ByAdam M. Zaretsky
As the current U.S. economic expansion approaches its historic 10th anniversary, it doesn't appear to be winded yet. Of course, periods of slowdown have occurred on several occasions, but all have proved to be "pauses that refresh," so to speak. The same could be said of the economy of the Eighth Federal Reserve District, which for many years served as a leading indicator of the national economy.1 More recently, however, the District has lost this distinction as its growth appears to have fallen behind the rest of the country, at least on paper. If one looks beyond the paper, though, the District economy is as active today as it ever has been and mirrors the national economy quite well.
In the early 1990s, the District economy was at the front of the pack, leading the nation out of recession. The economic recovery came to the Midwest sooner than to other regions of the country, in part because the depth of the recession here was not as severe as it was, say, in the Northeast or on the West Coast. The usual indicators of an economic downturn still existed here—for example, relatively high and rising unemployment rates, and reduced consumer spending and business capital investment—but they turned around quickly in 1991 and 1992. In comparison, parts of the West Coast continued to experience recessionary conditions well into 1993.
The Midwest's quick turnaround gave the District its front-runner status. One indicator of this status, though anecdotal, is that by mid- to late-1994, reports of shortages of certain types of workers were already beginning to crop up around the District. Construction workers, for example, were in particular demand at the time, especially as parts of northwestern Mississippi geared up for the building of riverboat casinos. Additional reports of difficulties in filling positions were soon arriving from other parts of the District and from other occupations and industries, so that by late 1995/early 1996, such reports were almost District-wide. The Eighth District was one of the first regions in the country to experience tight labor market conditions, which would soon become a nationwide phenomenon. Even today, almost six years after their first appearance in the District, tight labor market conditions remain the norm in many District areas, and are still an important note in almost all of the St. Louis District's reports for the Beige Book—a summary of current economic conditions that is compiled just before each Federal Open Market Committee (FOMC) meeting by every Federal Reserve Bank.2
The District lost its front-runner status as other parts of the country entered their expansionary phases with vigor. To almost any economist, the loss of this status is not surprising, especially when comparing different regions of a single, domestic economy. Eventually, the regions' economic growth paths converge so that they begin mirroring each other. That is, other regions of the country caught up with the Eighth District. In fact, a quick glance at some recent economic data shows that the rest of the nation might actually be growing faster than the District.
To investigate this claim further, an economist would naturally want to compare rates of output growth between the nation and District. Unfortunately, this comparison isn't possible for the most current period because state-level output data, Gross State Product, are usually about two years old when they are first released. Therefore, economists must look to the next best economic indicator: employment.
Employment is normally believed to be the "next best" economic indicator because workers produce output, which, to most minds, is the definitive indicator of an economy's performance. Generally speaking, one could infer that higher levels of employment would lead to higher levels of output. Similarly, faster rates of employment growth would lead to faster rates of output growth. Although these are by no means perfect relationships, they can help gauge the District's economic performance relative to the nation's.
As shown in the table below, District payroll employment growth rates, whether total or by major sector, have been slower than national rates since at least the last quarter of 1999. In fact, this trend goes back even further, to the fourth quarter of 1995.3 A natural conclusion from this observation, then, is that the District's economic performance—that is, output growth—has slowed relative to the nation's. And slower employment growth must also mean slower output growth, mustn't it?
If this were all the information that was available, a casual observer, or even a dedicated market analyst, might reach such a conclusion. However, the District's slower rates of employment growth do not exist in a vacuum. Whereas the payroll employment data have been indicating that growth is slowing, unemployment rates in District states and metropolitan areas have been at or near historic lows. And on top of this information is anecdotal evidence about the struggle many firms around the District continue to face finding and retaining qualified employees. Altogether, these tidbits and statistics paint a picture of a thriving regional economy without enough qualified workers available to fill all of its vacant jobs, which are therefore not counted as newly created jobs. Consequently, the slowing that is evident from the District's employment data reflects more of a saturation of the regional labor market than an economic slowdown.
To get behind the scenes, examine the average number of jobs created each month, which paints a slightly different picture. Between 1998 and 1999, this average fell in both the nation and District. In fact, the District number went from about 29,000 per month in 1998 to around 19,500 per month in 1999—an almost 33 percent decline. But during the first half of 2000, the District was averaging about 21,800 new jobs per month—a bounce back of 12 percent. District firms have thus been able to fill some of their vacancies. In the nation, average monthly job growth in 2000 has rebounded 15 percent.
On another frontier—residential construction—the District has certainly held its own over the years. As with the rest of the country, 1999 was a record-breaking year for the number of new building permits issued in the District. And this occurred in an environment of rising mortgage and interest rates! Nonetheless, higher interest rates have had their effect—new permit growth slowed in the latter half of last year. In fact, by the first half of 2000, the number of new permits issued in the District was off by 6.5 percent from a year earlier, while nationwide they were off only 3.7 percent. Construction activity, however, has not waned as much as might be expected, as builders now attempt to catch up with their backlogs. Fewer new permits today, which indicates slower activity tomorrow, should also help to ease the labor strains this industry has been experiencing for many years now.
At the end of the day, the District economy continues to perform as well as the rest of the country, with only a few signs of some slowing from its rapid pace. Rising interest rates have slowed housing sales and new housing construction, but this is happening nationwide, too. District firms' ongoing inability to fill vacant jobs is showing up in the data as slower employment growth, even though there has been some resurgence in that growth this year. Still, these unfilled jobs might be holding back some output production. Unfortunately, the output data to confirm this won't be available for two more years.