 96.1 140 0.9Raleigh NC 100.4 78 97.3 112 101.2 90 0.8Richmond VA 95.6 130 96.5 122 99.8 105 4.2Roanoke VA 92.0 198 90.7 191 90.8 218 -1.2Rocky Mount NC 87.2 327 84.8 327 84.5 338 -2.7Rome GA 90.4 240 88.1 259 87.8 269 -2.5Salisbury MD 90.8 235 91.4 179 95.1 156 4.3Savannah GA 94.1 153 95.4 134 95.6 147 1.5Sebastian FL 96.7 115 103.4 70 98.3 117 1.6Spartanburg SC 92.9 173 89.9 208 90.2 229 -2.7Sumter SC 89.7 263 87.2 276 87.2 284 -2.5Tallahassee FL 95.4 133 95.8 130 98 120 2.6Tampa FL 100.8 75 103.4 70 102.6 77 1.8Valdosta GA 88.3 296 87.2 276 87.6 275 -0.7Virginia Beach VA 93.2 169 96.7 118 100.3 95 7.1Warner Robins GA 91.3 222 89 234 89 245 -2.3Washington DC 112.4 27 121.8 19 119.5 18 7.1West Palm Beach FL 107.5 35 121.3 22 117.1 25 9.6Wheeling WV 83.0 381 79.9 382 79.6 382 -3.4Wilmington DE 102.9 59 103.7 68 108 41 5.1Wilmington NC 97.1 112 96.7 118 98.6 115 1.5Winchester VA 93.5 163 98.2 105 95.2 152 1.7Winston NC 96.0 125 93.2 157 91.6 201 -4.4

East South CentralAnniston AL 89.3 273 86.2 295 88.2 257 -1.1Auburn AL 92.6 179 89.7 213 91.8 197 -0.8Birmingham AL 97.9 104 95.7 131 97.8 122 -0.1Bowling Green KY 87.0 332 84.9 325 85.6 319 -1.4Chattanooga TN 97.0 113 93.9 146 95 157 -2.0Clarksville TN 89.2 277 87.4 271 87.3 281 -1.9Cleveland TN 91.3 220 88.3 254 87.9 265 -3.4Decatur AL 88.9 283 86.3 294 87.1 286 -1.8Dothan AL 87.9 311 87 280 88.5 249 0.6Elizabethtown KY 89.7 265 87.4 271 86.7 294 -3.0Florence AL 90.0 251 86.5 290 88 263 -2.0Gadsden AL 88.6 292 87 280 88.3 254 -0.3Gulfport MS 92.4 184 93.4 153 97.2 128 4.8Hattiesburg MS 91.6 209 89.1 230 91 211 -0.6Huntsville AL 92.1 197 88.9 239 91.1 209 -1.0Jackson MS 93.6 162 93.9 146 93.7 174 0.1

TABLE 1 (cont.)


2002 2005 2008 2002-2008




Jackson TN 89.9 255 89.4 220 86 309 -3.9Johnson City TN 90.4 239 87.3 275 87.7 271 -2.7Kingsport TN 88.6 291 85.4 305 85.6 319 -3.0Knoxville TN 93.8 159 91.9 171 94 170 0.2Lexington KY 91.1 230 89.8 210 90.9 217 -0.1Louisville KY 92.2 192 89.4 220 90 233 -2.2Memphis TN 96.1 121 92.4 164 91.8 197 -4.3Mobile AL 91.6 208 91.3 180 94.7 160 3.1Montgomery AL 92.2 191 91.6 176 94.3 166 2.1Morristown TN 90.1 249 88 261 87.9 265 -2.1Nashville TN 99.2 90 96.2 125 100.3 95 1.1Owensboro KY 85.0 369 82.9 364 82.8 364 -2.2Pascagoula MS 90.3 243 89.8 210 92.7 184 2.4Tuscaloosa AL 91.3 219 89.4 220 91 211 -0.3

West South CentralAbilene TX 88.2 300 88.2 256 88.4 252 0.2Alexandria LA 90.2 246 90.7 191 92.3 191 2.1Amarillo TX 89.9 260 89 234 90.2 229 0.4Austin TX 103.5 55 100.9 84 105.4 60 2.0Baton Rouge LA 94.0 156 95.1 136 100.2 98 6.2Beaumont TX 89.9 260 89.6 216 93.6 176 3.8Brownsville TX 84.0 375 85.3 312 83.9 352 -0.1College Station TX 91.5 213 89.7 213 91.5 203 -0.0Corpus Christi TX 92.1 196 96.9 117 101.8 83 9.7Dallas TX 104.9 48 103.9 64 103.5 70 -1.4El Paso TX 95.0 143 93.4 153 96.1 140 1.1Fayetteville AR 88.2 300 88 261 87.4 279 -0.8Fort Smith AR 85.4 361 84.8 327 83.8 354 -1.6Fort Worth TX 99.7 84 98.3 103 99.1 112 -0.6Hot Springs AR 90.0 252 87.2 276 88.2 257 -1.8Houma LA 91.4 217 92.2 169 96.3 135 4.9Houston TX 101.4 68 100.2 96 103.3 73 1.9Jonesboro AR 86.6 343 83.3 358 82.1 370 -4.5Killeen TX 93.2 167 92.5 162 92.2 192 -1.0Lafayette LA 94.2 152 94.8 140 98.1 119 3.9Lake Charles LA 90.2 247 89.7 213 92.5 189 2.3Laredo TX 88.7 290 91.3 180 93.4 178 4.8Lawton OK 85.2 365 84.6 335 85.3 323 0.1Little Rock AR 91.8 204 90 205 92.8 183 1.0Longview TX 89.2 277 91.5 177 91 211 1.8Lubbock TX 92.3 189 91.5 177 90.8 218 -1.5McAllen TX 87.4 324 90 205 91.9 196 4.5Midland TX 91.1 227 90.8 188 96.3 135 5.2Monroe LA 91.9 201 92.3 165 93.2 179 1.3New Orleans LA 96.6 117 97.6 108 102.5 79 5.9Odessa TX 89.0 282 89 234 92.7 184 3.7Oklahoma City OK 91.1 227 89.3 225 90.7 221 -0.4Pine Bluff AR 84.6 372 82.2 368 82.2 369 -2.4San Angelo TX 90.0 250 90.8 188 91 211 1.0San Antonio TX 95.9 126 94.2 143 96.8 131 0.9

TABLE 1 (cont.)


2002 2005 2008 2002-2008




Sherman TX 92.4 184 90.9 186 90.8 218 -1.6Shreveport LA 91.0 233 91.2 183 94.5 164 3.5Texarkana TX 88.4 294 85.8 303 84.6 332 -3.8Tulsa OK 91.6 209 90 205 92.6 187 1.0Tyler TX 97.7 105 95.1 136 94.6 162 -3.1Victoria TX 91.5 213 94.9 138 97.7 125 6.2Waco TX 90.8 234 90.2 201 89.9 235 -0.9Wichita Falls TX 88.8 286 88.7 245 88.3 254 -0.5

MountainAlbuquerque NM 93.8 161 91.9 171 95.9 142 2.1Billings MT 90.7 236 89.6 216 92.1 194 1.4Boise City ID 95.2 141 93.6 151 96.2 138 1.0Boulder CO 115.4 23 107.6 46 110.6 36 -4.8Carson City NV 104.7 51 111 40 107.1 49 2.4Casper WY 87.4 323 89.2 228 93.7 174 6.3Cheyenne WY 92.6 180 90.8 188 91.3 207 -1.3Coeur d’Alene ID 93.9 158 94.9 138 95.8 143 1.9Colorado Springs CO 100.3 81 95.5 133 95.8 143 -4.5Denver CO 107.7 34 100.7 88 99.9 103 -7.8Farmington NM 90.1 248 88.9 239 95.4 149 5.3Flagstaff AZ 98.4 98 100.6 92 104.9 62 6.5Fort Collins CO 100.0 82 94 145 92.4 190 -7.6Grand Junction CO 92.5 181 90.2 201 94.3 166 1.8Great Falls MT 86.7 337 85.5 304 86.4 305 -0.3Greeley CO 99.5 88 92.5 162 89.6 240 -9.9Idaho Falls ID 88.3 297 86.4 293 86.8 293 -1.5Lake Havasu AZ 94.8 147 98.5 102 96.3 135 1.5Las Cruces NM 88.0 306 87.2 276 89.2 241 1.2Las Vegas NV 104.1 53 112.2 37 106.6 53 2.5Lewiston ID 92.4 186 90.5 196 92 195 -0.4Logan UT 87.8 313 84.4 342 87 288 -0.8Missoula MT 95.1 142 93.8 148 97.8 122 2.7Ogden UT 92.5 182 89.1 230 93.2 179 0.7Phoenix AZ 102.3 63 106.5 52 104.3 65 2.0Pocatello ID 86.7 340 82.8 365 83.9 352 -2.8Prescott AZ 99.2 91 100.5 93 101 91 1.8Provo UT 93.0 171 89.1 230 94.2 169 1.2Pueblo CO 90.2 245 85.4 305 83.8 354 -6.4Reno NV 106.2 38 114.4 34 109.2 39 3.0Salt Lake City UT 96.0 123 94.2 143 103.2 74 7.2Santa Fe NM 106.7 37 104.9 60 107.1 49 0.4St. George UT 91.5 216 93.7 150 95.3 151 3.8Tucson AZ 99.1 92 100.7 88 100 102 1.0Yuma AZ 92.1 195 92.3 165 92.6 187 0.5

PacificAnchorage AK 104.8 49 103.8 66 106.6 53 1.8Bakersfield CA 98.3 99 105.8 55 100.2 98 1.9Bellingham WA 98.4 97 100.9 84 106 58 7.6Bend OR 98.1 101 99 101 102.4 81 4.3Bremerton WA 101.2 72 100.8 87 106 58 4.8

TABLE 1 (cont.)


2002 2005 2008 2002-2008




Chico CA 106.0 39 112.8 36 107.2 48 1.2Corvallis OR 95.4 132 93 158 98 120 2.6El Centro CA 89.3 274 91.9 171 89 245 -0.3Eugene OR 94.6 149 94.4 142 98.3 117 3.7Fairbanks AK 98.8 94 98.3 103 102.6 77 3.8Fresno CA 100.6 77 108.5 45 102.3 82 1.7Hanford CA 95.7 127 97.4 110 94.6 162 -1.1Honolulu HI 115.9 20 127.9 13 141.5 3 25.6Kennewick WA 95.2 139 90.9 186 91.5 203 -3.7Longview WA 92.9 172 89 234 91.7 200 -1.2Los Angeles CA 111.4 29 121.5 21 119.4 19 8.0Madera CA 103.1 58 106.2 53 101.3 88 -1.8Medford OR 97.4 108 101.4 79 100.1 101 2.7Merced CA 101.8 64 108.8 42 94.7 160 -7.1Modesto CA 101.8 65 105.8 55 95 157 -6.8Mount Vernon WA 102.6 61 101.5 78 106.8 51 4.2Napa CA 118.7 16 124.4 17 117.5 24 -1.2Oakland CA 135.6 4 137.7 6 135.9 6 0.3Olympia WA 100.9 74 97.9 106 102.5 79 1.6Oxnard CA 119.2 15 128 12 120.4 17 1.2Portland OR 102.6 62 100.7 88 107.4 47 4.9Redding CA 105.4 43 113.4 35 107.9 42 2.5Riverside CA 104.0 54 114.9 33 106.8 51 2.8Sacramento CA 108.2 33 115.7 32 104.2 66 -4.0Salem OR 95.3 136 92.7 160 97.6 126 2.3Salinas CA 125.5 8 135.1 7 115.4 28 -10.1San Diego CA 125.1 9 131.1 10 120.5 16 -4.6San Francisco CA 145.6 1 145.1 1 147.7 2 2.1San Jose CA 145.2 2 144 2 149.6 1 4.4San Luis Obispo CA 112.9 26 117.1 29 112.8 31 -0.1Santa Ana CA 131.5 6 142.5 3 137.6 4 6.1Santa Barbara CA 121.7 13 131.2 8 119.2 21 -2.5Santa Cruz CA 141.1 3 142 4 132.2 7 -8.9Santa Rosa CA 130.9 7 138.7 5 126.9 11 -4.0Seattle WA 111.7 28 111.3 39 123.2 14 11.5Spokane WA 92.7 177 92.1 170 96.7 134 4.0Stockton CA 110.4 30 116.6 30 101.4 87 -9.0Tacoma WA 101.2 73 100.7 88 106.4 56 5.3Vallejo CA 118.0 18 126.8 15 112.3 33 -5.7Visalia CA 97.2 111 102.7 73 99.2 109 2.0Wenatchee WA 92.0 199 88.9 239 95.2 152 3.2Yakima WA 90.4 240 90.5 196 93.6 176 3.3Yuba City CA 96.6 118 101.9 77 94.4 165 -2.2


TABLE 1 (cont.)


2002 2005 2008 2002-2008




areas remained, oddly, virtually the same (see Table 2). Between 2002 and 2008 the average COLI fell in the highest and lowest quintiles and rose in the three intermedi-ary quintiles, shifting the overall distribu-tion downward slightly at the tails and narrowing the difference slightly between the top quintile and the next two. The path toward this shift, however, was not lin-ear, as can be seen from the intermediate shifts for the 2002-2005 and 2005-2008 periods. Thus it is difficult to say whether the 2002-2008 shifts are indicative of a longer-term trend, but if so, it would in-dicate that cost differences between the highest quintile and the next are narrow-ing, minimizing somewhat the differences in comparative advantage, at least as it refers to costs.

ImplicationsThe relative cost of living across the

regions continues to change over time. Recently the change continues a trend that began in 2007 in which living costs began to recede in metro areas with formerly hot housing markets as house prices began to decline. Many of these areas are in the South and the West, where accelerating economic and population growth has steadily driven up costs over time. There is some indication now that this is reversing slightly.

Historically the Northeast has had the most stable cost structure. The region has an abundance of well-paying jobs, along with high population density and slow growth, which support the region’s high, but stable, cost of living. The cost of living has gradually fallen in the Midwest, where the ongoing restructuring among many manufacturing industries weighs on economic and popula-tion growth.

Low living costs can be a critical growth driver for some metro areas. In particular, small metro areas often develop as lower-cost bedroom communities for major metro areas, even though the smaller area may have few internal economic drivers. By contrast, occasionally individuals choose to remain in a certain area even though the

cost of living is high. An expensive metro area can still attract a positive flow of do-mestic migration if its costs are competitive within the region. The recent general move-ment downward of costs in the highest-cost metro areas indicates some improvement in their comparative advantage, which should help to support their economies as econom-ic recovery continues in the coming year as well as further into the future.

Other cost measuresAlternative cost measures exist for re-

gional economies such as the consumer price index and the ACCRA (formerly known as the American Chamber of Commerce Researchers Association) living cost index, yet each differs greatly in both methodology and focus from the Moody’s Analytics cost of living index.

The purpose of the CPI is to track price changes over time and is thus not designed to measure comparative living costs across regional economies. The composition of the goods and services consumed by households and their relative prices vary substantially across regions. In addition, the CPI measure is available only for a handful of economies at the metro area level of detail.

The goal of the ACCRA index is more similar to that of the Moody’s Analytics index in that it attempts to capture relative

price levels across regional economies at a point in time. However, there are a number of differences between the two measures.

The Moody’s Analytics cost of living in-dex is published annually and is based on a variety of data sources primarily published by federal agencies. Sources include the Census Bureau, the Department of Energy, the Energy Information Administration, FHFA, the Bureau of Economic Analysis, and the National Association of Realtors. In con-trast, the ACCRA index is released on a quar-terly basis and is based on comparative price surveys culled from a network of chambers of commerce, economic development orga-nizations, and similar entities.

The ACCRA index represents price dif-ferences across regional economies for a common basket of goods and services. This provides a consistent basis for cost com-parison—with regard to the same basket of goods and services—across cities and metro areas. The limitation of this approach, how-ever, is that it fails to account for differences in spending patterns across regions and product substitution. The Moody’s Analyt-ics index does not have this limitation, as it measures relative prices for the goods and services actually consumed regionally. Such methodological differences make it difficult to compare the cost of living measure from ACCRA with our measure.

TABLE 2

Average Metro Area Cost of Living Index by QuintileIndex: U.S.=100

1st 2nd 3rd 4th 5thDifference between

1st and 5th quintiles

2008 113.9 98.6 92.4 87.9 83.7 30.2

2005 115.0 97.3 90.8 87.5 83.7 31.3

2002 114.3 97.2 91.2 87.7 84.0 30.3

Change Between 2008 and 2005 -1.1 1.2 1.6 0.4 0.1

Change Between 2005 and 2002 0.7 0.1 -0.4 -0.2 -0.3

Change Between 2008 and 2002 -0.4 1.4 1.2 0.2 -0.3



FREQUENTLY ASKED QUESTIONS ��

FINANCE

What is the Texas ratio, and how can it be used in regional economic analysis?

TRADE

How exposed is the U.S. economy to trade with Europe?The U.S. is somewhat exposed to Europe-

an trade, but less than one might think. The proximity and economic size of trading part-ners matter more, which makes U.S. trade links with its North American neighbors and with Pacific Rim countries stronger than its trade links with Europe.

The U.S. exported 10.9% worth of its GDP in goods and services in 2009. Exports to Europe in 2009 were $260.4 billion, which is 24.8% of total merchandise goods exports, or 1.8% of U.S. GDP. In comparison, the U.S. exported $230.6 billion worth of goods to Canada and $129 billion to Mexico that same year. Exports to Canada and Mexico are 28% higher than exports to all of Europe despite the much smaller size of the Canadian and Mexican economies. Data describing trade by country only cover mer-chandise trade; the BEA and Census Bureau

data do not break out services trade such as tourism or financial services by country.

Exports to Europe are dominated by high-tech goods and mostly go to a hand-ful of Western European nations. More than 40% of the dollar volume of goods exported to Europe falls under four categories: aircraft and parts, nuclear reactors and parts, phar-maceutical products, and medical and surgi-cal instruments. Exports to Germany, the U.K., the Netherlands, France and Belgium combine to account for two-thirds of all trade with Europe.

This pattern of trade is not unusual by world standards. It broadly fits the pattern of what academic economists call the grav-ity theory of trade. Simply stated, transport costs remain high enough to trump the pattern of trade dictated by comparative ad-vantage, so a list of a country’s trading part-

ners should be dominated by its neighbors and by the world’s largest economies.

A decline in exports to Europe, driven by Greek debt fears and a crisis in the euro zone, would do little damage to the U.S. economy through reduced trade; the impact would more likely be channeled through financial services. As a hypothetical example, a reduc-tion of 5% of all exports to Europe would reduce U.S. exports by $13 billion per year, about 1.2% of the total. Holding imports constant, the shock would add just over $1 billion to the monthly trade deficit. Real GDP growth in the U.S. would be reduced by four-tenths of a percentage point for one year, less than trade fell during the Asian financial crisis in 1997-1998. The impact of a sover-eign debt crisis on U.S. banks would likely be a worse problem for the U.S. economy.

— CHRIS CORNELL

The Texas ratio is defined as the sum of nonperforming loans and bank-owned real estate divided by the sum of tangible com-mon equity capital and loan loss reserves. The ratio, usually calculated for a given banking institution, serves as a leading indi-cator of bank failure. When the ratio exceeds 1, meaning that the sum of nonperforming assets is in excess of the funds available to cover the loss, the bank is more likely to fail.

The Texas ratio is an accurate measure of financial stress because readings above 1 highlight undercapitalized banks that are at risk of becoming insolvent should the quality of nonperforming loans fail to im-prove. This ratio makes sense intuitively, as the bank does not have enough between

reserves, which are kept aside specifically to cover losses from nonperforming as-sets, and equity raised from common stock, which provides the bank with capital, to make up for the lost revenue from the non-performing assets.

Banks with Texas ratios above 1 are concentrated in the West, Illinois, Florida and Georgia. These same states have ex-perienced the highest rates of bank failure. Thus, Moody’s Analytics expects an area with a larger number of banks with a high Texas ratio to encounter more bank fail-ures. Bank failures constrict the amount of credit available in an area, which can make it more difficult for firms to expand and for consumers to access the loans neces-

sary to make big purchases such as houses and automobiles.

