By Crone, Theodore M.
Business Review (Federal Reserve Bank of Philadelphia)
Workers, business owners, and policymakers are typically interested in how the pattern of economic growth in their state compares with growth in other states or in the nation. Often their job prospects, their profits, or their tax revenues are sensitive to the local business cycle. They may want to know if recessions are more frequent in their state than in other states or if their recessions are more severe or last longer. They may also be interested in how well the information they have about the local economy reflects national conditions.
At the national level, we have a commonly accepted definition of business cycles. A committee of the National Bureau of Economic Research (NBER) sets dates for peaks at the end of expansions and troughs at the end of recessions. (1) The economies of the individual states, however, do not march in lock-step with the national economy, and there are no official dates for turning points in state economies. A casual glimpse at state economic data reveals that some states have suffered recessions when the nation did not and some states have avoided recessions when the nation was in a downturn. Using a recently constructed set of coincident indexes for the 50 states, we can more clearly define business cycles at the state level. (2) We can also learn about the course of the national economy from what is happening in the states. For example, by following the states whose indexes are declining we can trace the spread of national recessions across the country. Finally, by calculating an index based on the number of states in decline versus the number expanding we can get an early signal of national recessions.
WHAT IS A BUSINESS CYCLE ANYWAY?
The popular notion of a business cycle and the one used by the NBER dating committee goes back to the work of Arthur Burns and Wesley Mitchell. They identified four phases of the business cycle: an expansion followed by recession and contraction and then a revival of economic activity leading to the next expansion phase. These four phases are commonly collapsed into two periods: a period of growth (revival and expansion) and a period of widespread and significant decline in economic activity (recession and contraction).
The NBER dating committee looks at a number of indicators, such as personal income, employment, wholesale and retail sales, and industrial production, when it sets the dates for peaks in the expansion and troughs in the recession. These data are not all available at the state level. But the new state indexes combine several monthly and quarterly data series that are available for all 50 states--nonfarm employment, average hours worked in manufacturing, the unemployment rate, and wages and salaries adjusted for inflation. The indexes represent a composite measure of the underlying "state of the economy" in each of the 50 states, and we use changes in the indexes to define state business cycles.
To compare business cycles at the state level with national business cycles, we need a common measure of the underlying "state of the economy." For this purpose we have constructed a national index of economic activity based on the same economic series as the state indexes. (See A National Index of Economic Activity, pages 22-23.) Over the past 25 years, all of the monthly declines in the national index have occurred in unbroken time intervals that we can identify as national recessions. The four periods of decline in this index correspond closely to the four official recessions defined by the NBER. When we refer to national recessions in the remainder of this article, we will be referring to these periods of decline in the national index of economic activity.
BUSINESS CYCLES DIFFER WIDELY AMONG THE STATES
The state indexes do not trace out recessions and expansions as clearly as the national index. During state expansions, the indexes sometimes register a month or two of decline that is neither sharp enough nor long enough to indicate a separate state recession. …