America’s economy unexpectedly contracts in the first quarter


The american economy is contracting. Data out on April 28th revealed a fall in output of 1.4% in annualised terms, down from growth of nearly 7% at the end of last year. That is, however, misleading because it is more a reflection of strong imports and shifting inventory levels than of a sudden slowdown. Underlying demand is strong—personal consumption rose by 2.7% in the first three months of 2022—and most analysts are predicting growth for the full year.

Nevertheless, the true pace of growth—whatever it turns out to be—will be misleading in a different way. It will mask a wide variance in the economic health of different parts of the country. Looking at growth figures since 2018, to use a pre-pandemic baseline, America has a clear group of laggard states. Between 2018 and 2021 average yearly growth was negative in six of them. The experience of the three weakest performers shows how low growth has become entrenched. Hawaii was already languishing with output falling by 0.9% in 2019, and then crashing by 10.8% in 2020 as covid-induced restrictions forced tourism to grind to a halt. Alaska’s recovery—just 0.3% growth in 2021 after a 6% decline in 2020—has been the weakest in America. And weak activity in Louisiana’s oil-and-gas sector meant that, like Hawaii’s, its economy declined in 2019, and was then hammered by collapsing demand in 2020.

Contrast this with Utah, Idaho and Washington. In each, average annual growth over the past four years was around 4%, double the national rate. Utah was one of only two states in which the economy grew in 2020—the other being South Dakota—having already ended 2019 with chart-topping growth in output of nearly 5%. It then clocked up nearly 7% in 2021. Washington and Idaho recorded the country’s two highest growth rates in 2018 and recovered strongly after downturns in 2020.

The broad trend reflects the emergence of two Americas: a vibrant south and west, but a sluggish north and east. There are outliers: Wyoming is a blot of red in a sea of blue, with the fourth- largest contraction in the whole country in 2020 and growth of just 1.1% in 2021 because of weak performances in agriculture, oil and gas. But economic dynamism has undergone a geographic shift. The rise of remote working meant that people could choose to move to places with lower taxes, warmer climes or more affordable housing—or, in some cases, all three. That helps explain why states such as Florida, Idaho and Utah have thrived since 2018, while Connecticut and others have performed so poorly.

The cycle is self-reinforcing. Personal incomes—from earnings, transfers and property—have increased everywhere since 2020, but growth of around 9% in Idaho and Utah contrasts with a more modest rise of 5.5% in neighbouring Wyoming. That has boosted tax revenues. Compared with pre-pandemic levels, Idaho and Utah have enjoyed the fastest rises in tax receipts of any state except California—both up by over 20% in the second quarter of 2021, the period for which data are most recently available, compared with the last three months of 2019. Alaska’s tax revenues have fallen by over 30%. In March Jerome Powell, the chairman of the Federal Reserve, spoke of his hopes for a “soft landing”, where tightening monetary policy brings down prices without harming growth. The trouble is that some states were never really growing to begin with.

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