The Texas ratio is calculated at the indi-vidual bank level, and thus no national, state or regional metrics exist. However, the ratio could be calculated at a nationwide, state or regional level by aggregating the data available for regional banks. A regional Texas ratio would provide an indication of where bank failures would be most prevalent.

The metric was developed by Gerard Cassidy in the wake of the oil bust in the 1980s. The ratio was also used during the savings and loan crisis of the late 1980s and the recession in New England during the early 1990s.

— TYLER CASE


In March, the Census Bureau released data series that break out U.S. imports by state or territory of destination. The data are available on a monthly basis starting with January 2008 and provide detail at the 4-digit North American Industry Clas-sification (NAICS) level as well as the 6-digit Harmonized System (HS) level. The Census Bureau published state import data briefly during the 1980s but canceled the program due to quality issues. Improvements in elec-tronic reporting have now enabled the Bu-reau to re-release the series, offering users a finer description of imports.

Nonetheless, regional breakouts of these data are more reliable than state breakouts due to problems identifying the final desti-nation of imports. For example, the state of destination is recorded at the time of entry summary filing, which means later desti-nation changes are not reflected in these census data. Thus, goods scheduled to arrive in a state hurt by a disaster will appear to ar-rive even if the goods have been redirected.

Worse, destinations are defined loosely and inconsistently as data quality varies, reducing the value of the data. Imports will often go to distribution or storage facilities before being shipped to the place where they are consumed or refined. For example, a bulk import of shoes may go to a distribution center before being sent on to individual shoe stores. The data would most likely list the state of destination for the shoes as the distribution center, not the stores where the shoes are sold. Further, shipments with more than one listed des-tination are entirely allocated to the state where the majority of the shipment’s value is headed. If that information is not avail-able, the shipment is allocated to the state of the consignee or, if that is also not ap-parent, then to the port through which the shipment first entered the country. These inconsistencies will lead to overrepresenta-tion of states with large ports or distribu-tion centers. Also, state import data should not be combined with state export data to

create a state trade balance series. This ex-ercise would ignore interstate trade flows, which dwarf international trade.

A cautious interpretation of the data will still add value to an imports analysis. The data clearly show what types of goods are being shipped to each region and how each region’s imports are shaped by economic events. The series includes a foreign trade zone breakout, which supplements the state identification. Hence, a state’s import value includes imports to FTZs within the state, but a separate measure of imports to all U.S. FTZs now exists. Additionally, the series tracks the origin of imports to each state by country of origin. This could elucidate which regions would be affected and by how much if trade sanctions were imposed on a given trading partner or if there were significant shifts in foreign exchange rates.

More information can be found at http://www.census.gov/foreign-trade/statistics/state/.

— JOEL SLATER

FREQUENTLY ASKED QUESTIONS ��

TRADE, DATA

What is the Census Bureau’s new imports-by-state data? How useful is it in regional economic analysis?


STATE AND METROPOLITAN AREA FORECAST REVIEW �� Northeast

The Northeast is still outperforming every other region of the country. Only Maine, Rhode Island, Connecti-cut and Maryland are still in recession; the economies of the rest of the region are now recovering. New Jersey moved into recovery over the month. Private sector job growth in the Northeast is well above the

national average and faster than in every other region.

The Pressure Is on in the NortheastBY MARISA DI NATALE

Census hiring over the past few months is boosting payroll employment, though healthy growth in private sector industries is evident in most of the northeastern states (see High-Frequency Indicators). So far, private sector job gains have been suf-ficient to offset big losses at the state and local government levels, though several states in the region are coping with mas-sive budget deficits. The three metro areas where job growth has deteriorated com-pared with three months ago all are state capitals—Trenton, Harrisburg and Hartford. Albany NY is grappling with a huge state budget deficit and public sector layoffs, though growth in the private sector has been far more robust.

The European problemThe next few months will be critical

for the Northeast as the fallout from the depreciating euro and fears of a double-dip recession in Europe begin to take a toll on the region’s large tourism and export industries. Nationally, the European debt crisis will subtract only about 0.2 of a per-centage point from GDP growth this year, but it could knock more off growth in the Northeast. The Northeast’s manufactur-ing exports have the highest exposure to the euro zone than any other region—20% of the Northeast’s exported goods go to euro zone countries, compared with only 15% in the Midwest, 14% in the South, and 13% in the West (see What We’re Watch-ing). Fortunately, the Northeast is least

reliant on total exports for growth among the four regions. Also the strengthening of the Canadian dollar vis-à-vis the U.S. dol-lar is helping to offset some of the drag from Europe – a nearly equal share of the Northeast’s exports go to Canada as go to the euro zone.

Many Northeastern metro areas rely on Europeans to fuel their tourism industries. In New York City for example, international tourist visits were crucial in keeping the metro division from falling into a more se-vere recession over the past two years. And the marketing arm of New York City—NYC & Co.—estimates that foreign visitors to the city spend about five times more than do American tourists to the Big Apple. With the euro expected to fall to its lowest value against the dollar in nearly a decade by the end of the year, this could have serious implications for New York City’s tourism if domestic growth is not yet strong enough to offset European weakness.

ManufacturingThough manufacturing payrolls have yet to

turn up to any significant degree in the North-east, other indicators of factory activity point to a slow but steady improvement in the coming months. Both the Philadelphia Fed’s business outlook survey and the New York Fed’s Empire State Manufacturing survey are in line with one another and show that busi-ness conditions in the two fed districts are as strong now as they were before the recession. The New York district’s indicator shows stron-ger employment trends than does the Phila-delphia indicator, though both show a slow expansion of factory payrolls (see What We’re Watching). The most recent Beige Book from the Fed Board of Governors also told a slow and steady story for Northeast manufactur-ers. Boston-based producers reported strong increases in demand for biopharmaceutical products, though fears that healthcare reform will crimp R&D spending had survey respon-dents less optimistic about future growth. In Philadelphia and in New York, manufacturers reported rising orders and shipments and indicated that capital spending plans are still in place for the remainder of the year. The European debt crisis was mentioned only as a risk to the outlook for New England-based software and IT equipment manufacturers.

The only negative trend emerging for regional manufacturers is the decline in average hourly earnings since February. This trend runs contrary to the national data, which show steadily rising earnings since the start of the year.

Included in this issue » Connecticut .................................... 43 » Massachusetts ................................44 » New Jersey ...................................... 45 » New York ......................................... 46 » Pennsylvania ................................... 47 » District of Columbia ......................48 » Maryland .........................................48 » Rhode Island ................................... 49 » Vermont .......................................... 49



Comparative Performance Indicators

Contracting Slipping

Improving Expanding

Ann

ualiz

ed 3

-mo

% c

hang

e

% change yr ago Note: Size reflects relative total employment


Middle Atlantic

New England

South Atlantic

Apr 2010

Payroll Employment—Northeast MSAs 1-yr vs. 3-mo performance (3-mo MA)

-3

-2

-1

0

1

2

3

-3 -2 -1 0 1

New York

Washington Philadelphia

Baltimore

Nassau

Pittsburgh

Boston

Edison

Newark

Providence

Hartford

Bethesda

Buffalo

Camden

Rochester

Albany Bridgeport

New Haven

Wilmington

Harrisburg

Syracuse

Springfield

Portland

Trenton

Manchester

U.S.


Improving Expanding

Ann

ualiz

ed 3

-mo

% c

hang

e



-2

-1

0

1

2

3

-3 -2 -1 0 1

Middle Atlantic

New England

South Atlantic

Apr 2010

Payroll Employment—Northeast States 1-yr vs. 3-mo performance (3-mo MA)

New York

Pennsylvania

New Jersey

Massachusetts

Maryland

Connecticut

District Of Columbia

New Hampshire

Maine

Rhode Island

Delaware

Vermont

U.S.

High-Frequency Indicators

3-mo MA, % change from previous 3-mo period, April 2010

Private service-providing

employment (annualized)

Current unemployment

rate

Change in unemployment

rateResidential

permitsIndustrial

productionOverall recent

performance

Change in outlook from

last month

Albany 1.6 6.9 -0.3 49.9 1.9 ↑ ↔Bethesda 1.9 5.9 0.0 -22.1 2.9 ↑ ↑Boston 2.3 8.9 -0.1 4.9 2.2 ↑ ↔Buffalo 1.5 8.2 -0.3 60.5 2.1 ↑ ↔Cambridge 2.2 7.6 -0.2 -7.6 3.5 ↑ ↔Nassau-Suffolk 4.3 7.2 -0.2 -3.4 2.3 ↑ ↑New Haven 3.1 10.1 0.5 43.3 2.2 ↑ ↔New York 3.2 9.7 -0.3 -45.4 2.0 ↑ ↔Newark 1.7 9.7 -0.1 10.2 2.0 ↑ ↔Rochester 1.3 7.9 -0.3 -30.9 2.9 ↑ ↔Hartford -1.0 9.3 0.6 -28.3 0.9 ↓ ↔Allentown 0.1 9.8 0.1 -31.9 1.9 ↔ ↔Baltimore 2.1 8.2 0.4 -7.9 2.6 ↔ ↔Camden 0.2 10.2 -0.0 -46.2 2.7 ↔ ↓Edison 0.4 9.3 -0.1 0.3 2.1 ↔ ↔Philadelphia 1.8 8.8 0.3 -23.1 1.7 ↔ ↔Pittsburgh 0.6 8.5 0.5 -15.0 2.6 ↔ ↔Providence -1.0 12.4 0.0 -28.8 2.0 ↔ ↑Washington 3.0 6.9 0.3 -17.3 2.2 ↔ ↔Wilmington 2.6 9.5 0.4 4.3 -0.1 ↔ ↑Northeast 1.7 9.0 0.0 -9.3 2.2 ↑ ↔U.S. 1.1 9.8 -0.1 1.7 1.9 ↔ ↔

Sources: BLS, Census Bureau, Federal Reserve, Moody’s Analytics



U.S. Northeast

98

100

102

104

106

108

110

112

98 99 01 03 05 07 09

EmploymentIndex 1998=100

U.S. Northeast

20

40

60

80

100

120

140

160

98 99 01 03 05 07 09

Housing Starts3-mo MA, Index 1998=100

U.S. Northeast

3

4

5

6

7

8

9

10

11

98 99 01 02 04 05 07 09

Unemployment Rate (%)

U.S. Northeast

0

2

4

6

8

10

-2

-498 99 01 02 04 05 07 08

Personal IncomeYr/Yr Growth Rate

U.S. Northeast

0

10

20

30

-10

-2098 99 01 03 05 06 08

Median House Price (Existing)3-mo MA, Yr/Yr Growth Rate

U.S. Northeast

20

40

60

80

100

120

140

160

180

200

98 99 01 03 05 06 08

Personal Bankruptcy FilingsIndex 1998=100

What We’re Watching

Cyclical Indicators

Sources: BEA, BLS, Federal District Courts, NAR, Moody’s Analytics


0 10 20 30 40

Connecticut Massachusetts

New York Northeast Maryland

New Jersey DC

New Hampshire Pennsylvania

U.S. Delaware

Rhode Island Maine

Vermont

Exports to euro zone as % of total exports Total exports as % of GDP

High Exposure to Euro Zone in the Northeast

Sources: Census Bureau, Moody’s Analytics


-50

-40

-30

-20

-10

0

10

20

30

07 08 09 10

Philadelphia New York

A Recent Divergence in Factory Hiring Manufacturing employment diffusion indices

Sources: Philadelphia and New York Federal Reserve Banks



Connecticut now looks to be on the road to recovery, having re-corded three solid, if not spectacular, months of net job growth, and the unemployment rate edged downward in April and May from its peak of 9.2% in March. The state’s budget has stabilized thanks to a combined passage of spending reductions and corporate and indi-vidual income tax increases in fiscal 2010. Also, the global economic recovery has returned the state’s exports to normal levels and has spurred an overall improvement in industrial production since mid-2009. However, the economy is still fragile, and growth will be slow until the state can solve several structural problems.

Flagship industriesThe state’s long-term problem is that its most prominent in-

dustries have not yet clearly entered recovery and face long-term slowdowns beyond recovery. Due to the economic downturn and the resulting loss in insurance premium revenue, the state’s insurance carriers have been hit hard, and the industry has been shedding jobs for more than two years. This drag has been especially bad for Hart-ford, where Aetna, Travelers, The Hartford Financial Group, Cigna, and United Health Group all figure among the metro area’s top em-ployers and where their job losses have dragged down broader metro area employment. In addition, the new healthcare bill is the first step in controlling the growth of insurance premium payments that will reduce the industry’s profitability in the long term.

Although the securities brokerage industry has recovered finan-cially, it has still lost close to 10% of its workforce, and this loss accounted for much of Bridgeport’s economic slowdown. Finally, employment in aerospace has stabilized but has not yet started to recover. Even after it recovers, United Technologies has indicated that production in the state will still suffer from cost disadvan-tages that argue against expansion and for potential relocation to other states or even abroad, as the Pratt & Whitney division has started to do with jet engine production. While all three industries will continue to be large employers and a major source of state

income, it is doubtful that they can maintain their previous pace of growth after recovery.

Recovery so farWith slow recovery in its main industries, the state’s job growth

over the past five months is attributable mainly to rising consumer confidence and a fledgling recovery in the housing market. Both retail and leisure/hospitality employment have increased as consumers lose their previous caution and as tourism to the Norwich casinos has started to recover. The public sector, not yet a source of growth, has stopped being a drag, as state and local government payrolls have sta-bilized thanks to budget compromises in Hartford, and federal census hiring has temporarily boosted employment. The industries that have been less hard-hit by the downturn may also play a leading role in the recovery. Although New Haven entered recession earlier than the state’s other metro areas, the stabilizing presence of Yale University and the Yale-led healthcare and biotechnology industry has led to an earlier recovery, especially after improvement in financial markets sta-bilized the university’s endowment and allowed it to resume hiring.

External risksWith the nation’s highest per capita income, Connecticut’s gov-

ernment finances are substantially dependent on nonwage income streams, in particular on financial market income and, to a lesser extent, on tourism. After initial recovery, U.S. financial markets have again taken a hit due to fears about sovereign debt in Europe, and this has temporarily reduced capital gains and other income for the securities industry that is one of the state’s largest income tax sources. Tourism has also stabilized, but the impending expansion of the casino industry across the Northeast has cast a shadow on the future growth prospects of the Foxwoods and Mohegan Sun casinos. As such, state government cannot count on improved tax revenues within the next year, and thus the pace of recovery will remain slow.

— ANDRES CARBACHO-BURGOS

Connecticut


Connecticut Is Edging Into Recovery…

Sources: BLS, Moody’s Analytics

97

100

103

106

109

112

115

118

-12

-10

-8

-6

-4

-2

0

2

4

6

07 08 09 10

Monthly change in employment, ths, 3-mo MA (L) Industrial production index, 2002=100 (R)


90

92

94

96

98

100

102

104

106

108

08 09 10

Aerospace

Insurance carriers

…But Flagship Industries Still Struggle Employment index: Mar 2008=100


Cable programming

Securities brokerage



The recovery in Massachusetts is relatively strong, with job gains so far outpacing those seen nationally. Employment in private service-producing industries is up more than 1% from its low in late 2009, while employment in goods-producing industries is up almost 2%. All of the state’s metro areas are now in recovery. Massachusetts is benefiting from the national recovery, which is boosting demand for the state’s tech products and professional and business service industries, including those in the Boston and Cambridge metro divi-sions. Even employment in the hard-hit financial activities industry has improved in 2010.

Recovery will continueThe rebound in the Massachusetts economy will continue, with

forward-looking indicators pointing to stronger demand. With the national economy continuing to expand, demand for the state’s high-tech manufactured goods will continue to improve. The Pur-chasing Management Association of Boston produces a monthly survey of its members on business conditions in the Greater Boston area, which covers most of Massachusetts, including the Boston, Cambridge and Peabody metro divisions and the Worcester metro area. The overall index is up from its lows in early 2009 but has yet to consistently rise above the 50 level that signals expansion. How-ever, the new orders component has been above 50 in eight of the past nine months, indicating that demand continues to strengthen. The business confidence component of the index was above 70 in April and May, up from a low of below 20 in early 2009.

The employment component was above 60 in both April and May, the highest it has been in more than two years, a strong sign that hiring gains will continue. Another positive indicator for the labor market is withheld state income tax revenues, which is rising on a year-ago basis due to hiring and wage growth. The stronger job market will, in turn, fuel growth in consumer spending, leading to job gains in industries such as retail trade and leisure and hospi-tality services.

Weights on growthAlthough the recovery will continue, growth will slow in the

second half of 2010 before picking up again. Much of the drag on growth will come from government. Federal employment is spiking with temporary hiring for the census, but it will drop again as those jobs wind down. Budget problems are leading to job losses in state and local government that will persist throughout this year, even as revenues are turning around. For example, a large Boston-area school district is laying off about 100 teachers and other personnel after warning earlier that up to 500 could lose their jobs. Budget cuts will be a particular problem for the Springfield metro area, home to the state’s main public university.

Financial services, a key driver for the state, especially Boston and Springfield, will be another near-term drag. Firms will try to hold off on hiring until the regulatory environment becomes clearer, and strong job gains are unlikely until 2011. And even after those issues are resolved, the industry will be structurally smaller for years to come because of the fallout from the financial crisis. The weight on the economy will be magnified by the industry’s high salaries, and regulatory changes are likely to result in smaller long-run bonuses.

Commercial construction is another near-term weight on Mas-sachusetts. With vacancy rates rising and financing tight, there is little development going on. Harvard University announced that it is cancelling a proposed science center in the City of Boston because of financial problems. Commercial construction will not turn around until next year and will not see strong growth until 2012.

Casino developmentThe debate over casino gaming in Massachusetts continues. A sec-

ond Indian tribe has proposed a casino for Fall River, which is within the Providence RI metro area. Meanwhile, the state legislature contin-ues to work on legislation that would legalize casinos. The tribes argue that they could build casinos even without the approval of the state.

— AUGUSTINE FAUCHER

Massachusetts


350

360

370

380

390

400

410

420

430

2,320

2,340

2,360

2,380

2,400

2,420

2,440

2,460

08 09 10

Goods-producing industries (R)

Broad-Based Turnaround Is Starting

Source: BLS

Massachusetts employment, ths

Private service-producing industries (L)


10

20

30

40

50

60

70

06 07 08 09 10

Overall New orders

Conditions Better, but Not Great Regional survey of business conditions, 3-mo MA

Source: Purchasing Management Association of Boston



New Jersey’s recovery is gradually taking root. Industrial output is improving along with the rest of the nation’s manufacturing base, and homebuilding is rebounding at a slightly faster pace. The labor market has been slower to improve, as payrolls have only recently steadied. Sharp losses in construction, professional services and financial ac-tivities have abated, while retail trade and leisure/hospitality are re-bounding. However, state and local government payrolls are slipping.

Budget woesNew Jersey’s severe budget problems will weigh on the state’s re-

covery. State government payrolls are expected to decline modestly through the remainder of the year, but the outlook is much darker for 2011. A contract between the state and its unionized employees stipulates that a wage freeze will remain in effect through 2010. In exchange, the state agreed not to lay off or furlough any workers this year or it would be obligated to reinstate a pay raise. Therefore, New Jersey’s state government wages and payrolls will be fairly steady until the beginning of next year, when the state is expected to down-size employment substantially.

Meanwhile, local government will be vulnerable to over $1 billion in funding cuts for public schools and municipal services that were recently enacted in the fiscal 2010 budget. With the state expecting another $767 million revenue shortfall over the next 12 months, fur-ther drastic measures are a serious risk for New Jersey.

Trenton will be particularly vulnerable to the state’s budget prob-lems. In addition to the area’s large concentration of state employ-ees, many local private sector businesses also rely on government contracts. Meanwhile, recent job gains in education/healthcare and retail trade are being offset by the rapid downsizing of leisure/hos-pitality and government. On the upside, Trenton’s 8.3% unemploy-ment rate remains below average and a smaller share of jobseekers has dropped out of the labor force than has happened nationwide. Finally, residential building permit issuance has recently begun to increase substantially.

