District states surpass projected growth

Ninth District Economic Forecast

David S. Dahl | Regional Economist

Published April 1, 1994  | April 1994 issue

Since 1988 the Ninth Federal Reserve District's employment growth has exceeded the nation's. This is not surprising as the decline in defense spending and the commercial real estate glut, major factors curbing the nation's growth, were largely concentrated in East-Coast and West-Coast states.

What is surprising is that during the early 1990s, employment growth in Ninth District states exceeded projections prepared by the U.S. Commerce Department's Bureau of Economic Analysis (BEA). Every five years the BEA prepares regional projections to assist public and private officials in their planning. Projections, released in 1990, were compared to actual growth from 1988 to 1991 in the June 1993 BEA Survey of Current Business. These projections are based on extensions of the states' historical trends in a recession-free economy, where everyone is employed.

District states have done better than their historical trends would suggest because they appear to have been able to adapt to recent and rapid changes in national and international markets.

Much of the district's ability to adapt can probably be attributed to advances in technology, which have increased the district's accessibility to national and international markets. District states are removed from the country's major population centers and district population is highly dispersed within these states, but jet aircraft, for example, have increased travel to and from the district. More recently, advances in telecommunications have made the region less remote, and firms have established credit card processing, telemarketing and insurance claims processing centers in the district states. This helps explain why employment in the services exceeded projections.

Also, as US manufacturing has shifted toward high-technology products where transportation costs are not a significant cost factor, states such as South Dakota and North Dakota, where manufacturing wages are well below the national average, have become attractive manufacturing locations, and in the early 1990s their employment growth in the goods- producing industries was well above projections.

Government policy has also influenced the district's ability to accommodate changes in national and international markets. State and local government education outlays produced a high quality labor force, and the federal interstate highway system significantly increased access to the district.

While government services and infrastructure are part of a state's attractiveness to businesses, so it is with their tax structures. "There's a growing consensus among economists that state and local taxes have a significant effect on almost every other aspect of economic activity— business location decisions, startups, and income growth," according to a recent Business Week article. Montana's and South Dakota's state and local taxes as a percent of personal income are among the lowest in the nation, and these states' employment growth exceeded projections by the largest amount in the district.

Furthermore, changes in some economic conditions benefited district states. The region's tourism business got a boost from the mid-1980s decline in gasoline prices, which helped service employment to surpass projections in all district states. Also, in the mid-1980s the exchange value of the dollar fell and manufactured exports subsequently rose sharply, which helped district goods-producing industries. Moreover, people's tastes change; the desire for a less hectic life style has prompted many to leave California, and in the early 1990s Montana experienced immigration which helped its employment growth to exceed projections.

While the district's services and goods-producing industries adapted and exceeded employment projections, growth in the natural resources industries was below projections, and district states had substantial employment declines in these sectors. Some of these employment declines can be attributed to transitory factors such as the drought in the late 1980s, but others can be ascribed to permanent factors such as environmental regulations, ore depletion and increased foreign competition.

In the earliest stages of the district's development, agricultural, timber and mineral resources largely determined its growth. In terms of the percent of a state product derived from these three industries, North Dakota ranks third, South Dakota fifth, Montana eighth, Minnesota 20th and Wisconsin 24th, indicating the continued importance of these industries.

Meanwhile, the district's ability to adapt and exceed projections did not insulate the region from economic problems; the 1990-91 recession hurt district states, corporations have been restructuring here as elsewhere and cutbacks in defense spending have cost the region jobs.

Looking ahead, with the prospects for economic growth "the best in decades," according to Federal Reserve Chairman Alan Greenspan at a recent congressional hearing, combined with district states' ability to adapt to recent changes in national and international markets, the future bodes well for Ninth District states for the balance of the 1990s.