Charles Steindel

State real GDP growth rates in 2023:4 ranged from Nevada’s 6.7% to Nebraska’s  0.2%. Growth tended to be weaker in the center of the nation, with agriculture being a major drag.

The distribution of personal income growth was comparable to real GDP with Nevada again on top with a 6.7% growth rate, while Iowa and North Dakota tied for last with each having a growth rate of 0.8%. Over the last few years, the extension and withdrawal of federal transfers connected to the pandemic often grossly distorted movements in state personal income, and the ranking of states. This has become less evident in recent quarters, though the range of annual growth rates for transfers in 2023:4 did run from 8,1% in Mississippi to -5.0% in Arizona. The large drop in Arizona certainly had a visible effect on its overall income growth; Mississippi’s large gain was less meaningful, since other income components there also grew substantially.

State GDP and Personal Income in Q4 2023

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Sharmila Whelan

Globalisation is not going backwards. Figure 1 is a case in point. The chart illustrates the remarkable growth in global exports. By the end of 2023, global exports had increased 459-fold compared to 1948, reaching an impressive $24 trn. The global financial crisis (GFC), the US led trade war, the pandemic, the cost-of-living crisis, China’s economic malaise and conflicts have disrupted rather changed the trend. Again while global trade-openness, calculated as the sum of global exports and imports expressed as a percentage of world GDP, has been volatile, there is no sign of trade openness reversing decisively. Global trade openness has averaged, 46% since the GFC compared with 41% in the decade prior to GFC. 

241216W1.jpg

Source: Westbourne Research and Haver Analytics

Figure 1 reinforces two points. First, countries can de-risk but not decouple. Economic interdependence, the powerful idea on which the post-World War II international economic architecture was built, has been executed so efficiently that today economic interdependence is unavoidable, even if some global leaders and policy makers think otherwise. Second, companies are motivated by profits, which means they will gravitate to places with comparative advantages to exploit and markets for their goods and services.

**Changing global trading patterns**

Trading patterns shift continuously. As illustrated in Figures 2 and 3, these changes have unfolded over decades, rather than years. The U.S., Japan, and Europe have seen their share of global exports steadily decline. This erosion of dominance reflects the maturation of their economies, aging and more expensive workforces, and a gradual loss of competitiveness. Rising labour costs and structural changes have increased reliance on imports from cheaper manufacturing hubs while steering these economies toward services-oriented structures, reducing their dependence on exports and manufacturing.

America’s share of global exports has been declining since 1949. Then the US accounted for almost 26% of global shipments, compared with 8.6% in 2023. Europe’s share today is 30% down from a peak of over 43% in 1972 and Japan’s 3% compared with over 10% in 1986. As manufacturing moved offshore to cheaper production cost bases, advanced economies share of world exports in aggregate has fallen from 83% in 1971 to 57%.

241216W2.jpg

Asia has been the biggest beneficiary of structurally driven world trading pattern shifts and remains at the heart of the horizontally integrate global manufacturing supply chain. (Figure 3).

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Asia’s domestic market is growing. Figure 4 which shows shares of global imports across select countries and regions is illustrative. The EU not the US remains the largest export destination market among advanced economies, accounting for 29.2% of global imports in 2023 compared with America’s 12.8%. Granted the EU has a larger population, 449m compared with America’s 333m but per capita incomes are notably lower. More pertinently, Asia’s was already by the end of 2023 importing as many goods from the rest of the world as Europe.

241216W4.jpg

Asia is expected to drive incremental growth in global import demand. This is despite sharp disparities in affordability, a crucial factor in determining market size. The region has a lot of catching up to do. US per capita income at US$82715 in 2023 was well above peer and emerging market levels. In 2023 per capita incomes in Europe were 52% of American, Asia 30%, China 15% and India 3%. However Asia’s middle class and purchasing power are growing rapidly. Since the GFC, per capita incomes in Asia have risen cumulatively by 94%, with China experiencing a 230% increase and India 128%.

**The changing nature of globalisation**

Profit-seeking entrepreneurs will continue to seize opportunities wherever they arise, undeterred by geographical boundaries or political regimes. Globalisation is not reversing, but it is evolving. Geopolitics and protectionist trade and investment policies are reshaping its nature.
Businesses and investors are adapting creatively, transforming the landscape of globalisation itself. While horizontal integration has defined globalisation up to now, the future points toward vertical integration as the dominant strategy. This shift reflects efforts by non-financial corporates to mitigate the risks posed by geopolitical tensions by reconfiguring operations.

For example, Tesla has fully vertically integrated its Shanghai electric car manufacturing plant to bypass U.S. sanctions. Similarly, AstraZeneca, the Anglo-Swedish pharmaceutical giant, has devised plans to carve out its China operations and list them separately in Hong Kong to shield the company from geopolitical risks. These examples highlight a broader trend: firms are beginning to dismantle horizontal supply chains and create location-specific, vertically integrated manufacturing and service units. The pandemic was a catalyst, geopolitics and competition are the accelerators. Expect more companies to adopt this model, replacing traditional global supply chains with localised and self-contained operations tailored to specific regions.

Localisation will have costs, which will be borne by everyone. For companies it will probably mean higher production costs and slower scaling up and specialisation which in turn carries the risk of weaker innovation. For consumers, especially in aging and mature countries it means more expensive goods and services, a negative for socio-economic disparity and economic growth.  