Stalled payrolls everywhereHowever, Edison’s stagnant labor market typifies a trend seen

nearly everywhere across the state. Gains in education/healthcare and leisure/hospitality employment have not been enough to offset sharp losses in business services; employment elsewhere is flat. Edi-son’s unemployment rate is above the Northeast average.

Edison’s economy, however, is showing other signs of recov-ery, particularly from the housing market. Construction and other housing-related industries have downsized less aggressively re-cently, and they are expected to remain stable over the months ahead. Although Edison still has a fairly substantial inventory of unsold houses, the area’s rate of household formation has acceler-ated over the past year, and the backlog is expected to fall quickly once sales improve. As a result, single-family building permits have rebounded faster in the metro division than they have in the state or the U.S.

Newark’s economy has steadied, but it has not yet begun to recover. Payrolls are treading water, as professional services and retail trade have begun to rebound. However, most other industries are merely holding steady and goods-producing industries are still downsizing. Residential construction is flat due to the area’s large backlog of houses and high mortgage default rate.

Finally, Camden is struggling to break out of recession. Employ-ment is just beginning to stabilize. Retail trade and leisure/hospi-tality are rebounding strongly, but government is downsizing. The contraction of local government will be a significant hurdle for Cam-den over the months ahead, as most of the metro division’s private industries will be slow to regain momentum. Camden’s rate of popu-lation growth, which lags well behind both the Northeast and U.S. averages, will impede the recovery of local services. Migration into Camden is expected to remain weak over the quarters ahead because the area’s unemployment rate—above 10%—is much higher than it is in surrounding metro areas.

— SEAN MAHER

New Jersey


Falling Revenue Weighs on Government Jobs

Sources: BLS, Census Bureau

26

27

28

29

30

31

145

146

147

148

149

150

151

152

153

154

07 08 09 10

State government employment, ths (L) Total revenue, $ bil, 4-qtr moving sum (R)


0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

Edison

Vineland

New Jersey

Trenton

Newark

Atlantic City

Camden

2008 2009

Population Growth Accelerates in Most MSAs

Source: Census Bureau

Population, % change yr ago



New York’s recovery is becoming broad-based; most industries are now adding jobs, albeit at a slow pace in most cases. The state is benefiting from a confluence of positive macroeconomic factors: in-credibly low long-term interest rates maintain housing demand, rising business and leisure travel supports New York City’s tourism, and the strength of the Canadian dollar supports travel and trade upstate.

Lovin’ the loonieCanada is spurring a revival in hiring in the retail and leisure/

hospitality industries, especially in Buffalo. The Canadian dollar has appreciated against the U.S. dollar by about 10% over the past year, and it is expected to reach parity by this summer. Leisure/hospitality employment in the state already surpassed its prereces-sion peak, and it is almost there for retail as well. In Buffalo, retail payrolls exceeded their previous peak in March. These industries may be providing a temporary bridge for unemployed workers who cannot yet find employment in their former fields. The drawback, however, is that these are the two lowest paying of the major industries, and so these new job gains will not greatly improve in-comes in Buffalo.

Finance’s futureOnly recently have job losses in New York City’s financial services

come to an end. A little more than 50,000 jobs were lost from the late-2007 peak, and about 3,000 jobs have been regained since De-cember. Detailed employment data for financial services in the city show that most of these gains have come from real estate. Since the start of the year, leasing in both the apartment rental market and the commercial markets has begun to pick up.

Financial regulatory reform is likely to take a bite out of bank profits for a short period, but the ability of the financial industry to make lemonade from lemons has never disappointed in the past and is unlikely to do so this time around. The reform bill is likely to include restrictions on the types of trading activities FDIC-insured

banks can participate in—hedge funds are likely to be spun off, and these potential profit machines will no longer bolster balance sheets. Banks will also need to hold on to more capital, thus tying up money that could have been used to trade or invest for higher returns. Employment levels will not be affected much, and the forecasts for industry employment have not been altered.

ManufacturingNew York’s manufacturers are stable for now; job losses have

ended, though hiring has been weak so far. The Empire State manu-facturing survey shows that factory activity is expanding at the same pace now as it was prior to the recession. Demand has cooled a bit since last fall, when the federal stimulus depleted auto inventories, but the slow and steady increase in vehicle purchases since then ensures that Buffalo’s auto parts makers are in the clear for now. GM is investing $800 million in its Tonawanda engine plant to build cleaner-burning engines. The work on both the Ecotec engine and new V-8 will begin in 2012, and nearly 1,000 furloughed workers will be recalled. Just a few years ago, GM was threatening to close the plant because of high labor costs.

Manufacturers in Syracuse are not so fortunate; two of the metro area’s largest employers, Welch Allyn and Lockheed Martin, announced layoffs that will take effect soon. Welch Allyn sold off a line of business that produces lighting for medical offices, result-ing in over 100 lost jobs. Lockheed Martin announced the restruc-turing of its mission systems and sensors division earlier this year and recently announced that over 50 jobs will be cut at Syracuse’s Salina location. The abatement in manufacturing job losses is likely to be short-lived for Rochester as well. A poor 2010 outlook for Kodak could mean more layoffs are on the way. The company’s foray into digital inkjet printing is not expected to be profitable until next year. Similarly for Xerox, global restructuring will bring local layoffs.

— MARISA DI NATALE

New York


10

20

30

40

50

60

70

07 08 09 10

Most of New York’s Industries Now Adding Jobs Employment diffusion index, 3-mo MA



-14 -12 -10

-8 -6 -4 -2 0 2 4 6

07 08 09 10

Real estate Sec., commodity brokers Banks Insurance Funds, trusts, oth. investments

Real Estate Gains Push Finance Up New York City (five boroughs) employment, % change yr ago

Source: BLS



After stumbling at the end of last year, Pennsylvania’s recovery is back on track as hiring is accelerating. Private employment has in-creased in three of the past four months, and the 31,000 gain in April was the largest since 1996. Hiring is beginning to broaden, which is critical for the sustainability and durability of the recovery. Manufactur-ers are adding to payrolls as industrial production is rising. While the la-bor market is improving, it has a large hole to fill—private employment is still down 4.6% from its 2008 peak. Hiring is still insufficient to lower the unemployment rate, which is at its highest since the early 1990s, and wages are declining faster than those nationally. The median house price is edging higher while homebuilding remains depressed.

The contours of the forecast are little changed over the past few months, but there are a few minor tweaks. The opening of new casinos and the legalization of table games have led to an upward revision to leisure/hospitality this quarter. Leisure/hospitality is now projected to add 0.2 of a percentage point to second quarter em-ployment growth, double the May forecast. Meanwhile, the decline in residential permit issuance last quarter was smaller than antici-pated, leading to a modest upward revision to the forecast for the remainder of this year.

If you drill it, they will comeExcess supply and low natural gas prices are not deterring drilling

in the Marcellus Shale, and permit issuance is on pace to surpass last year’s total. This year through April, 894 permits had been issued and 364 wells had been drilled. More than 40% of the wells drilled this year are either in or around the Williamsport and Scranton metro areas. Permits and drilling are also gaining traction in southwestern Pennsylvania, near Pittsburgh.

Increased exploration is providing a boost to energy employment; payrolls in oil and gas extraction have increased steadily in Penn-sylvania and are at their highest since the early 1980s. While these high-paying jobs are positive for retail and housing, the industry only makes up a fraction of total employment in the state. Further, there

will be a near-term lull due to a temporary moratorium on drilling due to a fire at a well in northeastern Pennsylvania.

Drilling will have a positive effect on other parts of Pennsylvania’s economy as it will increase demand for intermediate goods and ser-vices. For example, drilling in the Marcellus Shale will benefit Pitts-burgh as it will increase demand for steel and piping, which favors Pittsburgh-based U.S. Steel.

Exports turn the cornerPennsylvania’s exports have increased over the past year as the

global recovery boosts demand for its manufactured goods and ser-vices. Europe’s debt crisis and the appreciation of the U.S. dollar may weigh on exports, but it will not be enough to derail the recovery. Canada, Pennsylvania’s largest trading partner, is recovering stronger than anticipated. This will help cushion state exports from the prob-lems in Europe and keep plans to expand the ports on track.

Developing a new terminal at the Port of Philadelphia could in-crease container traffic, boost demand for temporary construction workers, and add permanent positions in warehousing and transpor-tation. The Southport Marine Terminal is back on course after being sidelined because of the recession and disruption in credit markets. Because of its dependence on imports, trade through the Philadel-phia customs district, which includes the Port of Philadelphia, will ac-celerate as the U.S. recovery gains momentum through the remain-der of this year and into next. Also, the appreciation of the U.S. dollar will make foreign goods more affordable, providing a lift to imports.

Budget problemsPennsylvania’s widening budget deficit will force another round

of layoffs and spending cuts. April tax collections were $400 million below projections, bringing the revenue shortfall to $1.1 billion. State government layoffs will be a drag on Harrisburg, where the City of Harrisburg faces potential bankruptcy due to public works debt.

— RYAN SWEET

Pennsylvania


0

1

2

3

4

5

6

7

8

9

98 99 00 01 02 03 04 05 06 07 08 09

Marcellus Shale Total

Emergence of a New Driver in Pennsylvania? Well permits issued, ths

Source: Department of Environmental Protection Bureau of Oil and Gas Management


-50 -40 -30 -20 -10

0 10 20 30 40 50

07 08 09 10

Baltimore New York Boston Philadelphia

Philadelphia Looks to Expand Port Capacity


Trade through customs district, % change yr ago, 3-mo MA


The District of Columbia’s recession has blossomed into recov-ery, built on the strength of the federal government. The impetus for the recovery, public sector hiring, is no longer the only source of job growth in the district, as private hiring has been trending higher since the fourth quarter of 2009. Job growth during the first quarter was in line with expectations, showing balancing losses and gains from the snowstorms, leading to little change for the forecast. Job gains have allowed the unemployment rate to drop from its recent apex of 12% to 11%, still noticeably above the national average. The increase in job openings is expected to encourage more resi-dents to re-enter the labor force. With no large changes to the em-ployment outlook, the faster growth in the labor force has led to an upward revision to the unemployment rate forecast. The jobless rate is now expected to rise above 12% during the fourth quarter of 2010, due to the expanding labor force, before moderating in the ensuing years.

The strong population growth that helped create a fl oor for de-helped create a floor for de- de-mand for local services during the recent recession is slowing and will soon drop back to its long-run average. The shallower recession in the district brought new residents, turning net migration positive, but the trend of net out-migration is expected to return in 2011, as employment growth fails to keep pace with the national average.

HousingA hiccup in the housing market following recent strength has

begun. Prices lost their upward momentum in the first quarter, and sales dropped back. Job growth has returned, and residents in the district are fairly well positioned to buy, but the housing market rebound will falter as net in-migration fades. Prices will drop back to nearly touch their recent nadir and will not return to the most recent peak until 2013. As the surrounding areas’ recoveries gain steam, the comparative attractiveness of the District of Columbia will fade, re-ducing support for the local housing market.

— SARA KLINE

The recession in Maryland has moderated for several months, and the state’s economy is now on the doorstep of recovery. As expected, job growth moderated in April after the winter storm bounce back in March, but near-term strength will largely come from census-related hiring before the private sector kicks into a higher gear. The jobless rate has been well-contained, but it has remained at or above 7.5% for the first four months of 2010, and the peak has been revised higher, to 7.7% in the first quarter of next year.

Exports and EuropeTraffic through the Port of Baltimore is finding firmer footing

after stabilizing in late 2009. Both imports and exports handled in the Baltimore customs district improved early in the year. The European debt crisis and likely double-dip recession in that region pose downside risks to the volume of export traffic through the port, but this has not yet caused a change to the forecast for the metro area or the state. Exports to the European Union account for less than one-third of the total value of exports through the metro area.

Base realignment and closureThe biggest driver of state job growth in the coming years will

be the addition of BRAC-related jobs. The gains will largely ben-efit the Baltimore metro area but will also show up in both the Bethesda and Washington metro divisions. The first tangible signs of expansion are beginning to appear: Residential real estate devel-opers are submitting plans and starting to build new homes to ac-commodate new arrivals, and new office space is under construc-tion. Defense contractors and related firms are popping up in the state. As this growth comes to fruition, it may lead to adjustments to the forecast, but most of the growth has been factored into the outlook, since details of the announcement were outlined several years ago.

— SARA KLINE

District of Columbia Maryland



-5

-4

-3

-2

-1

0

1

2

3

4

09 10F 11F 12F 13F

Maryland Office Jobs to Get BRAC Boost


Professional/business services employment, % change yr ago


Not Yet All Roses for Housing Market

Sources: NAR, Moody’s Analytics

Existing single-family homes

230

260

290

320

350

380

5

6

7

8

9

10

11

12

07 08 09 10F 11F 12F 13F

Sales, ths, SAAR (L)

Price, $ ths (R)


Improving consumer confidence and recovering global demand for Vermont’s manufactured products have enabled the state to emerge from recession. The resumption of income growth has invig-orated spending, which has been instrumental in reassuring skittish Vermont businesses and sparking job creation. Initial claims for un-employment insurance have fallen sharply, and the unemployment rate has begun to decline.

Industrial expansionManufacturing, once the largest impediment to the state’s

economy, is now its greatest strength. Factories are rehiring work-ers to boost output, which is indirectly creating jobs in service industries. While manufacturers such as Ben & Jerry’s and Green Mountain Coffee Roasters have grown rapidly in past years, IBM’s Essex Junction (in the Burlington metro area) facility−which de-velops, designs and manufactures semiconductors−remains at the heart of Vermont’s industrial sector. The appreciable rebound in statewide exports is a testament to the surge in global smart phone and other high-tech electronic product sales, which has enabled IBM to begin rehiring the workers it was forced to lay off during the recession.

RecoveryIronically, two of Vermont’s favorable intrinsic characteristics

will hinder it from growing as fast as the nation during the recovery. Since Vermont has a highly educated and relatively well-paid work-force, it has a small concentration of cyclically sensitive temporary workers and commoditized support services. As such, this source of near-term national strength will be muted in Vermont. Moreover, the state’s strict mortgage lending laws that shielded it from steeper house price declines could amplify out-migration in the near term. Steeper home price declines outside the state have created larger improvements in housing affordability elsewhere.

— CHRIS LAFAKIS

Rhode Island seems to have pulled out of recession. There was some disruption of the economy following flooding in late March, but this lasted just one month. Total employment has held level since the end of last year, and the unemployment rate, after peaking at 12.7% in February, has fallen to 12.3%. Further, industrial production has been increasing since the middle of last year, though it is still not close to 2007 levels. The economy remains weak and still has to show solid employment growth, but the worst seems to be over for the state after its longest recession since the early 1990s.

Effects of the floodThe rainstorms that flooded much of the state in the last week

of March had only transitory effects. The worst impact was in Kent County, where the closure of the Warwick Mall—the second largest in the state—led to the loss of nearly 2,000 jobs temporarily, while other local businesses were also hard hit. All told, the state lost some 3,800 jobs for at least some period in April, but regained most of them the following month thanks in part to the natural surge in con-struction and home repair activity, partly funded by FEMA.

Although it was feared that the flooding would initially lead to a loss of retail sales and sales tax revenues, this decline did not materialize—any decline in normal retail sales was more than com-pensated for by increased sales of homebuilding equipment and materials in the wake of the storms. FEMA estimates that it has provided funding for the repair of over 22,000 homes, and only a small portion of these suffered damage extensive enough to neces-sitate complete reconstruction.

Rhode Island nevertheless faces slow growth and a possible resurgence in unemployment because existing employment totals are inflated by temporary construction and census jobs. With no industry showing dynamic growth, recovery will be protracted and the state will not regain peak employment levels until well after the U.S. does.

— ANDRES CARBACHO-BURGOS

VermontRhode Island



14

16

18

20

22

24

26

28

1.5

2.0

2.5

3.0

3.5

4.0

08 09 10

Flood Halts Downward Trend in Unemployment


Continuing (R)

Initial (L)

Rhode Island unemployment insurance claims, ths


Exports Have Bolstered Vermont Factories % change yr ago

-15

-12

-9

-6

-3

0

3

6

-30

-20

-10

0

10

20

30

40

06 07 08 09 10

Industrial production (R)

Exports (L)



STATE AND METROPOLITAN AREA FORECAST REVIEW �� Midwest

The Midwest leads the U.S. thanks to the recovery in its core manufacturing industries. Regional manufac-turing surveys indicate stronger conditions than the U.S. average as factories recall workers, add shifts and increase hours. Overall job growth since the end of last year is slightly ahead of the national average, and

the hire rate (hiring relative to the existing workforce) exceeds the average.

Midwest Rises AgainBY SOPHIA KOROPECKYJ

Across states within the region, employ-ment trends have undergone noticeable improvement in recent months. Only two states, Michigan and South Dakota, are still in the contracting quadrant, while the remainder are in or near the improving quadrant (see High-Frequency Indicators). North Dakota, which experienced a very mild downturn is already expanding. Despite the recovery in auto production, Michigan’s employment base has, thus far, only begun to stabilize. South Dakota took a turn for the worse at the end of last year but has begun to regain the jobs lost in recent months.

The recent performance of the region’s largest metro areas is much more dispersed, although the majority of metro areas is in the improving quadrant. Only a few larger metro areas are outperforming the U.S., however. The generally better performance of the state economies suggests that on av-erage the smaller metro areas are rebound-ing more quickly than the larger ones.

Layoffs down, more job openingsThe near-term outlook is optimistic as

the number of job openings is rising and the number of unemployed workers per job opening has fallen from a high of seven un-employed workers per available job to five. The unemployment rate has held steady at around 10% even as the number of job seekers has increased. While job openings are still concentrated in healthcare in some parts of the region, more varied opportuni-

ties in business/professional services and manufacturing are available elsewhere.

As a result, the outlook for 2010 has been revised higher for the region but is unchanged for subsequent years as the ex-pectation of steadily strengthening growth in 2011 and 2012 has not been altered. The unemployment rate will decline in step with the U.S. By the end of 2012, it is expected to fall to 7% in the whole Midwest but will be about a percentage point higher in the Great Lakes region where structural employment will remain a challenge.

ManufacturingThe Midwest’s manufacturers benefit

from the solid rebound in domestic invest-ment in equipment as well as stronger ex-ports. First quarter exports are up 24% with especially strong growth in exports of motor vehicles and parts (mostly cross-border trade with Canada and Mexico), steel and

chemicals, although they still fall well short of 2008 levels. Strong demand from Asia and South America is fueling orders of indus-trial equipment manufactured in the region.

However, following the strong boost during the second half of last year, the manufacturing recovery has slowed this year. As inventories are now well balanced, restocking no longer drives production. Auto production has been fairly steady during the last three quarters.

Yet, the outlook for manufacturing remains fairly optimistic. The overwhelming majority of surveyed manufacturers throughout the Midwest indicate rising new orders. Detroit’s new order index is particularly high, well ex-ceeding prerecession levels. Auto manufactur-ers plan to increase production by 14% during the third quarter though increased production and additional shifts will mainly preserve jobs. Rebounding auto production and demand for energy and construction equipment also sup-port steel shipments for Indiana, Michigan and Ohio producers. Moreover, according to Beige Book reports, many of the region’s manufac-turers believe that the recovery is now self-sustaining, at least for the short term.

Stabilizing manufacturing payrolls and longer workweeks will drive income growth in the region, but only about 150,000 of the million manufacturing jobs lost since 2005 will be regained during the next few years. Increased production will create more op-portunities in transportation and warehous-ing, but these highly efficient industries will create relatively few jobs.

