Thursday, May 31, 2012

Which States are Most Susceptible to EU Recession?

By Matt Tarleton, Project Manager.

Germany’s surprising 0.5 percent annualized growth in the first quarter of 2012 has allowed the European Union to technically avoid a recession. However, nearly every other EU country has slipped into an official recession, defined as two consecutive quarters of negative output growth. The likelihood that the EU avoids recession depends heavily on a number of risk factors, including but limited to the region’s debt woes, the ongoing crisis in Greece and the potential for a Greek exit from the EU, and the degree to which other European economies (such as France, Italy, Portugal, and the UK) continue to underwhelm.

So for those of us on the other side of the Atlantic, what does this mean for our economic recovery? One of the primary ways in which a European recession will affect the U.S. recovery is through American exports. As manufacturing activity and consumer spending are depressed in the EU, demand for American-made consumer products and intermediate goods used in manufacturing processes will fall, resulting in a decline in exports, and therefore output, in the United States. Similar effects could be seen in professional services exported to EU businesses.

In order to determine which states’ economic recoveries are most susceptible to an impending recession (or at worst, continued stagnation) in the EU, I examined exports to the European Union as a share of each state’s total output (gross state product). The following map illustrates the findings based on 2011 trade and output data. Those states in red possess the largest relative share of output derived from exports to the EU, and therefore more susceptible to weakened producer and consumer demand in the EU. Those states in blue are least susceptible, while exports to the EU as a share of GSP are roughly equivalent to the national average (within a few tenths of a percent) in those states that are white.

By this basic measure, the Utah, South Carolina, and West Virginia economies are most vulnerable to EU recessionary pressures, with the percentage of GSP derived from EU exports all more than double the national average. The majority of the states in the Great Plains are among the least susceptible, with tremendous variation in the South and the Northeast. A more detailed analysis would examine the hardest hit sectors in the European Union and tie these trends to the sectors most reliant on EU exports in each state. Perhaps something to look for in an upcoming blog…