US economy continues to show signs of sustained recovery after 3.7% growth in H2 2013, the best two-quarter pace in almost two years, led by states with surging oil production; bottom-quartile states mostly in South: BMO
February 4, 2014
– U.S. State Economic Scorecard From BMO Economics Finds Strength in Energy-Intensive States and Improvements in Those Hard Hit by the Housing Crisis
The U.S. economy continues to show encouraging signs of sustained recovery after growing 3.7 percent in the second half of 2013, marking the best two-quarter pace in almost two years, according to the annual State Economic Scorecard released today by BMO Economics.
"While remnants of the fiscal drag persist, the housing market is rebounding, business conditions are improving and consumer spending is up as well," said Michael Gregory, Head of U.S. Economics, BMO Capital Markets. "States with surging oil production come out on top. In fact, strong performance is seen throughout the west-Midwest and down through Texas. Bottom-quartile states are concentrated in the south, while states that were hard-hit by the housing crisis are climbing up the rankings."
Business conditions across the U.S. continue to improve, with net exports and consumer spending contributing to the recent upswing in growth. Real exports were up 5.4 percent year-over-year in the fourth quarter of 2013.
"This optimistic outlook is consistent with what we've been hearing from our commercial customers," said Dave Casper, Executive Vice President and Head, Commercial Banking, BMO Harris Bank. "They're confident in the prospects for their own businesses, and that optimism is being reflected in their decision-making when it comes to capital and business investment."
Conditions are extremely favorable in Texas, North Dakota and Colorado, supported by the energy sector. Strong population growth and low bankruptcy rates are helping support business conditions in the Carolinas, and export and population growth has helped push California near the top quartile, after it struggled throughout the recession.
"States in the Gulf area and Eastern Midwest are experiencing softer conditions. Alabama and Kentucky are the laggards, with low growth and sluggish population trends," said Robert Kavcic, Senior Economist, BMO Capital Markets. "Illinois and Wisconsin too are facing tough conditions, with a slowdown in exports holding these states back."
Although December nonfarm payrolls were soft, the labor market in the U.S. continues to improve. Nonfarm payroll growth topped 200,000 in three of the last five months of 2013. The jobless rate has been on a downward trend, reaching 6.7 percent in December, the lowest level since October 2008.
"The energy sector is also playing an important role in the job market, leading to top quartile performances by North Dakota, Texas and Colorado. Minnesota saw notable growth as well, and has one of the lowest jobless rates in the country," said Mr. Kavcic. "Florida is up there too, with employment growth above the national average year-over-year and a jobless rate that has fallen more than 44 percentage points since the depth of the recession."
Nevada had the highest jobless rate in the U.S. at 9.0 percent in the fourth quarter of 2013. Illinois has moved slightly up the list, but job growth was still sluggish at 1.1 percent year-over-year in the fourth quarter.
"The housing market is a driving force of the economic expansion in the U.S. Higher mortgage rates in the second half of the year temporarily put the brakes on growth, but residential construction activity and the overall market should see renewed momentum in 2014," said Mr. Kavcic.
The strongest recoveries have been in states that were hard-hit by the housing downturn. California, Nevada and Arizona are in the top quartile, with California topping the list as Federal Housing Finance Agency (FHFA) home prices have surged 14 percent in the past year.
The housing markets in Florida and Michigan also had a strong year.
"The underperformance we've seen in Illinois seems to be changing, with the state moving sharply up in the rankings in recent quarters. Chicago home prices are indeed improving and we expect this trend to continue," noted Mr. Kavcic. "States in the South are lagging. New Mexico, Arkansas and Mississippi have seen stagnant prices and homebuilding activity is subdued."
"State finances have seen significant improvement since this time last year, although fiscal restraint is still weighing on growth," noted Mr. Kavcic.
According to the National Association of State Budget Officers (NASBO), nominal General Fund spending will increase 3.8 percent for fiscal 2014, while enacted revenue measures will lead to a $2 billion tax reduction.
"The Western Midwest -- including Nebraska, South Dakota and Iowa -- has the most favorable conditions. These states have strong fund balances, negligible pension liabilities and high employment rates on which to fund expenditures," said Mr. Kavcic. "Ohio has moved up the ranks as of late, and is on track to cut personal income taxes by $1.6 billion in fiscal 2014."
Connecticut, Kentucky and West Virginia are underperforming, marked by slow growth in tax receipts, low employment rates and elevated pension liabilities. Illinois has started to address its fiscal challenges, with steps taken to address the pension shortfall.
To view a full copy of the report, visit www.bmocm.com/economics
About BMO Harris Bank
BMO Harris Bank provides a broad range of personal banking products and solutions through more than 600 branches and approximately 1,300 ATMs in Illinois, Wisconsin, Indiana, Kansas, Missouri, Minnesota, Arizona and Florida. BMO Harris Bank's commercial banking team provides a combination of sector expertise, local knowledge and mid-market focus throughout the U.S. For more information about BMO Harris Bank, go to the company fact sheet. Banking products and services are provided by BMO Harris Bank N.A. and are subject to bank or credit approval. BMO Harris Bank® is a trade name used by BMO Harris Bank N.A. Member FDIC. BMO Harris Bank is part of BMO Financial Group, a North American financial organization with approximately 1,600 branches, and CDN $537 billion in assets (as of October 31, 2013).