Included in this issue » Illinois .............................................. 53 » Indiana ............................................. 54 » Michigan .......................................... 55 » Ohio ................................................. 56 » Minnesota ........................................57 » Missouri ............................................57 » North Dakota ................................. 58 » South Dakota ................................. 58 » Wisconsin ........................................ 59





Improving Expanding

Ann

ualiz

ed 3

-mo

% c

hang

e



West North Central

East North Central

Apr 2010

Payroll Employment—Midwest MSAs 1-yr vs. 3-mo performance (3-mo MA)

-3

-2

-1

0

1

2

3

4

-5 -4 -3 -2 -1 0 1

Chicago

Minneapolis

St. Louis

Cleveland

Cincinnati

Kansas City

Columbus

Indianapolis

Milwaukee

Detroit

Omaha

Dayton

Grand Rapids

Madison

Des Moines

Akron Toledo

Wichita

Gary

Lansing

Fort Wayne

Ann Arbor

Peoria Sioux Falls

Fargo

U.S.


Improving Expanding

Ann

ualiz

ed 3

-mo

% c

hang

e



-2

-1

0

1

2

3

-3 -2 -1 0 1

West North Central

East North Central

Apr 2010

Payroll Employment—Midwest States 1-yr vs. 3-mo performance (3-mo MA)

Illinois

Ohio

Michigan

Indiana

Wisconsin

Missouri

Minnesota Iowa

Kansas

Nebraska

South Dakota

North Dakota U.S.






rate


rateResidential

permitsIndustrial


performance


last month

Cleveland 2.8 9.4 -0.1 11.7 2.4 ↑ ↔Indianapolis 2.7 8.9 0.3 33.9 1.6 ↑ ↔Milwaukee 0.6 9.3 0.1 19.2 2.4 ↑ ↔Minneapolis 0.7 7.2 -0.3 3.5 2.2 ↑ ↔St. Louis 1.6 10.4 0.0 3.3 1.5 ↑ ↔Akron -2.9 11.2 0.3 7.0 2.1 ↔ ↔Chicago 0.9 10.8 -0.2 -18.3 1.8 ↔ ↔Cincinnati -2.3 10.4 0.2 -4.6 1.4 ↔ ↑Columbus 0.3 9.6 0.3 43.2 1.8 ↔ ↔Dayton 0.2 12.0 -0.1 4.6 2.2 ↔ ↔Des Moines 1.4 6.6 0.5 14.7 1.8 ↔ ↑Detroit -2.0 16.4 -0.3 120.5 3.0 ↔ ↔Grand Rapids -0.8 12.3 0.2 -0.7 2.1 ↔ ↔Kansas City -1.4 8.8 0.0 -51.9 1.7 ↔ ↑Lake County -3.2 12.2 1.2 6.7 2.2 ↔ ↔Madison 2.4 6.4 0.1 -47.2 2.3 ↔ ↔Omaha 0.1 5.6 0.6 13.9 1.5 ↔ ↑Toledo -1.8 12.4 -0.1 25.5 1.3 ↔ ↔Warren -2.2 14.7 -0.2 43.4 2.8 ↔ ↔Wichita -0.3 8.3 -0.2 -4.8 -0.8 ↔ ↔Midwest 1.2 10.0 0.1 -6.9 2.0 ↔ ↔U.S. 1.1 9.8 -0.1 1.7 1.9 ↔ ↔




U.S. Midwest

96

98

100

102

104

106

108

110

112

98 99 01 03 05 07 09


U.S. Midwest

0

20

40

60

80

100

120

140

160

98 99 01 03 05 07 09


U.S. Midwest

3

4

5

6

7

8

9

10

11

98 99 01 02 04 05 07 09


U.S. Midwest

0

2

4

6

8

10

-2

-498 99 01 02 04 05 07 08


U.S. Midwest

0

5

10

15

20

-5

-10

-15

-2098 99 01 03 05 06 08


U.S. Midwest

0

50

100

150

200

250

300

98 99 01 03 05 06 08



Cyclical Indicators



1

2

3

4

5

6

7

8

800

900

1,000

1,100

1,200

1,300

07 08 09 10

Hiring Improving but Long Way to Go

Source: BLS: JOLTS

New hires, 3-mo average, ths (R)

Unemployed workers per job opening, # (L)


0 10 20 30 40 50 60

Trans. equip.

Primary metals

Chemical

Total

Commodities

Food

Elec. equipment

Fab. metals

Midwest U.S.

Exports Rebound Strongly; Risks Ahead


% change yr ago, 2010Q1



The Illinois economy is near the end of its long recession. How-ever, troubles remain as the state suffers from one of the worst state and local budget crises in the nation.

Employment trends illustrate some improvement. Job losses have ended and previously discouraged workers are returning to the labor force. The state’s jobless rate has fallen slightly to just over 11%, though it is likely to rise again as the number of jobseekers returning to the labor force outpace newly available positions. The biggest hir-ing increases are in healthcare, business and professional services, and the federal government. The latter is mostly census hiring, which will fade in the next few months.

The ISM/Chicago index and industrial production also signal re-newed growth. Manufacturing employment is rising and the manu-facturing workweek has lengthened. However, Illinois has extensive trade exposure to Europe and would likely suffer should the European debt crisis grow worse than expected. Exports from Illinois to Europe are dominated by chemicals, machinery, and computers and elec-tronic products. Each has been adding jobs in the state. More than half of the state’s trade with Europe is concentrated in trade with three countries: Germany, the United Kingdom, and France. Should Europe experience a double-dip recession due to tight credit condi-tions and national fiscal austerity measures, there would be some risk of a moderately slower recovery for Illinois.

The struggling finance industry is holding back the state’s econ-omy, especially in Chicago, where it is highly concentrated. Eleven banks failed in the state to date this year, more than in any single state except Florida. The exchanges are doing better, but most fi-nancial services employment in Chicago is in traditional banks, not the exchanges, driving the current dampened outlook. Financial ser-vices employment is more stable in downstate Illinois, especially in Bloomington, where the financial services industry is dominated by the headquarters of insurance provider State Farm.

The state budget that is near passage will paper over but not ad-dress the state’s financing and budget woes. A $13 billion shortfall

will be managed through borrowing and temporary service cuts rather than tax increases or long-term restructuring of the state budget. The present budget will also defer payment on a host of ser-vices ranging from office rents to school budget aid, curbing needed spending and delaying the state’s recovery as the austerity measures counteract the growth-inducing implications of the federal stimulus.

Chicago’s travel and tourismChicago’s important leisure/hospitality industry is near the end

of its long decline in attracting and managing large conventions. The state legislature has recently enacted laws lowering the costs of exhibitions at McCormick Place and the Navy Pier. The reforms are already paying off; the International Home and Housewares Show has agreed to keep its conventions in Chicago. This is the second-largest convention in Chicago each year, drawing 60,000 attendees and generating $82 million in spending. Competition for large conventions is tough, however, as venues have expanded nationwide. Two other major conventions have chosen to go else-where in recent months.

Industrial equipmentA long-awaited recall of Caterpillar workers bolsters recovery

prospects for Peoria and Decatur. Caterpillar will bring back nearly 3,000 workers in the U.S., and most of those to its Illinois plants, recovering most of the jobs lost in early 2009. The company benefits from a resurgence in the global economy and the recovery in U.S. investment spending. The company’s foreign growth is mostly in Asia and Latin America, minimizing its exposure to the potential down-turn in trade with Europe.

A more bullish outlook for Peoria is supported by a new $100 mil-lion hotel construction project slated for downtown Peoria. The two hotels will also be linked via a skywalk to the local civic center, pro-viding some improved potential to attract smaller conventions.

— CHRIS CORNELL

Illinois


5.0

5.5

6.0

6.5

7.0

7.5

Chicago Illinois U.S.

Weak Banking Industry Pulls Down Chicago

Source: BLS

Financial services employment, % of total, 2009


0.0 0.5 1.0 1.5 2.0 2.5

Germany

United Kingdom

France

Netherlands

Belgium

Switzerland

Italy

Russia

Other

Illinois Exporters Look to Germany and the U.K.

Source: U.S. International Trade Administration

Exports from Illinois to European countries, 2009, $ bil



Indiana’s recovery is increasingly broad based. Rising industrial production and homebuilding had been among the first signs of recovery. More recently, the state’s labor market has also begun to improve. The unemployment rate is inching higher, but this is largely due to the increasing size of the labor force.

Indiana’s payroll employment has begun to recover much faster than the Midwest or U.S. averages. Private services are underpinning the state’s recent growth, with very strong gains in business and pro-fessional services as well as leisure and hospitality services. Manufac-turing and retail trade are also rebounding, but healthcare services are tentatively downsizing, in contrast with the rest of the nation.

The household employment survey, which led the payroll survey coming out of the last recession, is increasing at a more moderate pace. This suggests that new firm creation is slow in recovering in the state and that payroll growth may be revised lower.

Hiring of temporary workers is a good signAlthough current business and professional services employment

may be revised lower, the substantial increase in employment ser-vices (part of business services) is an encouraging sign. Hiring of tem-porary workers through employment agencies is a leading indicator that businesses are seeing firmer demand. During recoveries, some industries such as manufacturing typically hire temporary workers before they commit to hiring regular workers.

Increased manufacturing hours are another leading indicator of expanding production. Indeed, average weekly hours in manufactur-ing have increased in Indiana at a faster pace than they have in the Midwest or the nation. Indiana’s average weekly hours in manufac-turing reached 41.9 in April, the highest level in two years.

Business and professional services underpin Indianapolis’ recent job growth. Indeed, employment services are a leading source of employment and wages in the metro area, with a location quotient of 1.8. Business and professional services are expected to remain a leading growth driver for the area over the quarters ahead.

Employment in retail trade has rebounded strongly in Indianapo-lis since the beginning of the year. This is a bit of a puzzle, however, given that the jobless rate has not yet improved from the roughly 9% rate that has prevailed since the beginning of the year. But In-dianapolis’ consumer credit conditions will support some recovery of spending and consumer-related industries. The area’s delinquency rates for bankcards and auto loans have improved substantially in re-cent quarters, and both are on par with their prerecession averages.

Fort Wayne recovers fasterFort Wayne’s recovery has gotten off to a stronger start with a

pace of job growth that has led the state over the past three months. As in Indianapolis, business services have been key to the area’s re-cent job growth. With Fort Wayne’s large concentration of manufac-turing and rapidly increasing industrial output, demand for tempo-rary workers, which is included in business services, will remain fairly strong over the near term.

The area’s permanent manufacturing payrolls have also increased, but they are expected to remain relatively flat over the months ahead. The planned addition of a third shift at General Motors’ Allen County truck plant created about 700 jobs that will add to income growth but will be a onetime boost to manufacturing payrolls. Nonetheless, Fort Wayne will outpace the state and the region for job growth this year.

Evansville lagsFinally, Evansville’s labor market has been a bit slower to recover.

Employment remains flat in manufacturing and retail trade, while gains in business services and leisure and hospitality have been slightly smaller. On the upside, the metro area’s unemployment rate has remained virtually unchanged over the past six months and, at 8.4%, it is well below the state and national averages. Meanwhile, the labor force is finally rebounding from its steep drop in 2009.

— SEAN MAHER

Indiana


-40

-30

-20

-10

0

10

20

30

08 09 10

Payroll survey Household survey

Household Survey Suggests Smaller Job Gains Employment, monthly difference, ths

Source: BLS


Manufacturers Ramp Up Production, Hours


38.0

38.5

39.0

39.5

40.0

40.5

41.0

41.5

42.0

42.5

80

85

90

95

100

105

110

07 08 09 10

Industrial production, 2002=100 (L) Average weekly hours, manufacturing (R)

Indiana manufacturing statistics


The Michigan economy has improved measurably during the past three quarters, although it has still not emerged from recession. Output and incomes are increasing at a steady pace. Payroll employ-ment has yet to turn around, but it has been steady for three quarters. Household employment, which often reflects turning points sooner than payroll employment, has been on the rise since the beginning of the year. Comerica Bank’s Michigan Economic Activity Index faltered in April, but at a reading of 82, was 11 points higher than a year ago. Weaker energy sales, steel production and housing pulled the index down, while motor vehicle production continued to trend higher.

Tepid outlookThe outlook calls for stable payrolls through year end and renewed

growth by next year. Jobs are still hard to come by, and the unemploy-ment rate stands at 14%. However, the glimmers of a turnaround will likely encourage more previously unemployed workers to reenter the labor force. In addition, although the state provides a maximum of 99 weeks of unemployment benefits, these have run out for many displaced workers, encouraging more workers to intensify their job search. With little net new job creation expected this year, the unem-ployment rate will increase to 15% by year end. The median length of unemployment was 19 weeks in the state last year, according to analy-sis by the EPI—the highest among all states—and based on national trends the median has likely increased further this year.

Even as the private sector begins to recover over the next year, expected cuts in state government employment will offset some of the gains. Michigan’s state officials have been struggling to align diminished revenues with spending. Recent estimates reveal that the state faces an approximate $340 million general fund shortfall in the current fiscal year. The shortfall was adjusted higher by $244 million from earlier projections. Part of the adjustment is due to lower than expected revenues from the new Michigan Business Tax in part due to refunds. Although sales and income tax revenues are rising mod-estly, state payrolls, which have held up, are expected to decline by

Michigan


4%, or about 7,000 jobs, by year-end 2011. Having targeted a vari-ety of programs to cut, more cuts and higher taxes are in store.

Labor market lagsAs in the state as a whole, there is little evidence of a revival in

job creation around the state, although similar to statewide trends, private sector payrolls have stabilized in most areas. There are a few exceptions. The private sector is surprisingly weak in Ann Arbor despite promising developments in tech-related industries, from life sciences to defense-related research to IT. Projects that were greeted with much fanfare such as the Google ad services office have disap-pointed; only one-quarter of the expected 1,000 jobs have been cre-ated. Offsetting the weakness in the private sector, however, is the sturdy and healthy presence of University of Michigan and, to a lesser extent, Eastern Michigan University. State government payrolls have increased by 3,000 since the beginning of the national recession.

In Lansing, the addition of a new shift at GM’s Delta plant pro-vided a nice lift during the second half of last year, but there has been no further growth this year. A couple of surprising areas that are making credible rebounds are Bay City, Flint, Holland and Sagi-naw. Flint benefits from auto-related expansions. Its Truck Assembly facility has been rehiring workers, although the closure of Powertrain Flint North by the year’s end will dampen the manufacturing recov-ery. Any baby steps in an economy that has contracted by a quarter since the mid-1990s are welcome, however. Bay City is benefiting from expansions in green industries, while Saginaw’s turnaround is more broad based. Business services lead the way in Holland with new manufacturing investments to provide further spark. Detroit’s economy faces huge challenges, but the stabilization of payrolls, new shifts at auto plants of all three auto makers, and parts expan-sions will allow for modest recovery next year. For example, Ford will produce battery pack and hybrid vehicle transmissions in Detroit; the work is currently done in Mexico and Japan.

— SOPHIA KOROPECKYJ


Spending Needs to Be Cut Further in Michigan Planned general fund net expenditure cuts, FY2010 & FY2011 avg

Source: NASBO

Spending growth

Less than 2%

2% to 5%

Over 5%


-1.5 -0.5 0.5 1.5

Lansing Flint

Holland Bay City

U.S. Saginaw Jackson

Muskegon Detroit

Kalamazoo Grand Rapids

Ann Arbor Battle Creek

Most Metro Areas Still Struggling to Stabilize

Source: BLS

Private sector employment, % change since 2009Q4, 3-mo MA


After months of moderation in job losses, the Ohio economy has finally started on a modest recovery. Payrolls have bottomed and are starting to show modest gains on a month-to-month basis. The outlook for the state remains unchanged from a month ago; the re-covery will gain momentum in coming months, but will evolve a step behind the U.S. recovery.

Industries across the board are contributing to the recent rise in payrolls. Private service-producing industries provide solid support, thanks to healthy expansion in healthcare, education, professional and business services. The public sector has also been a steady support in recent months. More importantly, manufacturing and construction, the biggest casualties of the recession, look to have overcome the worst; together these two industries have contributed more than half of the jobs created in the first quarter.

Manufacturing payrolls in the state are likely to receive a boost this year if Coda’s plan to open a facility in Columbus gets federal and state approval. The electric car manufacturer based in Santa Monica CA has chosen the former Lucent Technologies factory in the area for its battery manufacturing plant. The plant would create about 1,000 jobs.

Cleveland’s recovery firmly on track Having suffered one of the deeper and longer recessions in the

Midwest, the Cleveland economy has shown steady improvement in 2010 and its recovery is progressing in line with that of Ohio. Pay-rolls in Cleveland are showing signs of a turnaround for the first time in several years. This is encouraging, because barring sporadic short periods of growth, employment in Cleveland never really recovered from the recession of the early 2000s. Payroll employment is still below its level a year ago, but only slightly so.

From near 6% at the beginning of 2008, the unemployment rate leaped to peak at 9.5% in the third quarter of 2009. This is substantially higher than its past peaks during the recessions of the early 1990s or early 2000s when the unemployment rate never

Ohio


crossed 9%. Cleveland’s peak unemployment rate during this reces-sion would have been higher had it not been for a significant drop in the labor force; at the peak of the downturn, many discouraged workers stopped looking for work. Fortunately, workers have started re-entering the labor force as they sense that the job market is im-proving. Even with recent gains in the labor force, Cleveland’s job-less rate has declined marginally in the last few months thanks to the steady job creation.

Headquarters consolidation helps Cincinnati The Cincinnati economy’s modest recovery failed to pick up

steam in the first three months of 2010 as lingering weakness in several industries continued to weigh on the labor market. Signs of a turnaround in total payrolls late last year were short-lived, and pay-rolls have yet to bottom, although the pace of their decline is slowing measurably. Key services such as financial, business and professional services have seen renewed job losses this year and public sector em-ployment has yet to turn around. Manufacturing has contributed to the area’s recovery with modest hiring in the last few months. Cincin-nati’s unemployment rate had fallen as low as 9.6% in September but has since edged back up to 10.4%. This is primarily because the pace of workers returning to the labor force outpaced new job creation, a trend that is expected to continue in coming months.

From more than 15% above the U.S. average, median household income in Cincinnati has lost much of its edge; however, median in-come is still about 6% above that of the nation as a whole. One rea-son for Cincinnati’s better-than-average income is the concentration of a large number of well-paying headquarter positions in the area.

Headquarters consolidation will also add to local payrolls in the near term when Cincinnati-based Procter & Gamble Co. adds more than 600 new jobs to one of its facilities in the area. The company has decided to consolidate in Cincinnati logistics and planning operations that are currently scattered over several sites across North America.

— BODHI GANGULI


Sensing Opportunities, More Workers Looking

Source: BLS

3-mo MA

5

6

7

8

9

10

11

12

5.90

5.94

5.98

6.02

07 08 09 10

Labor force, ths (L)

Unemployment rate, % (R)


Cleveland’s Economy Will Rebound This Time


Employment, % change yr ago

-7 -6 -5 -4 -3 -2 -1 0 1 2 3

90 92 94 96 98 00 02 04 06 08 10 12


The recession is rapidly moderating in Minnesota, paving the way for a strong recovery as manufacturing job growth spreads to service industries. Employment growth will slightly outpace the national rate over the next two years as the state retains its comparative advan-tage in high value-added manufacturing and services. The state’s out-look has improved since the start of the year, especially for the pace of output growth. Risks are still to the downside, however, because of the escalation of current troubles in the global economy that may re-duce demand for the state’s exports, which have provided a key spark to its recovery.

Manufacturing drives the recoveryAfter suffering small employment setbacks for two previous

months, the state added 10,200 jobs in April. Manufacturing added jobs for the fourth straight month, buoyed by a global rebound in demand for investment goods and the rush by businesses to restock inventory. Capacity utilization is climbing rapidly in Duluth area steel mills, setting the stage for incremental hiring.

Job growth is more sporadic in services, but gains will become steadier in coming months as a generally stable employment situa-tion and growing business profits boost demand. For example, digital advertising and marketing services provider Space 150 of Minneapo-lis is rapidly expanding staff in anticipation of a speeding recovery in business spending.

The state legislature reached a deal to eliminate a $3 billion defi-cit for fiscal 2010-2011 biennium budget. The deal preserves most of the governor’s unilateral cuts made earlier that the state supreme court had ruled unconstitutional. The governor also prevailed by keeping tax increases at bay. There will be more public sector job losses, but it will put the state on a sounder fiscal footing and has the potential to increase competitiveness in the long run. The Pawlenty cuts are not permanent, however, so a $5.7 billion deficit looms for the next biennium budget to be dealt with by mid-2011.

