Charles Steindel

State real GDP growth rates in 2025:Q4 ranged from -8.3% in DC to 3.8% in North Dakota. The plunge in DC was related to the federal shutdown (Maryland also had a marked decline). North Dakota was an outlier on the other side, reflecting a pickup farm output. Most states had sluggish growth rates within a point of the nation’s .5%.

Personal income growth rates ranged from -4.0% in North Dakota to Hawaii’s astronomical 41.5%. Hawaii’s gain was the result of a large settlement payment related to the 2023 Maui wildfire. North Dakota’s loss stemmed from a sharp drop in earnings (compensation plus proprietors’ income). Most states saw gains trailing the national growth rate of 3.4%; with the exception of California the larger states typically saw higher growth rates.

State GDP and Personal Income in Q4 2025

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Joel Prakken

On February 28 the US and Israel launched airstrikes on Iran. In retaliation, Iran closed the Straits of Hormuz. By early April the average US price of regular gasoline jumped to $4.11/gallon from $2.93/gallon in February, an increase of 40%.

To put this price shock in historical perspective, I: defined the real price of gasoline as the price index for personal consumption expenditures (PCE) on gasoline (and other motor fuels) over the price index for total PCE; calculated monthly percent changes in this real price of gasoline; weighted each of those changes by the geometric average of the current and lagged monthly shares of nominal gasoline purchases in total nominal PCE; cumulated the weighted price changes from January of 1960 to the present.

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The resulting series (chart) is the cumulative contribution in percentage points of changes in the real price of gasoline to the cumulative change in the price index for PCE. I’ve grey-barred four earlier episodes associated with geopolitical upheaval in the Middle East and Eastern Europe: the OPEC oil embargo in 1973; the Iranian revolution in 1979; the Gulf War in 1990; and the Russian invasion of Ukraine in 2022.

Of course things could get worse, but so far the current shock (circled in chart) falls well short of the shocks associated with either the OPEC embargo or the Iranian revolution because: (1) in percentage terms, the recent increase in the real price of gasoline is smaller than occurred during those episodes; (2) the share of gasoline purchases in total PCE has since fallen in half.

To wit: following the overthrow of the Shaw of Iran in February of 1979, the real price of gasoline rose uninterruptedly over 13 months by 57%. Furthermore, at the start of that episode, gasoline was 3.7% of PCE. In contrast, given secular conservation of energy, by January of this year gasoline was only 1.74% of PCE. Hence today, to take the same bite out of consumers’ real incomes as after the Iranian revolution, the price of gasoline would have to rise by .57*.0366/.0174 = 120%, or to approximately $6.70/gallon. Using similar math, the price of gas would have to reach approximately $4.75/gallon to produce the same hit to consumers’ budgets as following the OPEC embargo.

To surpass the "shock" following the Iranian revolution, the price of gasoline must reach nearly $7 per gallon

On balance, state labor markets were fairly stable in January. Several states had statistically significant gains in payrolls, led by California’s 93,500 (.5 percent) surge. In other large states Texas was up 40,100 and Illinois 18,000-both increases of .3 percent. DC was the only significant drop; down 5,400 (.7 percent). Most other states had insignificant gains (these amounted to more than 20,000 in Florida and New York). As one might expect, most of the DC job loss was in government.

The only state to experience a statistically significant change in its unemployment rate was Florida, which saw a .2 percentage point gain. The highest unemployment rates were in DC (6.7%), California (5.4%), Delaware (5.4%), Nevada (5.3%), New Jersey (5.2%), Oregon (5.2%), Michigan (5.0%), and Washington (5.0%). Alabama, Hawaii, North Dakota, South Dakota, and Vermont had unemployment rates below 3.0%, with Hawaii and South Dakota’s the lowest, both at 2.2%.

Puerto Rico’s unemployment rate was unchanged at 5.7% and the island’s job count edged down 400.

State Labor Markets in January 2026

Sharmila Whelan

We remain overweight Japanese equities and view the recent market correction as a buying opportunity. The macro backdrop remains constructive: business cycle indicators are firm, corporate profitability is strong, and there are no major systemic risks. Any economic slowdown is likely to be temporary and should be looked through rather than feared.

