Factors Behind the Convergence of Economic Performance Across U.S. States

Abstract

The rolling recessions of the 1970s and 1980s were characterized by industry and region specific shocks that led to large dispersions in the economic performance of regions across the U.S. The 1970s were primarily impacted by sharply rising energy prices that hit the manufacturing states hard while stimulating growth in the energy states. The 1980s began with declines in the Farm Belt, followed by declines in the Energy Belt, the Rust (manufacturing) Belt, and finally, due to declines in defense spending, a decline in the Gun Belt. Simple measures of regional dispersion such as the populationweighted variance of job growth across states show that the economic dispersion was historically high during these two decades. The 1990s saw a continuous decline in regional economic dispersion and the 2000s has seen historically low levels of dispersion. Perhaps the biggest surprise this decade has been the low levels of dispersion of economic performance over the past several years given the significant energy price shocks and the depth of the national economic recession. In this paper, we look at the likely causes of economic dispersion across regions and test for the major influences both in the rise of dispersion in the 1970s and 1980s and the subsequent fall in the 1990s and 2000’s. Major factors that we test include state industrial structure, oil prices shocks, and bank integration. Regional growth; banking; industry diversification JEL Classification R11, G21 1 Keith R. Phillips is a Senior Research Economist and Advisor for the Federal Reserve Bank of Dallas, Roberto Coronado is a Senior Business Economist. James Nordlund was research assistant at the Federal Reserve Bank of Dallas when this article was written. The authors thank Kelly Klemme for help in compiling the bank integration variable based on bank deposits, as well as Howard Wall and the participants of the October 2009 meetings of the Federal Reserve System Committee on Regional Analysis. The views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Dallas, or the Board of Governors of the Federal Reserve System. Any remaining errors are our own. Corresponding author: Keith R. Phillips, Tel: +1 210 978 1409, E-mail: keith.r.phillips@dal.frb.org.