— ARIJIT DUTTA

Missouri’s recovery is progressing along with the nation’s, and it is less tenuous compared with three months ago. April’s payroll survey reported the largest job gains in three years, helping to allay concerns that the state’s crippled auto industry could impede the recovery. The near-term outlook for the state is unchanged. The pace of job growth will be moderate through year-end, before accelerating in mid-2011 and 2012. Missouri’s diverse industrial structure will tend to keep its economy trending parallel to the nation’s.

The state’s deteriorating fiscal situation is a concern. Governor Jay Nixon has stated that the budget for fiscal 2011 will require more substantial cuts. To cut costs, lawmakers have shifted their focus to reining in tax credits, a strategy that could weigh on busi-nesses and consumers statewide.

Metro area economies get an extra pushAll eight of Missouri’s metro areas have been in recovery since

March, when Joplin was the last to exit recession. Recent develop-ments help to bolster the forecast for recovery. Kansas City will receive a boost from the start of construction on a $750 million intermodal complex. It is expected to create over 600 construction jobs in the near term and 8,700 permanent positions over the next decade. The project was in doubt until an unanticipated grant was made available by the Kansas legislature. The complex will be a valu-able long-term asset to the metro area, augmenting its position as a leading regional freight hub.

Columbia will benefit from IBM’s decision to open a new IT center that will employ 800 well-paid technical professionals lo-cally. The company is the latest of several businesses to choose the metro area for its steady supply of educated workers from the University of Missouri. St. Louis’ outlook is unchanged, but Boe-ing’s recent multiyear deal with the navy to supply more F/A-18 jets substantially lessens the near-term risk of layoffs at the metro area’s largest employer.

— BEN KANIGEL

Minnesota Missouri



-30

-20

-10

0

10

20

30

07 08 09 10

Minnesota

U.S.

Exports Rebounding Rapidly Total exports, commodities and manufactures, % change yr ago

Source: BOC


-6

-5

-4

-3

-2

-1

0

1

08 09 10

Missouri U.S.

Fledgling Recovery Slowly Building Momentum


Four-factor coincident indicator, 6-mo change in 6-mo MA


North Dakota’s economy is recovering at a brisk pace. Job cre-ation has been strong since the beginning of the year. The unem-ployment rate not only remains the lowest in the nation, but fell in April to below 4%. This was achieved despite a significant increase in the labor force since the beginning of 2010, indicating that the unemployed are being hired.

North Dakota’s housing market is balanced and healthy overall. The median house price is stable. Sales fell somewhat in the first quarter, but the level remains close to the average of the last five years. New construction tightly tracks the long-term average.

The economic outlook for the state is largely unchanged. The job market is expected to fully recover its recession losses this year. However, despite a more stable economy than on average, North Dakota is still vulnerable to downside risks, particularly with re-gards to oil prices.

Oil price volatility implies modest growthThe strong recovery in oil prices in February, March and April

has been particularly beneficial to drilling in the area. Oil prices have faltered in recent weeks, however, amid uncertainty on fi-nancial markets caused by the European debt crisis. From more than $85 per barrel, oil prices fell to $70 in only a few weeks, then returned to $75.

While the current bout of volatility may be only temporary, uncertainty about the global recovery, especially in Europe, will likely keep price growth muted. The price of crude oil is expected to recover by the end the year to around $80 per barrel. Employ-ment growth in the state’s natural resource industries is expected to slow during the remainder of the year to an annualized pace of about 1%, following growth in the teens over the past two quar-ters. Should the oil price recovery not materialize, or worse, should prices fall further, oil extraction may be compromised in the state in the second half of 2010.

— JIMMY JEAN

South Dakota’s recovery is still in its early stages. The state is driven more by its agriculture than by relatively mild housing cycles in its metropolitan areas. Thus recovery may have started earlier, but its pace has remained very slow. The forecast has been little changed in recent months. Employment reached its low point in the first quarter and will gradually expand from here on out with a timing similar to the national trend. However, the magnitude of gains in the recovery is not expected to be as robust as nationwide, the result of the shallow-ness of declines as well as less exposure to highly cyclical drivers.

Manufacturing starts to stabilizeSouth Dakota is not as dependent on manufacturing as other

states in the Midwest, but the industry did contribute dispropor-tionately to job loss in the state, accounting for 6,000 of the 14,000 jobs lost during the recession. Over the last several months, manu-facturing employment has started to stabilize and other indicators are turning more upbeat. Manufacturing survey results have been improving since early 2009 and have been consistent with expan-sion since the third quarter. Food manufacturing was the most stable, while machinery equipment manufacturing—primarily agri-cultural machinery—experienced the sharpest declines. Machinery production is now improving as a result of rising businesses invest-ment spending.

Financial sector weighs on recoverySouth Dakota has a high concentration of credit card operations,

primarily in Sioux Falls. Financial services employment has been on the decline since late 2007 and signs of a near-term rebound are limited. Banks have tightened standards for credit card issuance. As such, fewer credit card accounts mean less need for South Dakota-based support functions. A swift turnaround is unlikely. Consumer borrowing will start to improve later this year, but it will not improve noticeably until late 2011 or 2012.

— ANDREW GLEDHILL

North Dakota South Dakota



Oil Production Has Accelerated in North Dakota

Sources: State of North Dakota, Federal Reserve Bank of St. Louis

20

40

60

80

100

120

140

3

4

5

6

7

8

9

08 09 10

North Dakota oil production, $ mil (L)

WTI oil price, $ per barrel (R)

Manufacturing Boosts South Dakota Economy

30

40

50

60

70

80

05 06 07 08 09 10

South Dakota U.S.

Purchasing managers index, 3-mo MA

Sources: Creighton University, Institute for Supply Management


Wisconsin’s climb out of recession is slower than that of most of the Midwest. Professional services employment growth—an early sign of recovery reflecting temporary staff demand—is lag-ging the pace of the region and the nation. Labor conditions are also weak. Hiring will improve in coming months, but Wisconsin has an unusually large population of discouraged workers who will reenter the labor force more quickly than job creation can absorb them.

Domestic and export shipments reboundImproving industrial production will drive Wisconsin forward.

U.S. paper purchases have climbed strongly in recent months, lifting sales for local manufacturers. Machinery producers are rid-ing a wave of business investment spending following recession-period spending freezes. Department of Defense contracts are driving strong military vehicle production in the Oshkosh metro area as well.

Export shipments are far below mid-decade levels, but they will support growth as they regain ground. Canada, Wisconsin’s primary trading partner, emerged from the Great Recession in better shape than the U.S. Exports to Canada should outperform domestic ship-ments through this year. Moreover, machinery exports will receive strong demand stemming from industrial and agricultural invest-ment in China and South America.

Wisconsin


Persistent downside riskLonger-term forecast risks still fall to the downside. Manufactur-

ers are at risk of losing sales to lower-cost competitors or changing market dynamics if they fail to innovate. For example, Harley-David-son is struggling to maintain sales while its customer base ages, and although unlikely, it has not ruled out the possibility that it may shift manufacturing outside Wisconsin. Nevertheless, there have been near-term gains. For example, Waukesha Electric is expanding opera-tions in Milwaukee and hiring 250 workers.

— MORGAN MCGOWAN


65

70

75

80

85

90

95

1.1

1.2

1.3

1.4

1.5

1.6

1.7

07 08 09 10

Global and Domestic Machinery Demand Rises

Source: Bureau of Census

U.S. machinery shipments (R)

Wisconsin machinery exports (L)

$ bil


STATE AND METROPOLITAN AREA FORECAST REVIEW �� South

The economic rebound in the South is firming as payroll employment gains have accelerated since Febru-ary. For many states in the central part of the region such as Alabama, Kentucky, Tennessee and South Carolina, improving national auto demand is gradually lifting local production of motor vehicles and parts.

Moreover, the recovery has begun to broaden further, and some of the last states that were still in recession last month, namely Florida, Georgia, Virginia, West Virginia and Mississippi, are seeing gains.

South Rebound in Place, Spill Adds Local RisksBY EDWARD FRIEDMAN

Still, for the largest of these, residential and commercial real estate problems con-tinue to hold back faster improvement. In the oil patch states of Texas and Louisiana, much higher oil prices since last year have lifted the energy industry, though downside risks on two fronts have emerged. On the supply side, the Gulf spill threatens both production and exploration activities, and on the demand side, the European debt crisis has caused oil prices to drop sharply back below $80 per barrel.

Diverse metro area performanceAcross metropolitan areas, regional

performance varies widely (see High Fre-quency Indicators). Texas metro areas have been among the best performing, and Austin specifically is already close to expan-sion, based on the resurgence of high tech, strong population gains, and the resulting growth in retail. However, improvement is beginning to occur even in hard-hit areas. In particular, some stability has returned to areas that suffered deep downturns, such as Atlanta, Tampa and Charlotte. Still, Miami and Orlando continue to struggle because of their weak housing markets and the result-ing weakness of their construction industries and local government finances.

Oil spillThe disastrous oil spill in the Gulf of

Mexico will not end the regional recovery, but potentially slow its pace in key states,

metro areas and industries. The spill, con-centrated off the shore of Louisiana and now extending to the Florida panhandle, has damaged the local shrimp and oyster industries, which are small in terms of the whole economy. More critical are the risks to local tourism and shipping. Since ships that have passed through oiled waters need to be cleaned before entering port, New Orleans faces the risk that they would be rerouted. So far, the coastlines of Alabama, Florida, Texas and Mississippi have not been hit, but the risks to Florida tourism espe-cially have risen since the spill has entered the loop current. With respect to ongoing drilling, declining oil prices in recent weeks associated with the European debt crisis have been the reason for a pause in the re-covery in rig counts in Texas and Louisiana rather than the spill. Houston, the center of the large oil exploration industry, is at less

direct risk but could see reduced demand for its related manufacturing and services if the spill limits prospective off-shore drilling elsewhere around the country.

Key driversThe pace of improvement in the South

region will be dependent on three major factors. Foremost is the continuation of gains in manufacturing in regionally impor-tant industries including autos, high tech, construction materials, energy and to some extent aerospace. These will boost the small and midsize metro areas that run north to south through the midsection of the region, particularly Chattanooga and Columbus GA, which have new auto manufacturing facilities, as well as such new hubs of auto manufacturing as Lexington and Nashville (see What We’re Watching). Industry gains in turn will lead to further improvement at major distribution centers such as Dallas, Houston, Memphis and Norfolk.

Second is housing. Outside of Florida, supply and demand are increasingly in bal-ance, so demand growth will generate more construction, especially in areas with fast growing populations. The improvement will be seen first in Texas, followed by the mid-South and last by Florida.

The third factor is the pace of in-migration, which over the longer term will once again begin to improve as local job opportunities grow, and as housing markets elsewhere begin to recover.

Included in this issue » Florida .............................................. 63 » Georgia ............................................ 64 » Louisiana ......................................... 65 » North Carolina ............................... 66 » Tennessee ........................................ 67 » Texas ................................................ 68 » Virginia ............................................ 69 » Alabama .......................................... 70 » Arkansas .......................................... 70 » Kentucky ..........................................71





Improving Expanding

Ann

ualiz

ed 3

-mo

% c

hang

e



South Atlantic

East South Central

West South Central

Apr 2010

Payroll Employment—South MSAs 1-yr vs. 3-mo performance (3-mo MA)

-3

-2

-1

0

1

2

3

4

-5 -4 -3 -2 -1 0 1

Houston

Atlanta Dallas

Tampa

Orlando

Miami Fort Worth

San Antonio

Charlotte

Austin

Virginia Beach

Nashville

Fort Lauderdale

Richmond

Louisville

Memphis

Jacksonville

Oklahoma City

New Orleans

West Palm Beach

Raleigh

Birmingham

Greensboro

Little Rock

Greenville

U.S.


Improving Expanding

Ann

ualiz

ed 3

-mo

% c

hang

e



South Atlantic

East South Central

West South Central

Apr 2010

Payroll Employment—South States 1-yr vs. 3-mo performance (3-mo MA)

-1

0

1

2

-3 -2 -1 0 1

Texas Florida

North Carolina

Georgia

Virginia

Tennessee Louisiana

Alabama

South Carolina

Kentucky

Oklahoma Arkansas

Mississippi

West Virginia

U.S.






rate


rateResidential

permitsIndustrial


performance


last month

Atlanta 1.6 10.5 0.2 13.8 1.7 ↑ ↔Austin 2.6 7.2 -0.1 4.5 3.5 ↑ ↔Charlotte 4.0 12.2 -0.1 15.6 2.0 ↑ ↔Nashville 0.7 9.5 -0.1 11.6 2.3 ↑ ↔Dallas 1.4 8.3 0.0 8.5 2.4 ↔ ↔Fort Worth 0.7 8.3 0.0 12.2 0.6 ↔ ↔Ft. Lauderdale 1.9 10.7 0.3 13.3 1.9 ↔ ↔Houston 0.6 8.6 0.4 -8.9 2.4 ↔ ↔Jacksonville 0.6 11.9 0.6 12.5 0.7 ↔ ↔Louisville -0.5 10.8 0.5 -22.3 1.9 ↔ ↔Memphis -1.9 10.8 0.2 71.2 1.2 ↔ ↔Miami 0.9 12.1 0.5 150.1 1.4 ↔ ↔New Orleans 0.3 6.8 0.0 -24.4 1.2 ↔ ↔Oklahoma City 0.8 6.3 0.0 2.4 2.1 ↔ ↔Orlando -0.4 12.4 0.7 48.3 1.7 ↔ ↑Richmond 1.8 8.2 0.3 -32.3 1.8 ↔ ↔San Antonio -1.2 7.3 0.2 36.1 0.7 ↔ ↔Tampa 0.8 12.8 0.5 -34.8 2.1 ↔ ↑Virginia Beach 2.4 7.5 0.2 -20.3 2.4 ↔ ↔West Palm Beach 2.4 12.5 0.4 -13.1 1.4 ↔ ↔South 1.2 9.7 0.2 1.4 1.8 ↑ ↔U.S. 1.1 9.8 -0.1 1.7 1.9 ↔ ↔




U.S. South

98

100

102

104

106

108

110

112

114

116

98 99 01 03 05 07 09


U.S. South

20

40

60

80

100

120

140

160

180

98 99 01 03 05 07 09


U.S. South

3

4

5

6

7

8

9

10

11

98 99 01 02 04 05 07 09


U.S. South

0

2

4

6

8

10

-2

-498 99 01 02 04 05 07 08


U.S. South

0

5

10

15

20

-5

-10

-15

-2098 99 01 03 05 06 08


U.S. South

20

40

60

80

100

120

140

160

180

200

98 99 01 03 05 06 08



Cyclical Indicators



0 1 2 3 4 5 6 7 8

Kentucky Alabama

Tennessee S. Carolina Mississippi

Virginia N. Carolina

Texas Oklahoma

Georgia Louisiana

Florida

2009

Auto Industry Focus Growing in Southeast


Location quotient, auto industry employment (NAICS 3361)

1990


0 1 2 3 4

Austin Houston

Dallas Charlotte

San Antonio Northern Virginia

New Orleans Atlanta

Orlando Miami

Tampa Memphis

Population Gains Support Housing Construction Population, % change 2009

Source: BLS



The Florida economy has emerged from a lengthy recession. Improvement has been broad based across the state’s geographies and industries. The recovery is being led by the state’s comparatively small manufacturing base, as seen in the ongoing recovery in indus-trial production and the acceleration of hiring in manufacturing and professional/business services, which includes temporary employ-ment by factories.

More importantly, recovering consumer confidence has been instrumental to the improvements seen in household spending and home prices. The steep decline in spending during the second half of 2008 was primarily the result of a loss in consumer confidence. Spending has subsequently recovered now that consumer confi-dence has risen to its highest level since October 2007. Improving confidence has also short-circuited the self-reinforcing decline in home prices.

Forecast not changed despite spillThe Gulf oil spill has not yet materially altered Florida’s near-term

outlook, but the situation is evolving quickly, and there are major downside risks. The main conduit by which the Florida economy will be affected is tourism. Should crude oil wash ashore, tourists would cancel their vacations, depriving coastal economies of commerce during peak tourism seasons. Along the Florida panhandle, during the peak of last summer’s travel season, tourism-related sales accounted for nearly 30% of taxable sales.

In the early weeks of the spill, the prevailing winds kept the slick to the west of Florida’s panhandle beaches, but more recently, it has come much closer. Some panhandle hotels have already reported cancellations from tourists who are concerned with the mere threat of crude oil washing ashore. Most of these cancellations are occur-ring in the panhandle metropolitan areas such as Crestview and Panama City, both of which had their retail and leisure/hospitality employment forecasts reduced in the second and third quarters of 2010 and strengthened in the following two quarters. Outside of the

panhandle, changes to the forecast are minimal. It is very unlikely that Orlando, Miami, or Jacksonville would be affected. West coast economies such as Tampa, Naples and North Port are expe-riencing some cancellations, but not enough to warrant significant changes in their outlooks.

Across the stateBuild America Bonds are enabling a bevy of construction projects

to commence across the state. The City of Jacksonville and the Jacksonville Electric Authority are making improvements in transit, power, water utility, and other public services.

Orlando has used the cheap bonds to finance infrastructure improvement. These two areas have benefited most from the pro-gram, accounting for 11% and 10%, respectively, of total statewide issuance. The metro area has also secured commitments from Fidel-ity Information Services and DiSTI to create 330 jobs over the next three years. The two firms provide software and support for financial firms and job trainers, respectively. The average salary of the created positions will be 50% higher than the Orange County average.

Orlando’s tourism is also expanding. Disney will open new rides at Disney World over the next few months and recently reopened its 220-acre Wide World of Sports complex to incorporate its ESPN brand. Hiring at Orange Lake Resorts is also picking up. Tourism sales tax revenue has rebounded following its sharp decline in the after-math of the financial crisis. As a result, air travel has risen, not just in Orlando but across the entire state. International passenger traffic has especially increased.

In Miami, construction has begun on the University of Miami’s Life Science and Technology Park, which will house high-tech em-ployers and create synergies with the university. It has been estimat-ed that the park will create 1,200 jobs directly and indirectly during construction and more than 500 permanent jobs upon completion next summer.

— CHRIS LAFAKIS

Florida


-15

-10

-5

0

5

10

15

20

50

60

70

80

90

100

110

120

00 01 02 03 04 05 06 07 08 09 10

Improved Confidence Has Lifted Spending…

Sources: University of Florida, State of Florida

Sales tax revenue, % change yr ago, 3-mo MA (R)

Consumer confidence index, 1966=100 (L)

Florida


40

50

60

70

80

90

100

110

07 08 09 10

Jacksonville Orlando Tampa Miami Fort Lauderdale West Palm Beach

…And Stabilized Home Prices

Sources: Florida Association of Realtors, University of Florida, Moody’s Analytics

Median existing single-family home price, Jan 2007=100



Georgia’s economy is underperforming the U.S. average, as payroll employment dropped further in the first quarter, with cuts concen-trated in construction, financial services, and durable goods manufac-turing. However, other signs indicate that the state will begin a weak recovery soon. Specifically, recent hiring in retail and hospitality re-flects the revival of convention activity and business travel. Likewise, improving state exports since the third quarter of 2009 are boosting the state’s important distribution industry, as are the recent gains in industrial production around the South.

Bargain huntingThe distressed commercial real estate market has begun to at-

tract bargain hunting in Atlanta’s office markets, although the hole to dig out of is deep. In particular, with the last batch of office buildings completed in the first quarter, the amount of empty office space is the equivalent of 33 Bank of America Plaza towers, the tall-est building in Georgia. The resulting commercial foreclosures have contributed to the weakness of local banks, a number of which have become insolvent. The good news, if there is some, is that the melt-down forced landlords into deep leasing concessions that have suc-cessfully attracted tenants. For instance, Two Alliance Center, one of the four recently completed Buckhead towers, saw occupancy rates rise rapidly this year.

