The Slowdown in U.S. Regional Employment

The most recent statistics for state unemployment rates show that 25 out of 51 (including the District of Columbia) had a higher jobless rate in October 2007 than one year before. Although the number of states with year-over-year (y/y) increases is not very high, it is the trend that merits attention. One year ago, the national unemployment rate was still declining, bottoming out at 4.3% in March of this year. Since then, the national rate has risen to 4.7%, while the number of states with a higher jobless rate in the seven-month stretch from March to October has moved much higher, to 35.

States seeing large upswings in their jobless rates since March are easily explained. California's increase is largely connected to the collapse of the real estate and construction sectors. Jobs have been cut in home construction and also in mortgage finance, leading to higher unemployment. Florida's and Nevada's increases can also be tied to the rapid deterioration of housing. In the Midwest, slumping manufacturing sectors led to increased unemployment in Michigan (up 1.3%), Ohio (0.7%), and Illinois (1.1%).

The most important question is whether the recent rise in unemployment rates is merely a reversion to a more normal rate of unemployment (typically referred to as "the natural rate") or if the economy is headed toward a recession. It may be instructive to compare data from the most recent downturn. The recession of 2001 started in March and lasted until November (marked in the chart above by red lines). The U.S. unemployment rate had bottomed out in March 2000 at 3.9%, and one year later had rebounded to 4.3%. The number of states experiencing gains in their jobless rates had moved from 8 in March 2000 to 39 in March 2001. This dynamic is remarkably similar to the changes seen this year.

But there was a similar rise in the number of states that occurred in early 1996. Back then, the economy was strengthening, the national unemployment rate was falling, and no recession occurred. It remains to be seen whether this recent rise in state unemployment rates will be more like the recession-less period in 1996 or the downturn in 2001.