Globalisation: Same, same but different

Joseph G. Carson

Due to the repetitive nature of economic and financial cycles, analysts frequently encounter phases that resemble previous cycles. At the December FOMC meeting of 1999, twenty-five years ago, the Fed research staff delivered a provocative presentation, arguing that parts of the equity market (mainly tech and e-commerce) had showed characteristics of a "bubble". How might policymakers respond today if the Fed staff made a similar argument, considering the aftermath of the tech bubble burst 25 years ago and the fact that many equity price metrics now indicate even more extreme valuations?

**Will History Repeat?**

The notion that predicting an equity bubble before it collapses is impossible has been debated for a long time. Yet, in today's context, can this remain valid when there is clear evidence of fundamental valuations defying basic principles of gravity, along with cases where lower valuations were linked to a bubble?

It's important to mention that Fed staff cautioned policymakers about an equity bubble in the late 1990s. At the December 1999 FOMC meeting, the Fed's director of research noted that "the market has defied our notion of valuation gravity by posting an appreciable further advance." The research director provided an example of a new IPO to illustrate the market's speculative nature and mentioned that analysts were disregarding fundamental analysis because the only thing that seemed to matter was "momentum." He then doubted whether an additional tightening of 75 basis points in the staff forecast would be sufficient to "halt the financial locomotive".

From a market perspective, 2024 differs from 1999. In certain instances, equity valuations today are as high, if not higher, than they were in 1999. For instance, the S&P price-to-sales ratio is over 3 today, compared to 2 in 1999, which at that time was a record. This higher ratio indicates even greater investor optimism or exuberance, suggesting potential fundamental instability as people are paying excessively for future sales and cash flow. Although the IPO market does not exhibit the speculation seen in 1999, there are other signs of market speculation in cryptocurrency and private credit.

Additionally, there is a significant contrast between the monetary and fiscal policies of 2024 and those of 1999. In 1999, monetary policy was being tightened, whereas recently, policymakers have reduced official rates at the last two meetings and signaled further easing. At the same time, fiscal policy was restrictive in 1999, with the US achieving a budget surplus, which stands in stark contrast to the current large budget deficit that boosts domestic spending and liquidity.

Drawing from past experiences and research, it would not be big surprise if the Fed staff made a presentation at the December 2024 FOMC meeting similar to that of December 1999. Essentially, market speculation has reached "bubble-like" levels, skewing resource allocation, pushing the wealth-to-income ratio to unprecedented heights, and posing a major economic threat should there be a significant drop in the equity market. The main question is whether policymakers will heed this warning.

Policymakers have consistently made official rate decisions with a focus on employment and inflation goals, often neglecting their financial stability mandate. It's no coincidence that the recessions since 2000 (excluding the pandemic-driven recession) were triggered by financial imbalances. Any decision to ease policy, or even a promise to ease later, would increase the risk of a harder landing that might be difficult to cushion, unlike in 1999 when the US operated with a fiscal surplus.

Regardless of the actions policymakers decide on, they can no longer ignore a speculative asset price cycle like they did in December 1999. Policymakers are fully aware of the economic and financial losses that come with asset price imbalances. When the tech bubble burst three months later, the Fed spent the next three years lowering official rates to lessen the economic impact of the financial crisis. After the housing bubble burst, the process took even longer. Currently, the Fed is confronting a larger and more extensive financial bubble, with no fiscal cushion to help navigate a severe recession.

Fed research staff predicted an equity bubble 25 years ago. What actions will policymakers take if they foresee another one?

The Federal Reserve Bank of Philadelphia’s state coincident indexes were again soft in October.. In the one-month changes, South Dakota led with a .67 percent gain, and Connecticut, Ohio, and Delaware had increases above .5 percent. However, the indexes for 13 states declined, with South Carolina and Michigan both down .4 percent (Michigan saw some pronounced retrenchment in autos, and South Carolina would have been hit by the Boeing strike). Over the 3 months ending in September, 12 states were down, with South Carolina (down 1.4 percent) and Massachusetts (off 1.1 percent) once again at the bottom. Connecticut was yet again at the top, with a 1.7 percent increase, with Over the last 12 months, 3 states were down, and 10 saw increases of less than 1 percent. South Carolina’s index was off by 1.2 percent. Arizona had a 4.9 percent increase, and Connecticut was up 4.7 percent, with 7 others up more than 3 percent.

The independently estimated national estimates of growth over the last 3 months (.55 percent) and 12 months (2.55 percent) appear to be roughly in line with the state numbers.

State Coincident Indexes in October 2024

State labor markets were little-changed in October. The Boeing strike, and Hurricane Milton, triggered statistically significant declines in payrolls in Washington and Florida. There were no other statistically significant changes, not even in North Carolina (which did have a insignificant drop). Nonetheless, the sum of payroll changes across the states was -76,400, a clear amount lower than the independent national change of 12,000.

Three states had statistically significant declines in their unemployment rates in October, and one  showed an increase.  None of the changes were larger than .2 percentage point.  The highest unemployment rates were in DC (5.7%),  Nevada (5.7%), California (5.4%), and Illinois (5.3%). No other state had rates as much as a point higher than the national 4.1%. Alabama, Hawaii, Maine, Mississippi, Nebraska, New Hampshire, North Dakota, South Dakota, Vermont, Virginia, and Wisconsin had rates of 3.0% or lower, with South Dakota at 1.9%.

Puerto Rico’s unemployment rate dropped to 5.4%--lower than both DC and Nevada, and matching California--while the island’s job count grew by 2,300.

State GDP and Personal Income in Q4 2023

Charles Steindel

More Viewpoints

Globalisation: Same, same but different

Fed research staff predicted an equity bubble 25 years ago. What actions will policymakers take if they foresee another one?

State Coincident Indexes in October 2024

State Labor Markets in October 2024