Digging Deeper Into GDP

Posted: Nov 20, 2015 12:01 AM
Digging Deeper Into GDP

Just over a decade ago, we discovered the U.S. Bureau of Economic Analysis' resources for digging deeper into GDP, including applications that could break the nation's GDP down by both industry and state.

Back then, the state-level Gross Domestic Product data went by the name of "Gross State Product", or GSP, which had a major deficiency, as updates for the state level data for a given quarter were released many quarters after which they actually occurred.

That began to change in 2012, as the BEA began developing more timely updates for state-level GDP data by industry, where they seek to release data within 30 days of the release of the third estimate of national-level GDP after the end of a given quarter.

The BEA is still working toward that goal, with the new state-level GDP data, now identified as "Quarterly Gross Domestic Product By State", coming out within 2-to-3 quarters of the end of the quarter to which it applies. The most recently available data at this writing spans the period from the first quarter of 2005 through the fourth quarter of 2014, with the next data release covering the period through the second quarter of 2015 expected to be released in December 2015.

To show what kind of analysis is possible with GDP data detailed to the state level, we're going to compare the performance of the entire U.S. economy, covering all industries, with that of the state of Kansas for the period from the first quarter of 2006 through the fourth quarter of 2014.

Given the difference in the sizes of the respective economies of the entire U.S. and the state of Kansas, the way we'll do that is to compare the real, inflation-adjusted growth rates of GDP at both levels. Our first chart shows each quarter's annualized growth rate over our chosen period of interest, which allows us to fully cover a period of time spanning two full years before the onset of the so-called "Great Recession" with the available data.

In the chart above, we've indicated the quarters in which Kansas' economy experienced negative real GDP growth with the red-shaded vertical bands. The U.S.' real economic growth is shown as the dotted line, while Kansas' is shown as the solid blue line.

Overall, we see that Kansas' economy generally outperformed the economy of the U.S. in the period preceding the Great recession. Beginning with the Great Recession however, we see that Kansas' economy has generally followed the overall trend of the entire U.S. economy, with some notable exceptions.

The most significant deviation between the two occurred in 2012, where Kansas' real economic growth significantly lagged behind that of the U.S. economy as a whole.

Using the state's GDP data broken down by major industry, we quickly determined that the state's agricultural output was very negatively impacted during this period. A simple search of contemporary news sources quickly confirmed why: a multiyear drought that began in earnest in the fourth quarter of 2010 sharply intensified in 2012.

The chart below shows how Kansas' real economic growth was impacted by the drought, where we calculated the state's real GDP growth rate without the contribution of its agricultural sector, shown as the light blue line.

The BEA's state-level GDP data confirms that Kansas' economy was negatively impacted by drought in 2012. Believe it or not, the National Weather Service also recognized the drought's negative economic impact contemporaneously:

The drought has had a detrimental impact on agriculture and crops across the region. Due to a very dry fall, the winter wheat crop is already suffering. According to the Kansas Agricultural Statistics Service from late November and early December, 25% of the winter wheat across the state was in poor to very poor condition, 46% in fair condition, and only 28% in good condition; only 1% was rated excellent.

Of course, livestock suffered terribly. Livestock producers were forced to move their animals off of pasture early because the grass was gone and the water supply was depleted. As of September 10th, farmers and ranchers with cow/calf operations had been feeding hay for a couple of months. They were also forced to either deplete part of their herds or purchase high-priced feed. No doubt, the economic ramifications were significant. Cash flows on almost all livestock operations were severely impacted and in many cases operators with cattle were forced to sell livestock early which, in turn, resulted in less income. Those who held on to their cattle had to buy expensive feed which also resulted in lost revenue. Furthermore, the drought has not only had a negative impact on agriculture and crops, but also has greatly reduced water levels on reservoirs and rivers, with many areas reporting very low and in some cases record low stream flows. This has adversely affected recreational boating.

The effects of extreme drought that year would also negatively impact the state's non-durable goods manufacturing sector, as mills in the state would have less grain to process into flour, particularly in the quarters following the main harvest, which is also evident in the detailed state-level GDP data.

But we also noticed that durable goods manufacturing also experienced a downturn in that period. As it happens, Kansas' economy was also negatively affected in 2012 and 2013 by a downturn in its aerospace and defense industrial sector, which resulted in significant layoffs within the state. In our chart below, we've shown what Kansas' real GDP growth rate was for all its other industries, less its agricultural and manufacturing industries:

What we find is that after accounting for the negative economic contributions of just these two industrial sectors, the gap between Kansas' real economic growth rate and that of the U.S. as a whole narrows to fall within a range that might be expected from simple statistical noise.

As for what prompted the contraction in Kansas' manufacturing industry, we can directly identify the influence of a significant reduction in aircraft orders from the industry's worldwide customers that disproportionately affected Kansas' aviation industry and also a reduction in defense spending on the part of the U.S. federal government, which came as part of the budget sequester that President Obama proposed for the Budget Control Act of 2011, making the downturn for aerospace and defense industries actually national in scope.

The remainder of the downturn in Kansas' economic growth in 2012 can otherwise be attributed to two very short term factors that took place in the first quarter of 2012. First, the first quarter of 2012 in Kansas was unusually warm, which reduced the contribution of utilities to the state's GDP that quarter, which was confirmed by one of the state's leading power companies in their financial statements.

The other very short term factor was a downturn in the state's real estate sector, which turned down after having peaked in real terms in the fourth quarter of 2011, thanks to the recovery of housing prices in Kansas, which had boosted the contribution of real estate to the state's economy in 2011, but less so afterward, in part because of the negative shocks experienced in the state's agricultural and manufacturing sectors.

In our final chart, we'll consider the counterfactual of how Kansas' state economy would have grown with respect to the overall U.S. economy, in which we'll show how the state's economy would have grown if its overall real economic growth had not been negatively affected by extreme drought and the results of the recession in its aerospace and defense manufacturing industries. In this chart, we've indexed the growth of both the U.S. and Kansas' economies to the fourth quarter of 2010 (2010:IV = 1.00, or 100% if you prefer), which corresponds to the beginning of Kansas' multiyear period of drought. We've also animated the chart to emphasize the difference that the fortunes of the state's agricultural and manufacturing industries make to its economic performance.

Basically, we've nearly completely accounted for the differences in overall performance between the U.S.' economy and Kansas' economy, substantiating that both severe drought on the state's agriculture and non-durable goods manufacturers and also a national recession for the state's aviation and defense manufacturers negatively impacted the state's actual GDP.