PortLogistics-related industries will be among the first to recover, and

reduced land prices and industrial rents have caused businesses to look at Georgia’s industrial market for opportunities. The state is one of the major trade hubs for the South, and industrial markets around Atlanta and Savannah have received much attention due to their proximity to the Hartsfield-Jackson Airport and the Savannah port. In particular, producers and distributors of high-end consumer goods who were successful in weathering the recession are surveying the area for distribution centers. Over the past decade, Georgia’s indus-

try composition has become more trade-oriented, adding to the stra-tegic significance of the Port of Savannah. The Panama Canal Deepen-ing Project, to be completed in 2014, gives the state more urgency to support its logistics industries, because the super cargo containers will be routed from the overcrowded West Coast ports to the East Coast.

ConventionsThe convention business in Atlanta had a strong first quarter and

this improvement in activity will continue. Seven of the nine major events surpassed their attendance goals by an average of 19%. As a result, hotel occupancy has risen significantly for the first time in a year. In the next few months, the metro area will host three more large shows. Further, major tourist attractions such as the Center for Civil and Human Rights and a new exhibit at the Georgia Aquari-um will be opening this year.

Auto expansionThe massive expansion of the new KIA plant will continue to pull

west Georgia out of recession. Its positive spillover effects enabled employment in the Columbus metro area to grow at an annual rate of more than of 2% during the first quarter. The plant produces KIA’s popular Sorento SUV, whose sales have been improving since January, and in April, the South Korean company was the industry leader among foreign makers. As the outlook for motor vehicle sales brightens, hiring at the plant is likely to increase this year, with a greater ripple effect on the local economy.

Georgia will lag the nation in recovery, however. The state re-mains one of the centers of the national commercial real estate and banking crisis. Consequently, its downturns in real estate, construc-tion and financial services will be deeper and longer. Still, the state has reached the trough of recession. Auto expansion in west Georgia, power plant construction in east Georgia, and improving retail, logis-tics and tourism will push the economy into recovery later this year.

— XU CHENG

Georgia


-7

-6

-5

-4

-3

-2

-1

0

1

2

07 08 09 10

Georgia U.S.

A Much Deeper Recession Than Elsewhere Employment, % change yr ago, 3-mo MA

Source: BLS


-4

-3

-2

-1

0

1

2

3

% change yr ago Annualized % change

Columbus Georgia U.S.

Korean Auto Expansion Benefits Columbus

Source: BLS

Employment, 2010Q1



Louisiana’s recovery is beginning, as many of the state’s pivotal industries, namely energy, trade and tourism see improvement. Em-ployment has bottomed, but significant job growth has yet to resume. The biggest reason for the slow turnaround is the lack of big increases in hiring in the state’s energy industry thus far. However, prospects are improving, despite the uncertainty associated with the oil spill in the Gulf of Mexico. Much higher oil prices than last year support extraction and exploration. The number of active rigs operating has long since sur-passed it prerecession peak, and the number of barrels produced is well above year-ago levels and just below the post-Hurricane Katrina aver-age. Though energy jobs are being created, the industry remains nearly 7% shy of its previous peak, and the number of employees per active rig is barely above a record low. This absence of employment growth is holding back the recoveries of the oil-based economies of Lake Charles and Houma. The positive implication is that the low workers-to-rig ra-tio will generate several strong quarters of hiring in the near term.

Oil spill effects Oil from the ongoing leak has washed up on 140 miles of the

Louisiana shore, mostly around the mouth of the Mississippi River. The key impact so far has been on the commercial fishing industry, but there are serious downside risks for other industries, particularly tourism. The National Oceanic and Atmospheric Administration has banned commercial and recreational fishing in more than one-third of the Gulf Coast’s waters. Much of the restricted area is imme-diately southeast of the state—prime commercial areas for New Orleans and Houma. Most deep-sea fishers have ceased operations at least temporarily. However, the effects to the broader economy are limited. According to the NOAA, seafood—including shrimp and oysters—caught in the waters off Louisiana, Mississippi and Alabama account for less than 0.3% of the three states’ combined GDP. Fur-ther, the employment multiplier for commercial fishing is extremely low, suggesting that any damages will be limited to that industry. As a result, the state outlook has not significantly changed so far.

However, risks are heavily weighted to the downside and could reverse the state’s tenuous recovery. A shift in the oil spill could interrupt shipping lanes to and from southeast Louisiana, crip-pling the major ports of Terrebonne in Houma, New Orleans, South Louisiana—the largest port in the western hemisphere measured by tonnage—or any of the other dozen ports located in that area. Water transportation in the southeast employs 1% of the workforce and provides 3% of wages. Worse, any interference to the state’s oil industry either directly through the spill limiting operations or a change in governmental policy toward Gulf drilling could be ex-tremely harmful to the economy. The oil industry in New Orleans and Houma collectively accounts for more than 3% of the workforce and more than 7% of the wage bill. Not only do shipping and energy directly account for such a large share of jobs and wages, but the industries also have very high employment multipliers. Thus any dis-ruption to these two industries could have a domino effect, curbing growth in other metro areas as any work stoppages ripple beyond southeast Louisiana.

Trade improving amid increasing demandThe oil spill notwithstanding, the state’s ports are beginning to

rebound as the recovering national and global economies foster de-mand for international trade. After falling 30% from 2008 to 2009, the value of goods transported through the New Orleans customs district, which encompasses the 15 international ports across the southern half of the state, is beginning to climb. While exports have almost entirely recovered to their prerecession peak, imports—which accounts for two-thirds of port activity—still have a ways to go. Though they have risen 50% from their trough in early 2009, they are still nearly 60% shy of their previous peak. Over the next two years, national recovery will benefit the state’s ports, many of which have only just completed post-Katrina and Rita rebuilding projects in the past year or two.

— MIKE ZOLLER

Louisiana


Drilling Employment to Rebound Over Time

Sources: Baker Hughes, BLS, Moody’s Analytics

68

70

72

74

76

78

120

145

170

195

220

07 08 09 10

Active rotary rig count (L) Energy employment, ths (R)

Louisiana energy industry indicators


-40

-30

-20

-10

0

All industries Petroleum Chemicals Agricultural products

Food

Recession Hit Petroleum-Related Exports Hard

Source: World Trade Center of New Orleans

Industry exports by value, % change, 2009



The recovery is gaining ground in North Carolina. The Richmond Fed’s Manufacturing Survey, coverage of which includes North Caro-lina, revealed a sharp increase in manufacturing activity in the area in April. The capacity utilization diffusion index jumped to levels not seen since 2002, and the index for new orders reached its highest level since 1993. These robust indicators have only recently begun to translate into net job gains in North Carolina’s manufacturing, in contrast with the situation nationwide, where job creation began in January. Until March, North Carolina’s manufacturers were very ef-ficient in satisfying increasing demand through productivity gains and longer workweeks. Finally, hiring has now begun. Part of the expla-nation for the lag compared with the national experience lies in the ongoing compositional shift in the state’s manufacturing. Demand is increasingly coming from capital-intensive technology-producing in-dustries. Meanwhile, historically large labor-intensive industries such as textiles continue to shrink and cut payrolls. It will be at least six months before textiles employment stabilizes, with very little recov-ery expected even in 2011.

Still-lethargic housingNorth Carolina’s housing market will take a while longer before

beginning to improve significantly. While the firming of the job market will be beneficial to home sales after midyear, recent data confirm that the housing environment remains extremely challeng-ing in the state. Specifically, home sales relapsed in the first quarter of 2010, after a promising recovery started in 2009, helped by the homebuyer tax credit. Further, RealtyTrac data show that foreclo-sures were up by nearly 10% in April compared with March and by 27% compared with April 2009. By contrast, nationwide foreclo-sures fell by more than 9% from March and 2.4% from April 2009. Elevated foreclosures pose a significant downside risk to the state’s housing outlook. A rising number of distress sales offset any gains in local consumer confidence and also maintain some pressure on the balance sheets of local banks.

Attracting and retaining businessesNorth Carolina scored a number of successes in attracting new

businesses in 2009, most notably the arrival of Apple’s data center in Hickory, an area in deep need of a compositional shift in its industry mix because of its overreliance on old-line manufacturing. Moreover, state authorities are working to keep this trend going; the 2010-2011 budget proposal plans to cap taxes on small businesses and allocate extra funds to the state’s Department of Commerce to augment its business recruitment efforts.

Rural areas are not the only locations that will benefit from this initiative. For example, Charlotte has a deep talent pool in the area of biotechnology, but the area competes directly with the more ma-ture Research Triangle Park in the Raleigh-Durham area. Efforts to attract businesses and cultivate Charlotte’s own life science industry, if they prove successful, could absorb a high number of skilled work-ers. So could further growth in the area’s energy-related industry. Several months ago, Siemens announced the expansion of a plant in Mecklenburg County to supply gas and steam turbines to worldwide markets. The company had previously reported plans to add office space locally for new engineers as it creates a hub for global produc-tion. Developments of this nature will encourage the arrival of ven-dors and suppliers.

The state is also considering beefing up its incentive offers to filmmakers, in order to revive an industry that has been in a lull after making significant progress prior to the recession. In 2007, direct spending associated with the film industry reached $161 million, according to the North Carolina Film Office; it fell to $91 million in 2008 and below $50 million in 2009. The state lost many pro-ductions to Louisiana and Georgia, which offer more competitive incentive packages. The film industry has its main presence in Wilm-ington, an area that currently suffers from overexposure to the con-struction industry. Hence, support to the film industry is key to this area’s diversification efforts.

— JIMMY JEAN

North Carolina


Industry Jumps, and Job Creation Will Follow

Sources: BLS, Federal Reserve Bank of Richmond

-12

-8

-4

0

4

8

-60

-40

-20

0

20

40

08 09 10

Richmond Fed composite index (L) Manufacturing employment change, ths, 3-mo MA (R)


Sales Relapse Will Delay House Price Recovery

Sources: National Association of Realtors, Moody’s Analytics

100

135

170

205

240

120

140

160

180

00 01 02 03 04 05 06 07 08 09 10

Median house price, $ ths (L) Existing-home sales, ths (R)



The Tennessee economy is likely to experience a more robust recovery than previously anticipated, thus the forecast has been revised upward through the year’s end. Following massive downsiz-ing and idled capacity during 2009, particularly in the auto industry, manufacturing is once again contributing to growth. Hiring is ac-celerating as durable and nondurable goods manufacturing, trade, and transportation power the rebound. Labor income climbed faster than the national pace during March and April, which may help con-sumers maintain a stable level of spending over coming quarters. However, the state’s unemployment rate remains higher than that of the nation.

Gross state product is projected to expand at a 3.8% annualized rate during the second half of the year, compared with 3.4% in the April baseline scenario. As job opportunities begin to materialize, previously discouraged workers reentering the labor force will prevent the unemployment rate from falling below 10% until the end of 2011 or early 2012.

The case for higher unemploymentThe fourth consecutive month of net job growth in April was the

longest stretch Tennessee has witnessed in almost three years, but the labor market is not out of the woods. The baseline forecast calls for the jobless rate to increase over the next six months despite the rebound in job creation.

The combination of the large pool of jobless manufacturing work-ers along with fewer new production jobs will contribute to lengthy unemployment and slow wage income growth. Jobs lost in paper, printing and textiles, which account for about a quarter of all jobs lost, are not likely to return even as the economy rebounds. Instead, many lower value-added production jobs of this sort will migrate overseas. In contrast, hiring sparked by Volkswagen’s Chattanooga assembly plant will recoup some of these losses over the next three to five years, even though auto industry layoffs accounted for most of the manufacturing jobs lost over the last year.

A reversal in labor force participation is a secondary factor contribut-ing to a higher unemployment rate. The discouraged worker effect in Tennessee has been larger than the effect at the national level, but par-ticipation will nonetheless rebound as job availability increases this year.

Sources of uncertaintyTennessee’s employment forecast is among the most uncertain

aspects of the baseline outlook, as resurgence in demand for primary metals or transportation equipment could result in a surge in rehir-ing if idle factories reopen. For example, a production restart at GM’s idle Spring Hill facility near Nashville could result in the rehiring of hundreds of workers. Likewise, Alcoa’s idle Knoxville smelter is an-other candidate for a restart if demand from the auto industry perks up faster than expected. Further, the Memphis area could see ear-lier-than-expected gains if there is acceleration in the development of a new casino in Tunica County or faster expansion in warehousing and rail transport, led by demand from medical device companies and expansion by large rail carriers.

FloodDamage estimates from the Cumberland River flood in early May

top $1 billion, and this figure will likely be revised higher as more information becomes available. The temporary disruption caused by the floods, which destroyed an estimated 2,000 homes and caused the closure of many businesses including the Gaylord Opryland Re-sort, will hinder growth over the short term, but the recovery that follows will be a source of growth for Middle Tennessee. The floods likely lowered total annual output by 1%, but reconstruction efforts should subsequently boost the construction and real estate indus-tries. The efforts of former homeowners to find suitable homes may also bolster house prices in the near term, which were falling at an accelerating rate in the fourth quarter. The flood did not prompt any long-term changes to Nashville’s forecast.

— ALEXANDER MIRON

Tennessee


-1

0

1

2

3

09 10

Tennessee U.S.

Earnings Rise Despite Slow Job Market… Average weekly earnings, % change yr ago, 3-mo MA

Source: BLS


…But Unemployment Is Apt to Rise This Year


9.5

10.5

11.5

-9

-6

-3

0

3

09 10F 11F

Employment, % change annualized (L) Unemployment rate, % (R)



Texas continues to recover at a faster rate than the nation, though the overall pace is still moderate. The unemployment rate has barely moved over the past half year, now standing at 8.3%, but still below average. Other recent data are more positive and point to the po-tential for near-term acceleration in the state’s economy, though the forecast did not change this month.

Manufacturing Manufacturing is accelerating, as noted by the Texas Outlook

Survey; the current activity index rose for the sixth straight month in April. Of particular note are recent strongly positive readings for employment and the workweek. These indicators are consistent with the employment surveys, which show slow but steady job growth for the state for the past six months. The key industries leading the advance are high tech, particularly semiconductor manufacture, telecom, energy-related equipment and petrochemicals.

Oil spillThe still-unchecked oil spill following the explosion of the Deep-

water Horizon offshore oil rig casts a long shadow over the prospects for Houston’s energy industry. Nonetheless, our forecast is that global recovery in energy demand will ultimately more than offset these risks, leading to a continuation of the rebound in oil prices and consequently local exploration. However, the oil spill will result in higher insurance rates for offshore drilling and new government safety regulations that will also be costly. Further, uncertainty arising from the European debt turmoil will constrain oil prices. As a result, less-profitable drilling projects will be postponed or canceled, affect-ing the pace of the metro area’s recovery.

Housing helpingHousing around the state is beginning to improve again after a

lull since mid-2009. The lack of excess supply in each of the ma-jor single-family markets has kept home prices essentially stable

throughout this cycle. Now, employment gains, better consumer credit conditions and faster local bank deposit growth combine to boost housing. New permits for single-family homes have risen recently to a nearly 80,000-unit annualized pace. Reflecting these trends is J.P. Morgan Chase’s plans to hire more than 200 mortgage lending personnel in Dallas and more than 100 in Houston.

Metro area developmentsDallas’ semiconductor and telecom industries will continue to

keep the local rebound on track. For example, capacity utilization at the huge Richardson TI plant is increasing, driven by the strong global high-tech recovery. The latest expansion phase means that two-thirds of the facility will now be in use. Additionally, gains in manufacturing are attracting relocations of distribution companies and facilities to the entire metro area including Fort Worth. Houston’s recovery is facing several new hurdles in addition to the dampening effects of the oil spill. The Obama administration’s proposal to cancel the Constella-tion program could mean the loss of many highly paid engineering and technical jobs. Further, the Continental-United merger will mean few-er local management jobs. However, prospects for local activity of the airline itself remain good as the airport has room for expansion and Houston remains a gateway to Latin America. San Antonio’s recovery is on track. The June addition of Tacoma production at the Toyota plant will diversify output and help the company hold onto its small-truck market share. Additionally, the local convention business will continue to expand in 2010, having bucked the national trend in 2009 as total room nights in the first quarter were up nearly 12% over the year. Ad-ditions to the stock of hotel rooms raised the metro area total by fully 20% between 2006 and 2009, enabling the area to compete for larger conventions. Austin will continue to lead the state as strong popula-tion gains drive retailing and consumer services. Additionally, the tech rebound is lifting the prospects of many small local companies. How-ever, a hiring freeze at UT, owing to state budget issues, will be a drag.

— EDWARD FRIEDMAN

Texas


2

4

6

8

05 06 07 08 09 10

Better Credit Conditions Support Housing

Sources: Equifax, Moody’s Analytics

First mortgage delinquency rate, % of $ volume

U.S.

Texas


120

160

200

240

300

500

700

09 10

Despite Spill, Drilling Rebound Continues

Sources: Baker Hughes, BLS

Texas (L)

Louisiana (R)

Active drill rigs, #



There is increasing evidence that Virginia will soon emerge from its recession. Employment has been stable since last fall, credit condi-tions are matching the moderate national improvement, and house prices are growing faster than average.

However, there are two causes of concern. The first is state gov-ernment. Virginia’s tax collections have not improved enough to meet state projections, boding ill for the outlook for state employment and spending. One example is the Virginia Department of Transportation, which closed many of its offices to the public in April, eliminating nearly 2,000 positions.

The second cause of concern is manufacturing; in recent months employment has been declining again, in contrast with the rebound nationwide. Once recent example is Stanley Furniture, which an-nounced it will cut about two-thirds of its workforce in the Henry and Martinsville area, shifting its production overseas. However, the impli-cations for the Virginia economy overall are less negative than those for other states, because the concentration of manufacturing in the state is somewhat lower than for the nation as a whole.

AttractivenessFavorable business climate and relative costs have enticed de-

fense contractor Northrop Grumman to relocate its headquarters to the Northern Virginia metro area. The exact location has yet to be determined, but the options have been narrowed down to Falls Church or Arlington. To entice Northrop Grumman to the state, Vir-ginia officials offered on the order of $12 million in grants and incen-tives. Although this was only half of what was offered by the District of Columbia and Maryland, the other positive factors proved more important. The relocation will mean that 300 executives relocate to the area by mid-2011. Although the number of new positions will be modest, they will be high-paying positions, generating increased consumer spending and a modicum of support for local housing demand. For the state as a whole, the company is already one of the largest employers, providing jobs for about 30,000. In general, the

forecast for Northern Virginia is unchanged. Federal hiring will con-tinue to boost the local economy throughout much of 2010. After a pause later in the year, reacceleration will occur in 2011, though a return to previous peak employment will not be reached until 2014.

PortThe port will continue to be an important driver of growth for Vir-

ginia Beach both in the short term and the intermediate term. In the short term, expanding shipping activity as the global recovery takes hold will lift demand for transportation and warehousing industries. Total container traffic in March was up by more than 20% from a year earlier, with imports leading the way with a 27% gain. This time last year, container traffic was declining at about a 20% pace, and as a result, the port scaled back operations and expansion plans.

Now expansion efforts are under way again to enable the port to meet trend growth resulting from globalization in general, and more specifically the expected gains from the expansion of the Panama Canal. In particular, the likelihood of construction of a new termi-nal on an expanded Craney Island has once again risen. Developers have received the required state and local approvals, and the early signs are that both state and federal funding will be forthcoming. Construction of the terminal will be a support for the economy even before it becomes operational.

Capital weaknessThe Richmond economy remains weak, and the latest evidence

comes from household finances. Unlike the rest of Virginia, whose credit quality has remained somewhat better than the national aver-age, the share of consumer loans that are delinquent in Richmond has not yet peaked. Further, the declines in local income have been in line with the national average but much larger than for the state as a whole. Weak household finances will limit spending both di-rectly and indirectly through limited access to credit.

— SCOTT HOYT

Virginia


Economic Recovery Lifts Virginia Beach Port

Source: Virginia Port Authority

Twenty-foot equivalent units handled by port

-30

-20

-10

0

10

20

30

120

150

180

210

05 06 07 08 09 10

Ths (L) % change yr ago (R)


2.2

2.8

3.4

4.0

05 06 07 08 09 10

Richmond Virginia U.S.