Business cycle signals reinforce this view (Figure 1). Profit and investment cycles are clearly in an upswing, while borrowing costs remain well contained. The two-year real lending rate, though rising, sits comfortably within its historical range, indicating that the cost of capital is not restrictive. Credit growth is broadly aligned with economic expansion, with signs of strengthening private sector demand. The only soft spot is money supply growth, but even here the recent acceleration reflects a rebound from low levels rather than a structural concern. Overall, the Bank of Japan (BoJ) expects real GDP growth of around 1% annually over the next three years—well above its estimated potential rate of 0.5%.

260408SW1.jpg

Source: Westbourne Research. Note: Green = positive, blue = neutral, and maroon = negative.
The direction the arrows point denote momentum – rising, falling and stable.

**Corporate Strength and Investment Momentum**

Corporate Japan is in robust health. Profitability across sectors and firm sizes has risen sharply, supported by strong demand and improved pricing power. Operating and ordinary profits are at record highs, with broad-based gains across manufacturing and non-manufacturing industries (Figure 2). Compared to the pandemic trough in late 2020, operating profits have more than doubled, reflecting both cyclical recovery and structural improvement.

260408SW2.jpg

Source: Japan Ministry of Finance & Westbourne Research

Importantly, corporate balance sheets remain exceptionally strong (Figure 3). Liquidity levels—measured by liquid assets relative to short-term liabilities—are near multi-decade highs, providing a significant buffer against external shocks. While debt-servicing costs are rising, they are doing so from historically low levels, highlighting how underleveraged Japanese firms remain.

260408SW3.jpg

This is a crucial distinction: unlike other economies that experienced credit-fuelled excesses, Japan’s prolonged period of accommodative monetary policy did not lead to widespread overborrowing. Even at its most accommodative point, real borrowing costs never reached the deeply negative levels seen elsewhere. As a result, corporate balance sheets are well positioned to absorb higher interest rates as policy normalisation continues. With the policy rate still below estimates of the neutral rate, borrowing costs are unlikely to become a binding constraint in the near term.

This financial strength is translating into sustained investment. Private domestic fixed investment has been growing steadily, supported by rising profits and improving demand conditions. While some moderation may occur in the near term, the broader investment upcycle remains intact (Figure 4).

260408SW4.jpg

Source: Haver Analytics & Westbourne Research

Two structural drivers underpin this outlook. First, the rapid adoption of artificial intelligence and digital technologies is accelerating investment in software and IT infrastructure. Second, demographic pressures—specifically a shrinking and ageing workforce—are forcing firms to substitute capital for labour. These forces are reinforcing each other, creating a durable foundation for continued capital expenditure.

Rising labour costs further support this trend (Figure 5). Personnel expenses have increased significantly in recent years as policymakers push for wage growth to achieve sustained inflation. In response, firms are investing heavily in automation and productivity-enhancing technologies to preserve margins. This shift is evident across sectors, from manufacturing to services, and reflects a broader transformation in Japan’s economic structure.

260408SW5.jpg

**A Changing Economic Landscape**

Japan today is markedly different from the economy of the past. Digital adoption has accelerated, payment systems have modernised, and businesses are increasingly integrated into global technological trends. These changes, while gradual, are meaningful and reinforce the case for sustained productivity gains.

The combination of strong corporate fundamentals, structural reform, and technological adoption suggests that Japan is not merely experiencing a cyclical recovery but undergoing a deeper transformation.

**Households and Consumption: A Gradual Strengthening**

Turning to households, the outlook for consumption has improved. While growth is unlikely to match that of emerging markets, spending should expand steadily as the business cycle broadens.

A more accurate measure of consumption than retail sales is the BoJ’s consumption activity index, which closely tracks national accounts data. This index indicates that household spending is stabilising and gradually improving (Figure 6).

260408SW6.jpg

Leading indicators support this trend (Figure 7). Real wage growth has turned positive after a brief decline, supported by easing inflation and rising nominal wages. The labour market remains tight, with policymakers expecting steady wage increases in the coming years. There is also potential for stronger-than-expected gains if labour shortages intensify further.

