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Hot States, Not States

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By Peter G. Hall
Vice-President and Chief Economist Export Development Canada

It can’t be said enough. America is hot, whether news services, pundits or the general public believe it or not. Key signals of this are its looming capacity constraints. Unemployment is getting down to levels that suggest sustained wage pressure. Industrial and office space are both getting tight, due to a combination of persistent under-investment and rising demand. It’s a nice problem to have, for a change, and indicators suggest there’s still a lot of runway. But are all US states participating?

Good question. Few economies can boast labour markets as fluid as America’s. Picking up and going to the opportunity zone is in American DNA, stretching back to its westward expansion, the Gold Rush, more recently the shale oil craze, and so on. Capital is sort of the same – it seems to move across the lower-48 with relative ease, finding its way to the ‘next big thing’. Multi-country surveys typically score the US highly for these features; growth spreads easily in the US. Thus, it should be possible to track America’s hot spots and not-spots by tracing these movements.

Employment tells a big tale. Generally, unemployment rates are moving down everywhere, suggesting that labor mobility is smoothing things out. However, in the oil and gas regions, they have wobbled. Employment trends are more revealing. Clearly, regions that are more resource-dependent are faring less well. Things definitely seem to be slowing in the West South Central zone, and there is likely more weakness to come. Oklahoma has softened considerably, and mighty Texas has recently geared down. Similarly, the trend is winding down in the West North Central zone. North Dakota, Nebraska and Kansas are particularly weak job-generators at the moment. Capital movements also illustrate the woes of the oil and gas-producing states. The investment surge is definitely off, but the worst effects of the oil price plunge are likely still ahead: both employment and investment are lagging indicators that take time to fully react to economic events.

Who’s hot? Job growth is definitely decent elsewhere. US growth is doing a good job of spreading, and when unemployment rates tighten in one zone, they generate movement. However, certain spots stand out. The Pacific region is doing well, with California driving the bulk of regional employment growth. The Pacific Northwest is also pitching in: Washington and Oregon are both seeing a decent acceleration in activity. The South Atlantic region is also ramping up. It boasts some of the strongest recent job growth activity, and shows little sign of a let-up. Also impressive is the East North Central zone. Known in the post-recession period as a sluggish rust-belt, job gains there have been steady, and in recent months saw an exciting upswing.

Canadian exports to the US follow a distinctly similar pattern. Michigan is the top destination for our exports, and happily, growth is doing well. On a year-to-year basis, merchandise exports earlier this year were up as much as 39 per cent. The success of auto sector shipments is obvious. Sales to California are also doing well. Posting 15 per cent growth last year, at one point a few weeks ago they were up by 27 per cent compared with last year. In the South Atlantic region, exports are generally impressive, with sales to Florida taking the lead.

Among the large states, New York is a disappointment. Contrary to what we’d expect, sales there have been very flat over the past year. But the real soft spots for Canada are shipments to the states that have a significant oil and gas industry. One by one, the shipments to these states are down sharply. There’s Oklahoma, down 19 per cent last year, Montana, down 28 per cent, North Dakota off 16 per cent and Wyoming, down a crushing 44 per cent.

Going forward, the areas of strength and weakness aren’t expected to shift much. Energy sector shipments are likely to see further weakness, while consumer goods, autos and industrial equipment are all likely to fare well.

The bottom line? Dive below the surface in the US and a very different picture of Canadian exports emerges. With all the growth Canada is seeing, there are particular hot spots to watch.

[Source: EDC]

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