A regional perspective on the U.S. business cycle

Chicago Fed Letter, Nov 2002 by Kouparitsas, Michael

Economic activity in the Great Lakes is heavily influenced by developments in durable manufacturing. The best example is the Rust Belt era, which began with a strong regional downturn in late 1970s and ended with a regional recovery in the early 1990s. The general view of why this came about is that the Great Lakes manufacturing sector had developed earlier than that of other industrial regions, so its technology tended to be of an earlier vintage and relatively less efficient. So, in the wake of the oil price shocks, the Great Lakes' manufacturing sector experienced a relatively larger decline in demand for its products, as a significant share of its market share went to regions with newer (more efficient) plants. It is widely believed that the downturn of the early 1980s drove out a significant share of the older plants with inefficient capital, thereby paving the way for more efficient plants with newer technologies that could fill the growing demand for durable goods when the economy recovered in the early 1990s.'

We observe a different cycle for the formerly industrial regions of New England and the Mideast. New England's idiosyncratic cycle reflects the hi-tech boom that started in the late 1970s, which more than offset the decline in activity bought about by the rapid erosion of the region's industrial sector in the early 1970s. The so-called "Massachusetts economic miracle" came to an end in the late 1980s for two reasons. First, rapid technological developments by hi-tech industries in other regions dulled the region's competitive edge and eroded its market share. Second, the end of the Cold War brought about a dramatic decrease in the demand for the region's defense-related products. The Mideast's idiosyncratic cycle also reflects the erosion of its industrial sector, which began in the early 1970s. However, in contrast to New England, the Mideast's turnaround was fueled by growth in demand for its financial services, which has persisted since the mid-1980s. The Far West's idiosyncratic cycle was influenced by some of the same events that shaped New England's cycle. For instance, the above trend income of the mid-1970s coincides with the rapid growth of the computer industry in Silicon Valley. Furthermore, the return to trend income in the early 1990s was fueled by the same cut in defense expenditure that led to the downturn in New England.

Conclusion

Academic economists have emphasized for some time that business cycles consist of persistent expansions occurring at about the same time in many economic activities, followed by similarly persistent general contractions. Using U.S. regional per capita income data, I show how one can apply this definition to get a new statistical measure of the U.S. business cycle, with turning points that closely match those of the NBER's Business Cycle Dating Committee. Another feature of my approach is that it allows me to decompose regional cyclical fluctuations into common and idiosyncratic components, with the latter serving as a useful tool for analyzing the effects of region-specific influences such as technology booms or commodity price spikes.'