State GDP

BEA has released new estimates of GDP by state (the release came out at the same instant as the April market labor report, so undoubtedly received even less notice than usual!). State GDP estimates are too a large extent a reworking of the recently released information on GDP industry—national measures of industry output are allocated to states, largely on the basis of information on QCEW information on compensation by industry by state, and then the state industry output figures are cumulated. It is clear there are a lot of potentially questionable assumptions involved in these calculations (most notably, is it reasonable to believe that the relative growth of an industry’s output across states, both in real and nominal terms, is tightly related to the relative growth in compensation?), and one should be wary of putting a great weight on the accuracy of these figures.

Looking at the estimates for the fourth quarter of 2017, both Dakotas are reported to have experienced declines in real output, while New York was unchanged. Texas is reported to have grown at a 5.2% annual rate, or nearly twice the 2.7% national rate of growth. In general, growth was less in the Mideast states than elsewhere in the nation—the reported national contraction in finance weighed more heavily in this area than elsewhere (New York and Delaware were estimated to have been heavily affected by this; the other states in the region much less so). The Plains region was also weak. Aside from the declines in the Dakotas, gains were tepid or lackluster elsewhere. Of course, the surge in Texas put the Southwest region at the top of the growth pack. The Far West was also strong. All states in the area except Hawaii are reported to have had real growth rates in excess of three percent in the fourth quarter.

The story for state growth in 2017 as a whole was roughly comparable to that for the fourth quarter: the Mideast and Plains states generally weaker than the nation, with the western sectors (the Rocky Mountains and the Far West) stronger. In line with all the recent stories about Seattle real estate, Washington was the fastest-growing state in the nation in 2017, with a 4.4% increase. Texas’s 2.6% increase in its real GDP level for 2017 compared to 2016 was in the national top ten, but less eye-popping than its gain in the fourth quarter (though in each quarter of 2017 the annual growth rate in the Lone Star State was said to be higher than four percent). Louisiana, Kansas, and Connecticut are all reported to have had lower levels of real output in 2017 than in 2016.

While calculations of state GDP, particularly fine points of real growth rates (especially by quarter), should be taken with some grains of salt, there is value in taking into consideration the estimate made of the level of a state’s nominal GDP. This, though likely imperfect, gives some idea of the size of a state’s economy and its fundamental ability to meet budget needs. To put some meat on this thesis, consider the continuing discussion of state public pension funding problems. Two states often put front and center in these debates are Illinois and New Jersey. BEA estimates that the annual rate of nominal GDP of Illinois in the fourth quarter of 2017 was $825.6 billion, and the figure for New Jersey was $601.9 billion. These are figures—the flow of current-dollar output—that seem useful to keep in mind when estimates of the stock of pension liabilities are mentioned and the inherent (economic) ability of a state to meet those obligations is brought into question. For example, current estimates appear to be that New Jersey needs to add an additional $3 billion or so a year to put its pension system on a path to amortize currently unfunded liabilities. That amount is about one-half of one percent of the state’s output.