Southwest Economy, Issue 5, September-October, 1997

federal reserve I SSUE 5SEPTEMBER/OCTOBER 1997 thwe u s o tt ss e c y onom bank of dallas ROLLING RsECESSIONS EGIONAL ECONOMIES ARE growing across the nation, lead- ing some to observe that this shared national expansion differs considerably from the traditional seesaw of regional downturns and upswings. However, this perception about the past is based on the relatively recent experience of the R 1980s and early 1990s, in which some regions contracted while others expanded. Before then, regional economies tended to move together. What contributed to this out-of-sync behavior? Does the situation differ today? A continuation of this pattern of regional disparities could have significant implications for the national business cycle. Just as the nation is composed of regions, the national business cycle can be thought of as the sum of regional business cycles. If parts of the nation expand while others contract, the nation as a whole may have INSIDE less severe recessions and less volatile business cycles. The current U.S. expansion, along with the expansion of the 1980s, has been ex- Is the Fed Slave to a ceptionally long, far exceeding the four-year average for post–World Defunct Economist? War II expansions. One contributor to this phenomenon may be diverging regional business cycles. Corporate Financing Many factors can cause regional business cycles to differ. For ex- And Governance: ample, national shocks may affect regions differently, due to differ- An International Perspective ing tax and regulatory environments or combinations of labor and capital. Regional cycles are also influ- Chart 1 economic activity as gross domestic enced by shocks specific to the region, Cyclical Components of Real product or the unemployment rate. At such as droughts or regional regulatory Personal Income of 12 Federal the state or Federal Reserve district changes. Reserve Districts, 1953–91 level, a narrower range of indicators is One particular explanation for di- Percent available, such as personal income and verging regional cycles gained promi- 10 employment. nence in the 1980s—“rolling recessions.” 8 The cyclical components of personal Analysts coined this term to describe a 6 income in the 12 Federal Reserve dis- phenomenon in which some industries 4 tricts are shown in Chart 1. The picture experienced downturns in reaction to 2 reveals that the cyclical components of shocks, or changes in the national econ- personal income tend to move together, 0 omy, while others continued to do well. increasing and decreasing at about the –2 These rolling recessions may have led same time, although not perfectly and –4 to divergent regional cycles as regions not at all times. To the extent the cycles –6 with varying output mixes reacted dif- ’53 ’57 ’61 ’65 ’69 ’73 ’77 ’81 ’85 ’89 are similar, this suggests that regional ferently to each industry downturn. San Francisco St. Louis Cleveland cycles are responses to changes in the While industry downturns may have Dallas Chicago Philadelphia national economy, rather than region- Kansas City Atlanta New York influenced the regional economic differ- Minneapolis Richmond Boston specific changes. As can be seen in ences of the 1980s and early 1990s, Chart 1, the degree of correlation of other factors were also at work, such as economic activity among the 12 Federal differences in taxes, local construction Reserve districts was strongest for the cycles and labor costs. These factors a decade or more. For example, over a cycle associated with the run-up to the may become relatively more important long period, employment numbers will oil price shock of 1974. in future regional differences, as in- trend upward with a growing popula- During the 1980s, however, there creasingly similar regional output mixes tion. Elimination of both the short-term were signs that the districts’ cycles were should lead to more similar responses ups and downs and the long-term becoming less synchronized, to a de- to industry shocks. trends leaves the cyclical components, gree not seen in earlier postwar which show where the economy is decades. While there were a few years relative to where it would be if it grew before the 1980s in which some regions Business Cycles at a nice, steady pace over the years. diverged, the disparities were not as There are a number of ways to pronounced or as frequent. Chart 2 There are two basic ways of looking divide the nation for the purpose of shows the same pattern for employ- at the business cycle. The one underly- studying regional cycles, such as at the ment. It is difficult to say how close the ing most media discussion focuses on state or census-region level. One inter- regional cycles are today. While regions absolute increases and decreases in eco- esting approach is to look at regions across the country are growing in terms nomic activity. For example, an increase that form