Equally important is the recovery in private credit demand. As households become more confident, borrowing is beginning to rise, signalling a shift toward the expansion phase of the business cycle. This dynamic—where spending grows faster than income—is typical of an upswing and reflects improving risk appetite.

260408SW7.jpg

**Tailwinds and Headwinds**

Several factors will shape the trajectory of consumption. On the positive side, higher interest rates are improving returns on savings—an important consideration in a country with a large retired population. Fiscal policy also provides support, with stimulus measures expected to disproportionately benefit households.

There are also discussions around reducing the consumption tax, although implementation is likely to be delayed due to legislative constraints. If enacted, such measures would provide an additional boost to spending.

However, there are headwinds to consider. Rising mortgage costs and higher energy prices could weigh on disposable income and discretionary spending. Conventional economic theory suggests that ageing societies are more vulnerable to such pressures, as fixed incomes limit the ability to absorb rising costs.

Yet Japan challenges this assumption. Labour force participation among older individuals remains remarkably high (Figure 8). A significant majority of households aged 60 and above still have at least one income earner, reflecting longer working lives and a more flexible labour market; nearly 70% of households aged 60 and above have at least one wage earner. For those aged 60–69, the figure rises to 88%, while it is 60% for the 70–79 age group and 42% for those aged 80 and above. This mitigates the negative effects typically associated with ageing populations.

260408SW8.jpg

Source: Japan e-stat & Westbourne Research

Moreover, while incomes tend to decline with age, this is partially offset by accumulated wealth and lower expenditure. Many older households have paid off mortgages and face reduced spending on education, transportation, and other variable costs. These factors help sustain consumption even as demographics shift.

Housing illustrates this dynamic clearly. A large majority of Japanese households own their homes outright, with only a minority still servicing mortgages. This contrasts with other advanced economies, where debt burdens remain higher and more persistent.

**Conclusion**

Japan’s economic outlook is underpinned by a combination of cyclical strength and structural change. Corporate profitability is robust, balance sheets are healthy, and investment is supported by both technological innovation and demographic necessity. At the same time, household consumption is gradually strengthening, aided by rising wages and resilient labour force participation.

While risks remain—particularly from higher energy prices and rising interest rates—the overall picture is one of resilience. The current market correction should therefore be seen not as a warning sign, but as an opportunity.

Japan

Japan: A Resilient Cycle Amid Structural Change

Joseph G. Carson

The US economy is currently facing a major energy shock, and the Federal Reserve needs to apply strategies designed for supply shocks. Yet, the Federal Reserve appears to be operating under the belief that they are still dealing with the long-term impacts of a demand shock. The projections from the March 17-18 Federal Open Market Committee meeting suggest a long-term forecast of official rates at 3% and inflation at 2%, resulting in a real official interest rate of 1%. In today's world, that projected rate is much too low.

Although demand and supply shocks may share characteristics like job losses and wealth destruction, the primary distinction lies in their impact on inflation. Demand shocks generally result in a significant drop in inflation, whereas supply shocks have the opposite impact, leading to price hikes from production through to distribution and retail, which in turn causes both headline consumer inflation and core inflation to rise.

Before the two demand shocks of the early 2000s (the tech bubble and financial crisis), the Fed maintained a real longer-run official rate of 2%, sometimes reaching as high as 3%. Following the demand shocks, particularly the financial crisis, the Fed maintained very low and even negative real official rates, after factoring in the stimulative impacts of the quantitative easing policy.

However, those economic conditions are now a thing of the past. Currently, with core inflaiton at 3% and managing with a nominal official rate in the low mid-3% range during the initial phases of an energy shock, it places monetary policy in a precarious situation, as it increases the risk of prolonged higher inflation. Policymakers aim to avoid the policy errors made after the COVID supply shock, but the political climate might leave them with no alternative.

Therefore, it should come as no surprise that the bond market is sensing more inflation.

State GDP and Personal Income in Q4 2025

Charles Steindel

More Viewpoints

To surpass the "shock" following the Iranian revolution, the price of gasoline must reach nearly $7 per gallon

State Labor Markets in January 2026

Japan: A Resilient Cycle Amid Structural Change

Fed Policy Versus Demand & Supply-Shocks