Identifying State-Level Recessions

Although the U.S. economy is in its eighth year of expansion since the Great Recession, some states are nevertheless in recession. The timing of states entering an economic downturn often differs from the nation as a whole: the onset and duration of recessions depend on factors that typically differ in each business cycle. A global recession such as the Great Recession is often wide-spread, dampening economic growth across most regions and sectors of the United States. But other downturns may be mote concentrated. For example, in the 2001 recession, the manufacturing sector was hit especially hard.

States with higher concentrations in specific sectors may enter downturns earlier than other states--and may remain in them longer. For example, energy-producing states in the Tenth Federal Reserve District entered a recession in 2015 and 2016 following the 70 percent decline in the price of oil from June 2014 to February 2016. In contrast, most non-energy-producing states experienced moderate but steady growth over the last two years. Energy-producing states have a larger share of employment and output in the oil and gas sector; as a result, declining of sustained low oil prices can decrease exploration and drilling, decrease activity in other sectors, and thereby dampen overall economic activity.

In this article, I use two approaches to determine whether the seven states of the Tenth District are in a recession. The first approach is helpful for identifying regional recessions retrospectively over the last four decades, while the second approach is more helpful for identifying regional recessions in real time. When applied to the seven states of the Tenth District, both approaches indicate that Oklahoma and Wyoming entered downturns in early to mid-2015. The second approach suggests Kansas and New Mexico entered recessions beginning in late summer 2016. On average, recessions in energy-producing states occur more frequently but ate typically shorter than recessions in non-energy-producing states.

Section I discusses some of the measurement issues involved in identifying regional recessions compared with national recessions. Section II uses an algorithm to identify the timing and duration of past regional recessions. Section III develops a formal model that categorizes state-level economic activity into two regimes--low growth/recession and high growth/expansion. This approach allows me to identify in real time when states slip into recession.

I. The Challenges of Identifying State Recessions

Identifying economic turning points for individual states is challenging for a number of reasons. First, while the National Bureau of Economic Research (NBER) Business Cycle Dating Committee identifies national recessions, neither it nor any other comparable organization dates state-level recessions. Moreover, the NBER has no fixed timeline for determining recession dates and often announces the beginning of a recession a year or more after it occurs. Second, timely state-level economic indicators are limited. The broadest measure, gross state product, is only available quarterly and is published with a lag of around six months (versus one month for advance estimates of U.S. gross domestic product). Similarly, quarterly measures of state-level personal income are published with about a three-month lag. Although monthly labor market indicators are available at the state and metropolitan level from the Bureau of Labor Statistics' Current Employment Statistics and Current Population Survey, it is not obvious which set or combination of indicators would be best to monitor and summarize state-level economic activity.

One possible alternative is the Federal Reserve Bank of Philadelphia's state coincident index, a timely and comprehensive measure of each state's economic activity. The Philadelphia Fed's coincident index captures each states current economic conditions by combining four state-level indicators--nonfarm payroll employment, average hours worked in manufacturing by production workers, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state's index is set equal to the trend of its real GDP. Each month, the Bank releases an updated version of each state's entire index that also includes the most recent month for which data are available. These regular updates are important, because the underlying state-level data can be subject to substantial revision.

Changes in the coincident index suggest that several states in the Tenth District experienced declining economic activity over the past year. Map 1 shows that the energy-producing states in the District, namely Oklahoma, Wyoming, Kansas, and New Mexico, accounted for four of six states in the entire country where economic activity declined from September 2015 to September 2016 (the other two states were North Dakota and Louisiana, also energy-producing states). Map 2 shows that the pace of decline accelerated in some states beginning in the middle of 2016. From June to September 2016, economic activity declined faster in Kansas and New Mexico than in Oklahoma or Wyoming.

Growth in each state's index may be a useful indicator for measuring state-level business cycles. However, growth alone is not enough to identify recessions. The next two sections discuss two approaches for identifying state-level recessions. I first use the Bry-Boschan method, as it is a standard and simple approach for identifying turning points in economic indicators. The Bry-Boschan method--like the NBER--typically dates recessions with a substantial lag. …

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