Credit Conditions Not Improving in Richmond Delinquencies, all consumer loans, % of accounts




Oil spill Oil from the spill has washed up onto Alabama’s Dauphin

Island, whose 14-mile resort shoreline is now the focus of the impact locally. The oil spill could not have occurred at a worse moment for local tourism whose peak season is from June through August. Additionally, damage to Mobile and Baldwin county tourism has already been done, as vacation rentals have been cancelled, even though oil has yet to drift toward those areas. The second disappointing tourist season in as many years will hurt leisure and hospitality employment, which had just begun to sta-bilize following the 2008-2009 recession. Further, although tour-ism will be the hardest hit industry, closed fisheries will hurt the area’s large shrimp industry as well. Altogether, Alabama could lose close to $200 million in output, according to an early release by BBVA Compass Bank.

However, the current outlook is not the worst-case scenario, which would occur if the oil contaminated Mobile Bay. If this trans-pired, shipping would be interrupted. Worse, even industrial activity up Mobile Bay could be disrupted, causing layoffs at both the Port of Mobile and Shell Oil’s Saraland Refinery.

Industry offsetOffsetting the concerns posed by the oil spill, conditions in

general remain favorable for the state’s manufacturing economy, which has the potential to outperform that of the nation in the coming months. Nationwide, demand for both durable and non-durable goods is improving, and should accelerate over the com-ing year, raising demand for the output of the state’s large concen-tration of steel, auto and textiles makers. Increased factory output will help stabilize manufacturing payrolls. However, a resumption of hiring in manufacturing is unlikely until next year, unless the national recovery accelerates to a significantly faster pace during the rest of 2010.

— MARTIN SOLER GARCIA

The Arkansas recovery is in place, but not yet picking up steam. Payrolls have bottomed out, but household employment, which includes the state’s large agriculture sector, has not. The state’s housing market, which has held up comparatively well in its re-cent decline thanks to a smaller runup in prices, is not yet on solid ground. Sales dropped appreciably in the first quarter of 2010, after jumping in late 2009 because of the federal first-time homebuyer tax credit.

Making and moving Arkansas industrial production began to push higher in mid-

2009, and manufacturing payrolls have followed in early 2010. Goods producers will replace some of the jobs lost, but the industry will not add a significant number of new workers over the forecast horizon. Much the same is true of the state’s trucking industry, though hiring there has not yet picked up.

Fayetteville is still supported by the presence of the headquar-ters of retail giant Wal-Mart. As U.S. job growth picks up, Wal-Mart’s core base of customers will benefit and once again begin to expand spending. Until then, a growing footprint in the U.S. plus international expansion will support Wal-Mart, preventing the firm from needing to resort to any managerial layoffs.

State capital Little Rock’s recessionary slide began after the na-tional downturn, but has nonetheless begun its recovery in tandem with the nation. State government held up well, propping up not only government offices, but also many of the professional and busi-ness services that support them. Arkansas is still nagged by budget woes, owing to a larger-than-expected decline in personal income tax receipts, though sales tax receipts were better than expected. Moreover, individual withholdings were up, making officials optimis-tic about a near-term turnaround in state revenues. Consequently, state government job cuts are not anticipated, in contrast to many other states.

— SARA KLINE

Alabama Arkansas


6

9

12

Mobile Alabama Birmingham U.S. Dothan Huntsville

Oil Spill Adds to Mobile’s Difficulties Unemployment rate, %


-20

-15

-10

-5

0

5

10

15

00 01 02 03 04 05 06 07 08 09 10F 11F 12F

Arkansas South U.S.

Housing Cycle Not as Pronounced Median existing single-family home price, % change yr ago

Sources: NAR, Moody’s Analytics



Kentucky’s economy is slowly recovering from its worst recession in decades. The part of the state’s economy that has shown the most improvement has been the housing market. Housing permits are well above their low reached in the first quarter of last year, although part of the increase can be attributed to the homebuyer tax credit that expired last month.

Employment appears to have finally stabilized and recent income gains will provide support for above-average economic performance in the near term. Specifically, in 2009, personal income in Kentucky rose by 0.4% versus a 1.7% decline nationally. Over two years the in-crease was 4% versus 1.1% nationally. Wage income did fall last year, but not as fast as the U.S. average. As a result, consumer spending has improved, as indicated by a rise in retail payrolls. Exports drive further gains. Exports originating in Kentucky rose 11% over the course of 2009. The largest buyer of Kentucky’s production is Canada, whose improving outlook bodes well for the state.

Credit qualityThe less-than-average erosion in credit quality in Kentucky will

also be beneficial for the recovery, even though Kentucky’s per-centage job loss was comparable to the national average during the recession. Delinquency rates on first mortgages, credit cards and auto loans are now well below their respective national aver-ages, for two reasons. First, as noted, income growth has held up better. Second, going into the recession, consumers had relatively

Kentucky

low debt service burdens. Defined as the percentage of personal disposable income required for debt payments, Kentucky’s was 12.7% in 2007, compared with 13.9% nationwide. Adding further support to the economy, house prices have declined much less in Kentucky, significantly reducing homeowners’ incentive to default on their debt obligations. The state’s better credit quality will allow its housing market to recover more quickly, as financial institutions accelerate lending activity.

— PATRICK ARMSTRONG


50

60

70

80

90

100

110

120

05 06 07 08 09

Kentucky U.S.

Lower Risk of Strategic Defaults Equity per household index, 2005Q1=100



STATE AND METROPOLITAN AREA FORECAST REVIEW �� West

By a number of measures, the West is the last region to recover from recession and is struggling to catch up to the rest of the U.S. The spread between the West’s unemployment rate and that for the rest of the U.S. has widened during each month of this year through April, accelerating a trend that began more than two

years ago. The West was the last region to have a majority of its metro areas exit recession.

West Struggles to Catch UpBY STEVEN G. COCHRANE

California, Nevada, New Mexico and Washington still do not have a majority of their metro areas in recovery as of April, although at least in California, the largest metro area economies are now mostly re-covering. Housing markets are recovering in the West, but the risk of another downturn through the end of the year is greater than elsewhere because of the West’s high rate of late-stage mortgage delinquencies—only Florida rivals many of the western economies.

And yet employment is finally on the rebound. Its turnaround is not as conclusive as elsewhere, yet it is improving (see What We Are Watching). Total payroll employ-ment has at least leveled off in each of the Pacific states; the cycle of the labor market is a bit more lagged in much of the Mountain West. Further, most of the larger metro ar-eas—where the housing market was such a significant factor in creating the length and breadth of the West’s recession—are recov-ering nearly in unison, with only Northern California trailing. Las Vegas is the exception, where the economy was arguably hit the hardest of any western metro area and re-mains weak. Denver and Salt Lake City were late to fall into recession, and their labor market recoveries are likewise delayed.

Income The West’s economy is further weakened

by a sharper downturn in personal income throughout 2009. Estimates for the first quarter of 2010 will not be available until

late June. There is reason to believe, how-ever, that income growth may already be beginning to improve, as average annual wages in manufacturing in the West have been outpacing the rest of the U.S. for over one year. With manufacturing production rising everywhere, the West’s higher concen-tration of high-value manufacturing, and its stronger linkages to expanding Asian export markets, the manufacturing rebound is likely now supporting stronger income growth, even if the industry is not so highly concen-trated in the West.

Housing With housing affordability at a record

high and mortgage rates at a record low for the past 30 years, there is some potential that pent-up demand for housing may begin to work off inventories faster than expected. This will be critical to minimizing the poten-tial impact of a rising number of distress sales

in coming months, particularly in Arizona, California and Nevada. Indeed, house prices rose measurably in California and Arizona in last year’s second half, according to the Case-Shiller home price index. Additional data from the California Association of Realtors and the Federal Housing Finance Authority suggest those gains have leveled off in recent months. Given that late-stage mortgage delinquency rates rose at an accelerating pace in the first quarter in California and in much of the West, the baseline outlook is unchanged in calling for a moderate house price reduction through the end of this year in much of the region. Risks are to the upside, however, particularly if long-term fixed mort-gage rates remain at their historic lows.

OutlookThe region’s outlook remains moderate

for the coming months but should acceler-ate in 2011 as consumer industries such as travel and tourism improve and as the hous-ing market finally finds its footing, adding to the support now provided by technology industries and export demand. Funding and production expansion of green and alterna-tive energy industries add some further up-side potential for the region, as exemplified by the improbable notion that the region’s auto assembly industry is likely to get a boost from the reuse of existing production space for electric vehicles. Thus, there is good potential for the region to shift from an underperformer to an overperformer.

Included in this issue » Arizona .............................................75 » California ..........................................76 » Colorado...........................................77 » Oregon ............................................ 78 » Nevada ............................................ 79 » Utah .................................................80 » Washington .....................................81 » Hawaii .............................................. 82 » New Mexico .................................... 82





Improving Expanding

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Apr 2010

Payroll Employment—West MSAs 1-yr vs. 3-mo performance (3-mo MA)

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Los Angeles

Phoenix

Seattle

Santa Ana

San Diego

Denver

Riverside

Portland

Oakland

San Francisco

San Jose

Sacramento

Las Vegas

Salt Lake City

Honolulu

Albuquerque

Tucson Oxnard

Tacoma

Boise City

Colorado Springs

Spokane

Provo

Boulder

Eugene

U.S.


Improving Expanding

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Payroll Employment—West States 1-yr vs. 3-mo performance (3-mo MA)

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California

Washington

Arizona

Colorado

Oregon Utah

Nevada New Mexico

Idaho

Hawaii

Montana

Alaska

Wyoming

U.S.






rate


rateResidential

permitsIndustrial


performance


last month

Denver -0.6 7.9 0.2 75.2 1.2 ↑ ↔Honolulu 1.9 5.9 -0.0 83.3 0.9 ↑ ↔Los Angeles 3.8 12.3 -0.0 71.0 1.9 ↑ ↔San Diego 3.0 10.8 0.2 26.8 2.7 ↑ ↔San Jose 3.3 11.9 -0.2 -10.7 4.4 ↑ ↔Seattle 3.4 8.6 -0.3 39.9 -0.4 ↑ ↑Albuquerque -2.3 9.0 0.8 0.6 2.8 ↔ ↔Fresno 1.2 17.0 0.8 6.6 1.9 ↔ ↔Las Vegas 0.8 13.8 0.6 69.5 0.9 ↔ ↔Oakland 1.2 11.6 0.1 1.5 2.4 ↔ ↔Oxnard 0.5 11.3 0.4 26.4 2.5 ↔ ↔Phoenix 2.5 9.1 0.5 -4.2 2.3 ↔ ↔Portland 1.6 10.6 -0.1 -11.5 3.2 ↔ ↔Riverside 2.5 14.9 0.3 1.4 1.7 ↔ ↔Sacramento 0.0 12.7 0.4 44.2 1.5 ↔ ↔Salt Lake City -3.7 6.9 0.3 4.4 2.5 ↔ ↔San Francisco -1.1 9.6 0.2 -56.5 2.6 ↔ ↔Santa Ana 5.6 9.9 0.0 -29.7 2.1 ↔ ↑Tacoma 1.1 10.2 0.5 -13.7 0.9 ↔ ↔Tucson 2.9 8.8 0.5 14.5 0.1 ↔ ↔West 1.3 10.9 0.3 17.2 2.1 ↔ ↔U.S. 1.1 9.8 -0.1 1.7 1.9 ↔ ↔




U.S. West

98100102104106108110112114116118

98 99 01 03 05 07 09


U.S. West

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160

98 99 01 03 05 07 09


U.S. West

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98 99 01 02 04 05 07 09


U.S. West

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U.S. West

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98 99 01 03 05 06 08



Cyclical Indicators



The West’s Weak Labor Market…

Source: BLS

Unemployment rate, % (R); difference from U.S. in ppts (L)

4

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12

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0.6

0.8

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1.4

1.6

08 09 10

Difference (L) West (R) Rest of U.S. (R)


16.5

17.0

17.5

18.0

18.5

19.0

19.5

08 09 10

West

Rest of U.S.*

…Is Offset by Higher Wages in Manufacturing Average hourly earnings in manufacturing

Source: BLS

* Weighted average of Northeast, Midwest and South using manufacturing employment as the weight



Arizona’s outlook is improving; better than expected gains in em-ployment have been broad based, with nearly nine in 10 industries expanding in April. Tourism contributed to growth in the first quarter. Hotel occupancy rates are above the year-ago level, and lodging and food service employment increased by twice the national pace. The positive swing in the inventory cycle helped stabilize transportation and warehousing employment, while wholesale trade companies con-tinued to expand at a robust clip. Solid productivity gains are enabling manufacturers to increase production without hiring new workers. Increased productivity ultimately will lift wages for employees once the labor market tightens.

There are reasons to be cautious about raising the outlook. Risks remain weighted to the downside, as house prices are expected to de-cline further in this year’s second half. Housing temporarily benefited from the postponement of foreclosures via mortgage modification programs. Nearly 30,000 mortgages have temporary modifications under the Home Affordability Modification Program, about half of ac-counts more than 90 days delinquent. Not all of these modifications will become permanent, and a surge in foreclosures may put enough downward pressure on prices to crimp consumer sentiment.

Tourism will be tested as boycotts related to recent state legisla-tion on immigration divert conventions to other states. Despite rev-enue expected from a 1-percentage point increase in the state’s sales tax, state and local governments layoffs will accelerate in the second half of 2010 as the new fiscal year begins.

AirlinesConsolidation in the airline industry could provide growth op-

portunities for U.S. Airways, headquartered in Phoenix. Company officials have suggested the firm is interested in expanding even after talks fell through with United Airlines, which merged with Continen-tal Airlines. There is upside potential for corporate management jobs if the local airline ends up being the purchaser in future negotiations, giving it more power to protect its employees and leverage to relo-

cate operations to its current headquarters. Management employ-ment remained resilient throughout the recession, and lower office rents would make Arizona attractive for corporate operations.

The effects on airport personnel and flight volume would be less certain. Consolidation of routes would depend on the established hubs of any combined firms. Phoenix would have an upper hand for gaining flights in a merger because above-average demographic and business growth will support expansion. Following the last recession, the state was able to recover lost air transportation employment, while employment continued to founder nationwide. Over the past two decades, passenger traffic growth at Phoenix Sky Harbor Airport handily outpaced growth at airports across the U.S.

Investing in the futureLow business costs and entrenched growth industries will attract

investment, bolstering the long-term outlook for Arizona. Computer electronic parts manufacturer Western Digital Technologies Inc. has purchased STMicroelectronic’s manufacturing facility in Phoenix. This is the company’s first operation in Phoenix, which stands to at-tract most of the state’s high-tech investment because of its surplus of highly skilled workers and global market access. In the past year, state exports of computer and electronic products rebounded 20% from their cyclical low. Western Digital’s purchase of a local facility saves hundreds of jobs that would have been lost if the plant had been left vacant, supporting wage growth and allowing local workers to stay in Phoenix rather than driving them to seek job opportunities elsewhere. Despite the plant closure, STMicroelectronics will keep many engineering jobs in the area.

Demand for electrical engineers will help offset losses from com-panies shifting production to lower-cost centers. Phoenix’s concen-tration of engineers will help draw solar and other alternative energy companies to the region. For example, Suntech, a producer of solar panels, is on schedule to open a new facility in Phoenix later this year.

— NATHAN TOPPER

Arizona


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U.S. (R)

Arizona (L)

Employment at Airports Declines Air transportation employment, ths, NSA

Source: BLS


0.0

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Arizona Colorado West U.S. California

High-Tech Industries Will Bolster Growth


High-tech employment, average growth rate, 2013-2040



The pace of California’s recovery is gathering speed. Total em-ployment has leveled off and is beginning to edge upward following earlier improvements in tech-producing industries and trade. House prices and sales have continued their upward momentum, aided by the rush to take advantage of expiring federal tax credits and the in-troduction of new state incentives for first-time purchases of existing houses and purchases of newly constructed ones.

Manufacturing restructuringTesla Motors’ partnership with Toyota to build electric vehicles in

Oakland beginning in 2012 will soften the fallout of the April closure of the NUMMI plant—which will reopen as the Tesla assembly plant—but will do little to change the near-term metro area job forecast. At current projections, the production of Tesla’s Model S roadster will employ 1,000 workers by 2012—only a fifth of the most recent peak employment level at NUMMI. The companies are partnering to de-velop and manufacture a sub-$30,000 electric vehicle, which could increase utilization of and employment at the plant beyond 2012.

Beyond the direct impact on the workers and the assets idled by the shutdown of the NUMMI plant, the Tesla-Toyota partnership will give momentum to the retooling of California’s manufacturing and other industries toward clean and other emerging technologies. Companies in San Diego and San Jose have been the recipients of federal stimulus grants and loans in addition to private capital to finance the development and manufacture of clean technologies and equipment, allowing them to expand facilities and payrolls. China-based electric vehicle manufacturer BYD Co. announced in April that it will locate its North American sales headquarters in Los Angeles—attracted by the area’s ports and large car market.

BudgetThe impact of job losses in 2009 and carried-over financial losses

from 2008 diminish the near-term fiscal outlook for budget officials in Sacramento. Personal income tax receipts in April—the largest

month for collections—came in 25% under budget projections. Law-makers now face a $10 billion deficit for fiscal 2010-2011 in addition to an $8 billion deficit for the current budget year.

The shortfall increases the likelihood of more statewide spending cuts and further diversions of local funds in the near term, creating more drag on the recovering economy. The forecasts for most metro areas in the state already assume that the scale of last year’s layoffs of K-12 teachers and staff will be matched in the 2010-2011 school year. For example, in anticipation of reduced budget funds, more than 70% of K-12 teachers and staff in Santa Ana who were recipi-ents of preliminary layoff notifications received final layoff notices in May for next year—a loss of more than 1,500 jobs.

The revenue shortfall also increases the possibility that the state will need to repeat the issuance of IOUs to vendors and recipients of cash transfer payments to address a possible shortfall in cash as early as late summer.

HousingWeakening mortgage credit conditions will weigh on house pric-

es, despite federal and state housing incentives that extended the momentum of improvements in house prices and sales into the first quarter of 2010. The number of late-stage mortgage delinquencies continued to rise through the first quarter; they now account for just under 6% of all mortgages—less than the rates in hard-hit Arizona and Nevada but more than 2 percentage points higher than the U.S. average. These late-stage delinquencies will add to the filling pipeline of distress sales. This generates a risk of another fall in house prices by up to 8% by the end of the year. This risk, however, has eased slightly since the April forecast as mortgage rates have fallen.

Construction permits and starts have bottomed and are edging upward, illustrating some optimism within the housing industry. The improvement adds some upside potential that residential construction could contribute to the state’s recovery before the end of this year.

— EDUARDO J. MARTINEZ

California


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Recession Still Weighs on State Revenue

Source: California State Controller’s Office

California personal income tax revenue, $ bil, April of each yr


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07 08 09 10

U.S. California Arizona Nevada

Pipeline of Foreclosures Continues to Fill First-mortgage delinquencies, % of total, 120 days or longer




Colorado’s nascent recovery is slowly building up steam, and la-bor markets are finally reflecting the improved pace of business. The Centennial State, which suffered a comparatively mild recession, is showing renewed job growth in retailing, education and healthcare services, with census-related federal job growth supplementing the recovery. The state’s jobless rate has risen to 8%, though this is due to previously discouraged workers returning to the active labor mar-ket. Like the national recovery, Colorado’s is strongly tied to federal fiscal stimulus. Data gathered as part of the recovery act indicate that more than 10,000 Colorado jobs were created or saved since February as a result of the stimulus, meaning that, on net, further job losses were prevented, as the state has gained less than 10,000 new jobs this year.

Energy industryColorado’s energy industry has an outsize influence on the state’s

economy. Energy and tech are two of Colorado’s biggest growth drivers. Further, they rarely slump at the same time, thus balancing the state’s overall growth prospects. Natural gas extraction is more important in Colorado than oil extraction, unusual for an energy-exporting state. The state also has a budding alternative energy in-dustry, complementing conventional energy. Moreover, two-thirds of all oil supply services are concentrated in three of the state’s metro areas: Denver, Greeley and Grand Junction.

