January 2013

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States of Diffusion

cally prudent. Some Euro Area members (countries that use the Euro currency) have exceedingly Samuel Rines high unemployment. In 2011, The Netherlands had an unemployment rate of 4.4 percent. At the other end of the spectrum was Spain with 21.7 percent. Germanys economy grew a fairly impressive 3 percent in 2011; while Spains grew n September 10, 2010, the National Bureau at just less than half a percent. The European Central Bank has the dubious of Economic Research announced that the Great Recession officially ended in the task of attempting to set monetary policy for the lot. It sounds fairly easy, especially considering second quarter of 2009. Good news, but that the ECBs singular mandate is to maintain in many respects, for huge swaths of the counEuro Area price stability, a mandate the ECB try, the recession never ended. The country as a has interpreted to mean inf lation of below, but whole grew 1.5 percent in 2011, but some states close to, 2 percent. Of course, this applies to still had negative GDPs with higher than averthe Euro Area as a whole and not any specific age unemployment. The US economic diversity individual member state. The difficulty arises brings a host of blessings. But it can also distort when, as now, there are tremendous def lationary the strengths and weaknesses of the economy as pressures in some areas, and inf lationary presregional growth rates diverge. sures in other areas. It is understandable that an economy as vast in geography and expertise as the US would have regional differences. States are endowed with different levels of natural resources and have differing climates. Tax rates and structures differ from state to state, and business friendliness is not uniform. In 2011, states grew anywhere from -1.2 to 7.6 percent, and unemployment rates ranged from 3.5 The Euro Area Dilemma percent to 11.7. With any close look at the numbers, the US appears to be very much a patchwork One of the critiques of the European Union is that it is not an Optimum Currency Area, in of economies. which countries benefit more from joining a currency union than from remaining independent. United-Euro In exchange for giving up monetary sovereignty In this respect, the US resembles another well known economic coalitionthe European Union. to an overarching central bank, a member state should enjoy lower trade costs with other memThe EU contains many unique economies with bers and increased macroeconomic stability. But particular specialties and situations. While many have high debt-to-GDP ratios, a few have been fis- it is not all rewards and no cost. There is the

The European Central Bank has the dubious task of attempting to set monetary policy for the lot.

chance a member may join and become uncompetitive due to the exchange rate. Much of a countrys ability to react to economic downturns is also stripped away in a currency regime, as seen in the EU. It may not really matter. The US is not a uniform economy with easy policy measures to spur it to growth. Much like the South of Europe, the Southern US has struggled to find its legs in recent years even with Fed policies that are much more accommodative than those of the ECB. Indeed the US is not so different from the EU when broken into regions and states. Both contain areas that struggle with generating growth and reducing unemployment. While the ECB may have a difficult time initially, there is hope that the EU may eventually coalesce into a singlepseudo economy. The US may be an example of what the EU eventually becomes.

US economy. Size matters. Of the 10 states that posted GDPs above 2 percent, only four were significantly higher: West Virginia, boosted by coal; Texas, with broad based gains in oil and gas as well as manufacturing; North Dakota, driven by oil and gas but broad gains as well; and Oregon, accelerated by strong growth in durable goods. And, while California did not have outrageous growth, its 2 percent accounted for 17.6 percent of the nations growth, second only to Texas at 19.4 percent. The Fed and the Lagging 20 The disparity makes it much more difficult for the Fed to create effective policies for the country as a whole. The Fed may accomplish its unemployment and job creation goal in Texas, for example, but the labor markets in Mississippi and Alabama may continue to lag. Unemployment rates vary spectacularly from state to state, but even by region there are variations. The Pacific region (West Coast including Alaska and Hawaii) had an unemployment rate of 11.0 percent in 2011, but the Fed has almost reached its 6.5 percent goal in the West North Central region where unemployment is 6.6 percent. Only when we aggregate these sub-regions to the regional levelWest, Midwest, South, and Northeast do the variations begin to disappear (though the West still has higher unemployment than the other regions). The four regions had inf lation rates that differed by only .2 percent in 2011 in a range of 1.5-1.7 percent. The Fed can continue to hold down borrowing rates and purchase assets, so long as the broadest metrics do not exceed its limits. The aim is for the US as a whole to have a low unemployment rate. Some areas of the country are likely to be a drag, and others are likely to significantly overshoot to the upside. Even with the diverse and seemingly disparate economy, the US does tend to have a somewhat coherent growth trajectory.

Much like the South of Europe, the Southern US has struggled to find its legs in recent years even with Fed policies that are much more accommodative than those of the ECB.
A Booming Recession Unlike the Euro Area (which seems to always be viewed through the lens of its individual member states), the US economy is viewed as a uniform whole too often. The reality is that, though both grew in 2011, the economy of California differs substantially from Texas in everything from the drivers of its economic growth to its tax codes. States with exposure to energy, durable good manufacturing, and technology have performed well. States without them have tended to lag. North Dakota is a prime example of a state ideally situated in the recovery. Sitting on the Bakken Shale, one of the least populous states posted 2 percent growth in the depths of the recession. The US unemployment rate is 7.9 percent, but North Dakotas rate is 3.1. In 2011, the state grew 7.6 percentby far the fastest in the country. Statistically speaking, the Great Recession never made it to North Dakota. There is little reason to believe North Dakota will slow down significantly in the near future. But it is a very small economy, and it can grow very quickly without making a significant impact on overall US GDP. For perspective, 20 US states grew less than 1 percent in 2011, with Alabama, Mississippi, New Jersey, Wyoming, Maine, and Hawaii all experiencing negative growth. These six states account for about 6.2 percent of overall US GDP. This compares with Texas, which grew at a 3.3 percent clip, accounting for 8.7 percent of the
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The Fed can continue to hold down borrowing rates and purchase assets, so long as the broadest metrics do not exceed its limits. The aim is for the US as a whole to have a low unemployment rate.
States of Diffusion The EU does not really look like a single economybut on further inspection, neither does the US. The US looks much more like a diverse set of economies with little in common except proximity and currency. And it works. Somehow, some way,

the US manages to get along without uniform growth rates, unemployment rates, or tax codes. While there is ample, and justifiable, mocking of the EU for its policies there is a bit of hope on the horizonhope that a bunch of states may in fact be able to get along in economic accord. After all, if the US can have Texas and Maine, why cant the EU have Germany and Greece?
Sources: Eurostat; Bureau of Labor Statistics, Regional and State Unemployment; Census Bereau; Bureau of Economic Analysis; Optimal Currency Areas, Martin Feldstein; New Views on the Optimum Currency Area Theory: What is EMU Telling US?, Francesco Mongelli.

SAMUEL RINES is an a nalyst and Economist at chilton capital m anagEmEnt in houston, tExas. dirEct quEstions or commEnts to: srinEs @chiltoncapital .com ZACH BECk is thE E ditor of chilton currEnts and an opErations spEcialist at chilton capital m anagEmEnt in houston, tExas. for furthEr information on chilton capital m anagEmEnt stratEgiEs and sErvicEs, plEasE contact christophEr l. K napp, cKnapp@chiltoncapital .com for rEprints contact srinEs@chiltoncapital .com www.chiltoncapital .com/currEnts