The Many Economies of America
The US is not economically homogeneous, and it is too often treated as if it were. It sounds reasonable to say the US economy is rebounding from the recession. But in reality it is far more complex. The US is comprised of regions that have economic spirits idiosyncrasies all their own. It is unreasonable to say “The US economy is...” anything, because there is no “US” economy.
According to recently released 2013 data, states grew anywhere from -2.5 percent (Alaska) to +9.7 percent (North Dakota). To be fair, North Dakota sits on the Bakken formation and is growing from a very low base. Regardless, it had 2 percent growth in the depths of the most recent recession, and its unemployment rate is now 2.6 percent. Interestingly, lower oil production on the North Slope was the cause of the decline in Alaska’s output. Even regionally, growth rates differ substantially. In 2013, the Rocky Mountain region grew at a 4.1 percent clip, while the Mideast grew at only 0.7 percent.
The coasts of the US have long dominated economic activity, but increasingly, the middle matters. The “middle”—regions that include the Southwest (3.3 percent growth), the Plains (2.5 percent growth), and the Rocky Mountains (4.1 percent growth)—grew far more quickly than either coast. Together, the 3 regions contributed 38 percent of total economic growth; up from 36 percent in 2012. With the exception of Texas, most of the rapid growth in the middle came from smaller economies such as Wyoming, North Dakota, Oklahoma, and Idaho.
This regional economic disparity makes it difficult for the Federal Reserve to create effective policies for the country as a whole. By default, the Fed is forced to set policy based on the economies of the larger states: the ones that do have an effect on the aggregate statistics “US GDP” and “unemployment”. These would be New York, Texas, and California which represent about 30 percent of US GDP, but are not necessarily representative of the US economy as a whole. This creates the potential for economic overheating in some parts of the country, while other locales require continued Fed support.
Regionally, the Fed could declare mission accomplished in the Southwest, but must remain concerned with developments in lagging New England. While portions of the country have recovered, the Fed is forced to set monetary policy to produce maximum employment and stable inflation for the US. It is an impossible task, and it is also one with potential negative consequences for the regions that recover earlier or weather recessionary storms the best. Pockets of the US economy may be allowed to overextend and overheat as the goal of the aggregate is chased with little regard for the local.
Housing prices and inflation are all over the map. The latest Home Price Index (HPI) from the Federal Housing Finance Authority (FHFA) showed prices were flat month over month. But this hid the underlying regional movements. New England saw its prices decline 1.3 percent, but East South Central (Kentucky, Tennessee, Mississippi, and Alabama) homes appreciated 0.6 percent. The FHFA reported that 4 of the 9 census divisions actually saw declines. Year-over-year numbers give an even clearer picture of the divergence. The Middle Atlantic appreciated a mere 1.7 percent, but the Pacific (with the fabled San Francisco housing market) gained 10.7 percent. The US as a whole came in at 5.9 percent.
Because the Fed is mandated to maintain stable prices in the adjudication of monetary policy, inflation matters for policy, but it also varies considerably from place to place. San Francisco’s and Houston prices, putting aside the volatile categories of fuel and food, gained 3.3 and 2.8 percent respectively as the tech and shale booms have driven strong economic growth in both those metros. For perspective, the Fed has stated inflation of around 2 percent is desirable. Two cities within a relatively close distance, Los Angeles and Dallas, have different realities. Prices rose only 1.4 percent in LA, and 1.7 percent in Dallas. While the cities would appear to have similar traits and economic fortunes, two have inflation running well above the Fed’s comfort level and two well below. But there is no need to be concerned; at the aggregate level, the Fed is on target at 2.1 percent.
This poses a problem: the issue of the aggregate. On the surface, the US is growing at a slow clip with relatively benign inflation. But this hides the potential bubbles that are driving growth; the areas that continue to languish are shielded by a focus on the singular “US” number. It is nearly impossible to conduct effective regional monetary policy to circumvent these problems. Economists need to be cognizant of how their policies affect different regions and states, and understand that monetary policy for the “US” is a misnomer.
Excepting proximity and currency, the economies of US States and Regions can have little in common. While the US is a single nation, the US economy needs to be thought of as a collection of smaller, diverse entities. Not a singular whole.