or encompass clusters of eco- in many indicators, such as employment nomic activity, which was the basis for and gross domestic product, over many how the country was divided when the months is considered an expansion. Federal Reserve districts were deline- Chart 2 Cyclical Components of Conversely, a decline in these indicators ated in 1913. One might expect to find, Nonfarm Employment over many months is regarded as a con- within each area of concentrated eco- Of 12 Federal Reserve traction. nomic activity, a common business Districts, 1953–93 An alternative definition of the busi- cycle that could differ from that of Percent ness cycle, which this article uses, is another location. Although the econ- 4 grounded not in terms of absolute omy has evolved since 1913, this divi- 3 increases and decreases in economic sion seems reasonable for an analysis of 2 activity but in terms of fluctuations regional business cycles. around a trend. When economists look 1 at economic indicators, they first ex- 0 clude the seasonal patterns, such as the Do Regional Cycles Just Reflect –1 increase in holiday retail sales, to get a –2 more accurate picture of how the econ- National Industry Cycles? –3 omy is doing relative to other times of –4 ’53 ’57 ’61 ’65 ’69 ’73 ’77 ’81 ’85 ’89 ’93 the year. When looking at business As already noted, one can think of San Francisco St. Louis Cleveland cycles, economists go a step further, the business cycle in terms of fluctua- Dallas Chicago Philadelphia eliminating not only these short-term tions in economic activity around the Kansas City Atlanta New York Minneapolis Richmond Boston changes but also the trends—changes trend. At the national level, economists that occur over a long horizon, such as typically focus on such indicators of Page 2 Southwest Economy September/October 1997 of absolute measures, they may still dif- Chart 3 before the 1980s, such as the oil price fer in terms of movement around their Cyclical Components of changes and defense cuts of the 1970s, trends. Unfortunately, the econometric Real Personal Income were not accompanied by widely vary- techniques used to obtain cyclical com- Of the Dallas and Boston ing regional responses, in spite of a ponents do not allow reliable estimates Districts, 1980–91 greater degree of regional industry con- for more recent years. Percent centration. The cause of this increased The divergence in regional cycles in 3 responsiveness to industry shocks in the 4 the 1980s may have been caused by a 2 Boston 1980s is still unknown. series of changes in the national econ- 1 omy that had varying effects on regions 0 due to their differing regional output –1 Other Regional Influences Dallas mixes. This is consistent with the notion –2 of rolling recessions—different indus- –3 The series of national shocks to tries experiencing downturns at differ- –4 the manufacturing, energy and defense ent times—that permeated U.S. policy industries is clearly reflected in move- –5 discussions in the 1980s. For example, a ’80 ’81 ’82 ’83 ’84 ’85 ’86 ’87 ’88 ’89 ’90 ’91 ments in Federal Reserve districts’ per- manufacturing downturn hit the Mid- sonal income and employment. Regions west in the early 1980s. Then the oil responded differently to these shocks price drop of 1986 hurt the oil patch, because they had differing degrees of and defense cuts stung California and defense spending caused the defense dependence on these industries. How- New England in the early 1990s. In industry to decline. This national shock ever, other region-specific factors also addition, these downturns caused some was clearly a source of weakness for influence regional cycles. migration of workers, which in turn New England and some other areas of For example, a change in federal tax helped fuel other regions’ expansions, the country, such as California. Dallas laws affects states differently, depending such as those of Texas and California in Fed economist Lori Taylor studied em- on state tax structure. States may choose the early 1980s. ployment sensitivity to defense spend- from a variety of levies to raise revenue, Studies of rolling recessions’ effect ing by state, based on each state’s such as sales, income, property and busi- on regional economies in the 1980s industrial mix and each industry’s sensi- ness taxes. Since some of these taxes centered on absolute increases or de- tivity to defense spending.1 She found are not deductible against federal increases in regional indicators such as that Connecticut was the most defense- come taxes, sensitivity to changes in employment, gross state product or sensitive state because of its high con- federal income taxes will depend on personal income. However, looking at centration of transportation equipment the state tax structure. In addition, these fluctuations around the trend, the same manufacturing, particularly shipbuilding.

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