Ranking State Recession Risk

The unending drumbeat of comparisons between today’s crisis and the Great Depression has helped to foster a sense of shared apocalypse, a constant reminder that we are all chained to the oars of the same sinking ship. While it is true that a devastating economic depression would eventually sink the entire country, the unfortunate reality is that one part of the boat would go under first.

Last Thursday the Wall Street Journal published an article that broke out TARP handouts (née “investments”) on a state-by-state basis. Not surprisingly, the states that play host to the headquarters of large banks were the biggest winners. New York led all states with roughly $80 billion in TARP receipts, nearly $30 billion more than the next two states combined (North Carolina and California). As lawmakers begin drafting legislation to hand out more than a trillion dollars to other troubled industries, many questions remain unanswered. How should recipient industries be chosen and compared against each other? How should the disbursements be structured? What kinds of demands can/should the government make?

Perhaps most importantly, what is the metric by which the success of this stimulus package should be judged? One might be tempted to throw out macroeconomic measurements like U.S. GDP growth, the unemployment rate or even the stock market. But a 1% growth in GDP will not constitute success if it results from the average of 3% growth in the Southwest and a 2% decline in the Midwest, nor will surging employment in Houston offset the socio-political impact of emptying Detroit. Success will be measured on how the stimulus package helps those regions, states and communities that are bearing the brunt of this recession.

So which states are on the sinking end of the boat? One approach is to look at state GDP by industry, and stack rank the economic risk based on composition. Starting with the industry classifications provided by the Bureau of Economic Analysis these industries can be further grouped into three buckets based on their level of economic risk in the current global environment:

At Risk: Each recession has its particular victims and this one is no different. The Real Estate, Construction, Financial Services and Automotive sectors have been the hardest hit so far. State and Local government spending has also suffered mightily, as elected leaders try to cope with a collapse in property tax rolls and a frozen market for public debt. As in any recession, General Manufacturing has severely retracted, as has the Travel and Entertainment industry.

Neutral: A number of industries are bound/cursed to follow the general direction of the economy, even if they aren’t leading the way into a recession. These include Media, Professional Services, Technology/Software, Publishing, Transportation/Warehousing. This high beta-ness applies to general retail sales as well. Given the confluence of this crisis and the turnover in the national government, consumers are still holding their breath, and will closely follow the recovery of at risk sectors.

Safe: While nearly every industry eventually feels the negative effects of a recession, some industries are relatively insulated by nature. These include utilities, education, health care, mining, oil/gas production and last but certainly not least….federal spending. In a stark contrast to the dustbowl Great Depression, the agricultural sector remains remarkably stable.

Using these classifications, one can create a “Recession Risk Index” to apply to each state based on their industry mix. This Index measures the proportion of a state’s economic output comprised of at risk industries, adjusted for the cushion provided by safe or countercyclical industries. The calculation is straightforward:

(% of GDP made up of “At Risk” industries) – (% of GDP made up of “Safe” industries)

For full data results, click here

The results, displayed on the map below, serve as a directional if not scientific approach for disbursing bailout funds. EVERY state will be dragged down into the abyss of a protracted recession, but those states in red and yellow will sink first and fastest. They have greatest exposure to industry risk and the least amount of protection provided by diversification. If the bailout package is truly meant to be preventative, the approach above might be one worth considering.

As a brief aside on electoral politics, try comparing this map with that of the 2008 presidential election. Economic anxiety can be a powerful political lubricant for squeezing incumbents out the door.

High Risk: > 85th percentile

Moderate Risk: 50-80th percentile

Low Risk: 15-50th percentile

Very Low risk: <15th>