Rise in Unemployment May Signal State Recessions

by | August 27, 2019 AT 10:09 AM

By Tim Henderson

National recession fears have intensified this month amid growing concerns about the U.S.-China trade war and the appearance of a normally reliable recession warning in the bond market that sent stocks tumbling.

A significant spike in the national unemployment rate would be another ominous sign. That hasn’t happened nationally since the Great Recession, and almost certainly would signal a new recession, which is generally defined as declining GDP for at least two consecutive quarters.

Since 1970, when the unemployment rate rises at least a half a percentage point above its lowest point over the previous 12 months, the national economy is almost always — 97% of the time — in a recession, according to a recent report by Claudia Sahm, an economist at the Federal Reserve.

The Brookings Institution applied the Sahm standard to instances when the U.S. unemployment rate goes up by at least 0.4 percentage points and found that there is a 76% chance that a recession has arrived.

The relationship between unemployment and recession is more complicated at the state level, however. Nevertheless, several states may be straying into dangerous territory.

While at the national level an unemployment spike of half a percentage point almost always equals a recession, the same bump for a state means there is only a 50% chance that a recession has started, according to Stateline’s application of the Sahm standard to state unemployment figures since 2005. That’s when the U.S. Bureau of Economic Analysis began tabulating quarterly GDP by state.

Using that standard, there is a 50% chance that Minnesota and North Carolina are currently in a recession. It’s not yet possible to confirm that, however, because state GDP numbers are only available through the first quarter of 2019.

The disconnect between unemployment and GDP in another state, Colorado, illustrates the uncertainty: Colorado’s unemployment rate has risen several times in the last year, but GDP figures show its economy did not contract at those times.

The most recent state recessions, in late 2017 and early 2018, occurred in Alaska, Delaware, New Mexico and West Virginia.

In North Carolina, the unemployment rate is 4.2% as of July, up from 3.7% in December and higher than the U.S. rate, which is 3.7%. But Jeff DeBellis, director of economic and policy analysis at the North Carolina Department of Commerce, said that despite the recent spike “we do not see signs of a greater recession risk for North Carolina than other states.” DeBellis said North Carolina has not experienced any mass layoffs or increases in unemployment claims.

In Minnesota, the unemployment rate is 3.4%. That’s up from a recent low of 2.8% in October, but state economist Laura Kalambokidis said she doubts that a contraction is “imminent” in her state, either.

“Our labor market appears to be slowing, but demand for labor remains very high here,” Kalambokidis said. “Job vacancies have risen to very high levels. That makes it hard to conclude that an actual contraction is imminent.”

Kalambokidis said states with higher-than-average unemployment rates, such as West Virginia, where the rate is 4.7%, would be more likely candidates for contraction.

Brian Lewandowski, associate director of business research at the University of Colorado Boulder, said his state’s unemployment increase — from a recent low of 2.9% in March 2018 to a high of 3.7% in February 2019 — might have been a sign of economic strength, rather than weakness.

Colorado has drawn movers from other states who are seeking jobs in its booming business services sector, Lewandowski said. He also noted that housing in Colorado is less expensive than it is on the coasts.

“Some people had dropped out of the labor force since the Great Recession, people who were maybe a little older or with outdated skills,” he said. “When they see such a tight labor market and wages rising, they see an opportunity to reenter.”

The result, Lewandowski said, is an uptick in an “absurdly low” unemployment rate.

Hawaii, in contrast, has readily acknowledged that its tourist-dependent economy is in the doldrums: The number of Asian visitors has declined, and those who are coming are spending less. Recent floods and volcanic eruptions in the state haven’t helped.

Its current unemployment rate is 2.8%, up from a recent low of 2.3% last year.

“Hawaii’s slowdown is becoming more entrenched. Better get used to it,” the University of Hawaii warned in a May forecast that predicted rising unemployment through 2021.

But there are hopes for a rebound, said Carl Bonham, director of the Economic Research Organization at the University of Hawaii.

“We have seen some retreat from the jumps in the unemployment rate,” Bonham said. “At least for now, we think Hawaii is in a slow growth phase. Very slow.”

The Hawaii Department of Business, Economic Development and Tourism predicted last week that Hawaii’s GDP for the year will rise 1.1%, down from the 1.2% it forecast in May.

Michael Belsky, director of the Center for Municipal Finance at the University of Chicago, said states should start thinking ahead when their unemployment rate rises. Prudent preparation might include building up reserves, “stress tests” to plan for dramatic drops in revenue and some preliminary cost-cutting.

“One of the biggest sources of revenue for states is income tax and sales tax, and when people are unemployed that’s not coming in,” Belsky said. “You have to plan for that, so you’re not shocked into making across-the-board cuts that can hurt your chances of coming back.”

Stateline | Nonpartisan, Nonprofit News Service of the Pew Charitable Trusts | editor@stateline.org  |  @pewstates