Conventional energyImproved natural gas drilling technology has not yet benefited

the natural gas industry in the state or in Grand Junction, where the state’s industry is concentrated. The industry will benefit from expected moderate price increases in coming years, and from new hydraulic fracturing techniques that will increase yields. However, standard measures of the industry’s performance, such as active rotary rig counts and total employment, are not rising. Current price forecasts do not support a return of statewide industry employment

to its 2008 peak of nearly 30,000 workers. However, employment should remain above 20,000 workers.

The possible discovery of a large oil deposit near Greeley adds up-side potential to the state’s outlook. Advances in drilling technology make long-acknowledged oil reserves more accessible, and major oil and gas companies are flocking to the area. Typical prices of mineral leases in the area have risen tenfold from their base a few years ago. Expect rapid development in Greeley should this potential be realized.

Alternative energyRecent environmental concerns pose upside potential for alter-

native energy, particularly wind power in Greeley and solar energy in Fort Collins. Alternative energy growth is driven by subsidies spurred by environmental concerns and regulations, particularly a possible change in federal policy that would require utilities to gen-erate a certain percentage of their power from renewable sources.

Rising orders support wind turbine production among Greeley’s alternative energy industries, including Vestas, a manufacturer of wind turbines and their components. The national recovery and interest in al-ternative energy are bringing orders to where they might have been had the recession not occurred. Upside potential has been strengthened by the Gulf oil spill, as lawmakers’ support for alternative energy may rise.

Fort Collins’ focus on solar energy will be of greatest benefit in the medium run. In the short run, job gains will be limited to head-quarters growth since most solar cell manufacturing takes place in lower-cost manufacturing hubs. Solar energy’s growth has been de-layed by relatively low energy prices and faster advances in ethanol and wind turbine technologies.

Support for environmental policies may be higher, especially after the oil spill, but this has not yet translated into policy changes. Until significant change is made to federal energy policy, alternative en-ergy will take a back seat to conventional sources as a driving force of Colorado’s economy.

— CHRIS CORNELL

Colorado


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Little Recovery Seen in Colorado’s Rig Counts…

Source: Baker Hughes

U.S., ths (R)

Colorado, # (L)

Active rotary rig counts


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03 04 05 06 07 08 09

…While Turbine-Making Job Cuts Were Small

Source: BLS

Turbine and power trans. equip. mfg., NAICS 3336 (R)

Mining, NAICS 21 (L)

Employment in energy-related industries by NAICS code, ths



Oregon is inching into recovery, as the labor market has improved considerably in recent months. Hiring is still largely dormant, but lay-offs have ended in nearly all industries, including beleaguered wood and metal manufacturing. Several of the state’s largest employers have begun hiring again, and household employment has experienced large gains since the beginning of the year. The Moody’s Analytics three-month diffusion index suggests a notable broadening of hiring across industries since mid-2009, although the pace of hiring has yet to pick up. The unemployment rate has fallen by a percentage point since mid-2009, but at 10.6% it is still above the U.S. average. The state would be well into recovery if not for its delayed housing cycle.

High-tech promiseOregon’s near-term outlook is shaped by accelerating U.S. and

global business investment spending. Semiconductor manufacturers have reported earnings gains since the fourth quarter of 2009 amid a rise in sales, and chip producers in Oregon made fewer job cuts than those in other parts of the U.S. or in other manufacturing industries. This bodes well for the state, as about 45% of state exports by dollar value are computer and electronic parts. Orders among technology firms have improved markedly, noted by the semiconductor book-to-bill ratio. This indicator tracks the local economy closely and is a useful leading indicator. Further, the National Venture Capital As-sociation reports a 100% increase over the year in venture capital placements statewide, an additional indicator of tech rebound. Most of the spending will go to green technologies, with heavy shares al-located to projects in Portland and Medford. Reflecting the growth of tech-producing industries, Intel, one of the state’s largest employ-ers, will hire more than 1,000 new employees companywide over the coming year, although their location has not been announced.

Portland and Corvallis will benefit the most because of their large shares of high-tech employment. Intel employs more than 15,000 in Portland, while Hewlett Packard maintains campuses in Corvallis.

A downside risk to the tech-led recovery lies in HP’s restructuring plans that will include layoffs of 9,000 employees in its computing centers. Two-thirds of the jobs lost will be replaced with sales and delivery staff, but the loss of further high-tech jobs could thwart re-covery. It is still uncertain where HP will cut or add jobs, but Corvallis stands to lose the most among the Oregon metro areas as HP is the focal point of its high-tech cluster.

Construction forecast changesThe outlook for construction employment has been revised up

over the near term and over the forecast horizon to remain consis-tent with household formation, migration, and residential permit activity. Oregon has enjoyed strong migration growth recently, which is projected to continue. Also, residential construction permit issuance is expected to return to its prerecession level.

Challenges to recoveryOregon’s delayed housing correction is the main factor prevent-

ing a speedy economic recovery. Despite the state’s strong in-migration, house prices have yet to stabilize. A steeper than average decline in 2009 brought the correction up to pace with the nation’s. Permit issuance has increased slowly since early 2009 and likely will accelerate in 2011 when excess inventories are worked off and the unemployment rate falls further. The housing forecast also depends heavily on income; new income tax increases imposed recently may affect disposable income.

Further losses in the state’s food and beverage and wood manufacturing also present downside risk to recovery. The belea-guered timber and wood manufacturing industries heavily rely on residential construction throughout the West. A few mills have begun to reopen, but many will not reopen. Eugene and Salem are heavily exposed to these industries, and further losses would hinder recovery.

— DANIEL BUEHRENS

Oregon


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Indicators Suggest Hiring Is Around the Corner

Sources: BLS, QCEW, Moody’s Analytics

3-mo diffusion index of employment growth 3-digit level (L)

Employment, temporary employment services, ths (R)

Oregon employment indicators


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Housing Still Weighs on Oregon’s Recovery

Sources: BLS, QCEW, Census Bureau, Moody’s Analytics

Residential permits 3-mo MA, ths (R)

Employment, logging and wood product manufacturing, ths (L)



Signs of a lessening of recession conditions in Nevada are increas-ingly visible, and some areas are even beginning to show improve-ment. The year-over-year decline in gaming is moderating. And while retail sales are still down measurably over the past year, they are beginning to improve and are evident in recent employment gains. Employment in business services has seen intermittent growth for the past six months and has gained on net since August.

Positive signs are emerging elsewhere. House prices are close to stabilizing, albeit at very low levels, adequate to support relatively strong sales. The foreclosure pipeline is beginning to see its flow re-duced, although foreclosures remain a problem. Taking in the overall picture, the general trend of the economy has shifted from an intensi-fying recession to one that is moderating.

Cyclical upswingThe high volatility of the Nevada economy will turn from a weight

to an advantage in the next year. Employment volatility in the state can be twice the U.S. average as a lack of diversity and high dependence on gaming create large swings in jobs during business cycles. As the U.S. economy improves, employment and income growth will improve, sup-porting discretionary spending by visitors. The pace of job growth is ex-pected to exceed the national rate by next year and accelerate further as the gaming industry gains traction. In recent months, leisure and hospi-tality employment is showing the first signs of improvement. With more than 35% of total state employment in leisure/hospitality and retail, the hiring improvements suggest that the contraction is finally ending.

Tourism is one of the most telling barometers of economic condi-tions in the state. Las Vegas will shake off its recession only after the U.S. recovery is sustained; but vitality in the area’s core industry is slowly returning. Gaming win and taxable sales both are on distinct upward trends for the past few quarters so that gross gaming reve-nues were down less than 1% over the year in Clark County in March.

The moderating recession in Reno will still require several months to turn into an outright recovery. The positive signs emerging in re-

Nevadacent months are still somewhat tenuous, especially with persistent instability in gaming and construction. Gaming is also the dominant industry in Reno, although not to the same extent as in Las Vegas. Even though the area has a more diverse economy than in the rest of the state, recovery will depend upon an increase in tourist inflows, which will occur when discretionary spending in the western region and in the rest of the country rebounds. Recent gaming win data give reason for optimism. In March, the Washoe County gaming win was 1.6% higher than a year earlier.

Demographic influenceNevada will be less of a draw for new residents as job expan-

sion in other parts of the country will precede the state’s recovery. The population growth rate of nearly 4% prior to the recession has slowed to around 1%, just above the national average. Although, on net, new residents will still flow into Nevada, migration and popula-tion growth will not return to previous rates until economic growth exceeds regional and national trends and the labor market tightens, which will take several years. Thus, improving demand for consumer-related industries will be somewhat delayed.

The housing market will also see a relatively slow recovery as new household formation rates will be low until 2015. The high level of housing sales associated with the federal tax credit are not expected to be sustained in the short term, and it will take at least a decade for the state to consistently match prerecession housing sales. Construction will not be a contributor to recovery and the en-suing expansion as it was to the strong growth of this past decade. With more moderate support from building industries, short-term recovery will be somewhat constrained, exacerbating the lag that a return of discretionary spending will have on the state. These con-straints notwithstanding, the forecast still envisions Nevada leading job growth once again by 2012, but at a modest pace compared with the last cycle.

— MICHAEL HELMAR


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Nevada U.S.

Volatility Will Be an Advantage in the Recovery

Source: BLS

Employment, annualized % change, 3-mo MA


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Population change Net migration

Not Much to Draw New Residents for a While


Ths



Utah’s economy has moved into its recovery phase, based on data available through April. Payroll employment gains in three of the four months to April provide the conclusive evidence. Housing starts and estimated industrial production, which are also included in a state’s recession status, have both been increasing since 2009. The one component of the business cycle indicator that has not turned around yet is house prices. The state’s dominant metro area, Salt Lake City, also moved into recovery, based on the data through April. The Provo and Logan metro areas were already in recovery, while the Ogden and St. George metro areas remain in moderating recession, as both continue to see payrolls decline.

Recovery will accelerateThe Utah recovery will strengthen throughout the rest of 2010

and into 2011. With the national economy picking up, the state’s cyclical industries—manufacturing, natural resources, wholesale trade, warehousing and distribution, and professional/business ser-vices—will drive the recovery. Job growth is receiving a boost in the current quarter from census hiring, and expanding payrolls will lead to steady growth in consumer industries.

Lagged house price cycleThe Utah house price cycle lags the U.S. cycle, weighing on the

area’s recovery, although the peak-to-trough decline will be smaller than that seen nationally. Prices had a smaller run-up in Utah than they did nationally and peaked in the middle of 2007, more than one year after they did in the rest of the nation. Since then, house prices in Utah have fallen 16%, compared with a 28% decline in the U.S., according to the Case-Shiller index. And while prices now have increased slightly nationally, they continue to decline in Utah and in all of its metro areas.

House prices in the state ultimately are expected to fall 19% peak to trough, bottoming out in the middle of next year, compared with a national drop of 33%. Because Utah is still in the middle of

its house price downturn—compared with most of the U.S., which is largely through the process—housing will be more of a weight on local near-term growth, particularly on consumer spending through the negative wealth effect. However, despite this, growth in con-sumer spending and employment in associated industries will be stronger in Utah in the near term relative to the rest of the country, because of the state’s very strong population growth.

Commercial construction woesOne drag on the state’s recovery that will persist through 2010 is

an ongoing contraction in commercial construction. With the state’s booming economy, the value of nonresidential permits in Utah increased by about 30% in both 2006 and 2007. This led to an over-supply of space, however, and the value of permits has since fallen by more than one-half. In the first fourth months of 2010, the value of permits was down 43% from the same period last year, with an 81% drop in the Salt Lake City metro area as some phases of a large downtown redevelopment project wrap up. This project has taken some office space off the downtown market, preventing vacancy rates from moving even higher with the steep drop in Salt Lake in office-using employment.

Commercial construction activity will not fully turn around until 2011, when stronger growth in employment, consumer spending and credit flows Utah is expected. Commercial building in the state will also get a boost with the construction of a new federal facility. The National Security Agency will be building a data center near Lehi over the next few years, on the border of the Salt Lake City and Provo metro areas, in part because of ample electricity. Firms are currently preparing bids, with the Army Corps of Engineers expecting to an-nounce a decision in October. With a construction budget of around $1 billion, the project will add to the recovery in commercial con-struction in Utah over the medium run. Still, the state will not see a return to the construction boom of a few years ago.

— AUGUSTINE FAUCHER

Utah


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100

105

04 05 06 07 08 09 10F 11F 12F 13F

Pre-revision

Later, Smaller House Price Downturn Case-Shiller® Home Price Index, Utah, cyclical peak=100

Sources: Fiserv, Moody’s Analytics

Revised


-60

-40

-20

0

20

40

00 01 02 03 04 05 06 07 08 09 10

2010 ytd through Apr

Commercial Construction Is Plunging

Source: University of Utah

$ value new nonresidential construction permits, Utah, % change



Washington is approaching recovery as the state’s high concen-tration in technology industries is beginning to find momentum. Once recovery begins, the state is expected to outperform on the backs of its tech presence and global connections, particularly with Asia. The recovery to date remains tenuous, however, as some of the usual signs of improvement, including a steady upturn in temporary help employment and gains in weekly hours worked, are lingering near their lows.

High tech: Key to recovery Software is the heart of the state’s cluster of tech-producing in-

dustries, which has generally grown continuously over the years, with the exception of the past 18 months. Exports and domestic invest-ment spending will make tech an important component of national recovery and subsequent expansion, and thus Washington should gain momentum and outperform by year’s end. These jobs are often high-paying, helping power income gains and the broader economic recovery. The state’s ability to lure jobs in this field is evident from Facebook’s decision to set up an office in Seattle. It represents a relatively small number of jobs, but illustrates a developing trend.

Manufacturing’s upbeat outlookWashington’s other core driver is aerospace manufacturing,

which has been surprisingly stable through the recession com-pared with prior economic downturns. Boeing built up a large order backlog through the last expansion that helped carry it through the recession. Now general economic conditions and the airline industry are looking more sanguine as the global economy is gaining its footing. Aerospace adds to the optimism for the medium-term outlook.

Reinforcing this optimism, Boeing recently will increase the pro-duction rate of the 737 in 2012 to 34 a month compared with the current rate of 31.5. This comes on the heels of other production increases planned for 2011.

Boeing’s expansion of airliner manufacturing in South Carolina creates some risk that the industry’s long-term future will be located outside of Washington, but the industry’s exodus from the Pacific Northwest remains a long ways away.

The outlook for manufacturing in the state outside of aerospace is less certain. The wood products industry is important for parts of the state, including Longview and Bellingham. Hit hard by the severity of the housing downturn, wood product manufacturers shed payrolls rapidly, and many such jobs may not return. Homebuilding will re-cover but is never expected to return to its prerecession pace.

ObstaclesConstruction still presents a high hurdle for Washington, but in

coming quarters single-family residential construction will improve. Single-family starts already are off their early 2009 lows, supported by the homebuyer tax credit and improved affordability. Washington has an advantage of a relatively low foreclosure rate, compared with other parts of the West. At the end of last year, Washington’s rate of mortgage foreclosures was less than half the national average.

The outlook for multifamily residential, office and industrial mar-kets is more grim. Each faces very high vacancy rates, particularly problematic in Seattle. Overall, construction employment will hit its nadir in this year’s third quarter and expand moderately there after.

Risks also include state fiscal troubles. The state capital, Olym-pia, continues to grapple with the aftereffects of recession. Recently, a state law was passed and signed that will force more than 25% of state workers to take 10 days of unpaid leave. This comes on top of a 5% decline in state employment since late 2008. The bulk of the job cuts are likely past at this point, but public sector employment is ex-pected to fall an additional 2.5% before it hits bottom in 2011. With state government representing nearly one-quarter of total employ-ment, it will be difficult for Olympia to weather this drag and make the transition to recovery before next year.

— ANDREW GLEDHILL

Washington

33.5

34.0

34.5

35.0

35.5

36.0

30

35

40

45

50

55

60

06 07 08 09 10

Employment services, ths, SA (L)

Average weekly hours worked, #, NSA (R)

Leading Employment Indicators Bottoming Out


3-mo MA

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

10

12

14

16

18

20

22

02 03 04 05 06 07 08 09 10

Wood products manufacturing employment, ths, SA (L)

Single-family housing starts, mil, SAAR (R)

Forest Products Slow Washington’s Recovery

Sources: BLS, Census Bureau, Moody’s Analytics


Driven by improving tourism, Hawaii’s economy has turned the corner in the last six months and is now in recovery. Payrolls have expanded in each of the last three months, in line with the nation’s. Housing starts have also ticked upward. The near-term outlook is for the recovery to trend with the national economy, slightly lagging because of the state’s dependence on domestic tourism. The largest downside risk is the possibility of a stalled recovery in one of Hawaii’s key tourism markets—Japan, Canada or the U.S.

As the housing correction approaches an end, its effects on the state economy are becoming clearer. Price declines were moder-ate relative to the appreciation during the housing boom. While this retention of value is beneficial to Hawaii’s current homeowners, it makes housing more expensive for potential buyers. The high cost of homes relative to incomes will deter in-migration to the state, weigh-ing on long-term growth.

Fiscal problems and responsesThe recent expansion of state government payrolls is unsustain-

able. Hawaii’s deteriorating fiscal situation will necessitate cuts of more than 800 state positions, as outlined in the freshly passed bud-get for fiscal 2011. The downsizing will be a drag on the recovery, as Hawaii has a particularly high concentration of government employ-ment. The effects will be felt the most in Honolulu, where over 75% of state government workers are based.

The newly approved statewide tax on petroleum products will be economically neutral. It is expected to increase gasoline prices by 2.5 cents per gallon; because of Hawaii’s reliance on oil for pow-er generation, electricity costs will go up for consumers and busi-nesses. However, energy costs in Hawaii are already astronomical, and the marginal effects of the tax will be small. The upside is that the boost in tax revenue will help the state government minimize other belt-tightening measures, such as additional job cuts and tax credit caps.

— BEN KANIGEL

Hawaii



-20

-15

-10

-5

0

5

10

07 08 09 10

Visitor arrivals

Total employment

Consumer-related employment

Tourist-Driven Industries Support Recovery

Sources: BLS, State of Hawaii

% change yr ago, 3-mo MA

With construction and energy-related industries contributing little to output growth, the New Mexico economy is still strug-gling to emerge from recession. The lingering effects from the initial blow to goods-producing industries are a large drag on consumption; service-providing employment has fallen at an ac-celerating rate over the last three quarters. However, the housing market is in recovery: Homebuilding is rebounding and a smaller foreclosure pipeline will keep additional house-price depreciation to a minimum.

Worse than expectedThe baseline forecast calls for net job growth to resume during

the second quarter, but this possibility looks less certain amid weak incoming labor market data. Despite increased revenue per avail-able room, tourism industries shed jobs rapidly in April, making our forecast for continued growth during the second quarter appear too strong by comparison. A downward revision to leisure/travel would weaken Santa Fe more than the state; leisure and travel is projected to supply 10% to 20% of overall job growth in the metro area this year.

In addition, initial claims for unemployment insurance remain at a level that is consistent with net job losses of around 1,000 per month, whereas the forecast looks for a net gain of 3,000 jobs this quarter. If jobless filings do not retrench soon, projections for the remainder of 2010 will be softened.

Options for recoveryA rebound in high-tech and alternative energy industries later this

year underlies the forecast for gross state product to rise at a 3.8% annualized rate during the second half of the year, compared with 2.9% nationwide. Solar energy manufacturing firms will drive output growth, while Intel is on track to ramp up production of its new line of processor chips at its Rio Rancho facility.

— ALEXANDER MIRON

New Mexico


-8

-6

-4

-2

0

2

4

0

2

4

6

8

10

12

06 07 08 09 10

Initial unemployment ins. claims (L)

Nonfarm employment, net change (R)

New Mexico Labor Market Healing Slowly Ths, 3-mo MA

Sources: BLS, DOL


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REG

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