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Sept. 10, 2020, 9:09 a.m. EDT

The COVID recession has decimated some states, but barely touched others

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This is not a typical recession with a broad downturn. It’s a series of micro-recessions and micro-recoveries. When I first discussed this phenomenon , it was within the context of industries and categories. Some industries flourished while others foundered. Variance increases further when you delve into categories within those industries. 

However, the notion of micro-recessions and micro-recoveries is not limited to industry. States across the United States are experiencing a wide range of consequences from pandemic-related pressures. This is dependent on a number of factors, including the number of Covid-19 cases, response to the pandemic, and regional industries vulnerable to the novel coronavirus.

Here are the most important factors to consider when evaluating geographic-based impact over the next few quarters.

The Differences Between States Magnified

The Philadelphia Federal Reserve’s coincident state indexes are a basket of state-specific indicators indexed to state gross domestic product, which are intended to demonstrate overall economic performance at the state level. This includes average hours, unemployment, wages and other indicators. Most states, with rare exceptions, are experiencing recession. More important, the gap between well-performing states and underperforming states has widened.

This is nothing new. Gaps between well-performing and underperforming states have historically widened during recessions. This was the case during the double-dip recession of the 1980s, the recession of the 1990s, and the Great Recession of 2008-09.

It’s important to note, though, that the divergence between well-performing and underperforming states is far greater during this recession than at any other time since the data became available in the 1980s—a 40-year sample of data. We have never seen such wide economic differences by geography in modern U.S. history; it has never been so important to customize a business strategy according to location.

Pay Attention to States Reliant on Vulnerable Industries

Tourism Industry

Some states and regions are more reliant on industries that are especially vulnerable to the pandemic. The tourism industry is a good example of this phenomenon. As the pandemic took hold in the U.S., we saw the restaurant and hotels consistently drop off across the country, but as we’ve seen time and time again, we don’t come out of recessions the same way we go into them. The same can be said about economic shutdowns. We started to see pronounced variance when states began to reopen and those states that draw a higher percent of their income from out-of-state and international travel are showing particular challenges in the pace of their recovery.

Naturally, restrictions around social distancing had an impact on restaurants, which were compelled to operate on a fraction of their capacity. The precise restrictions varied from state to state, but the data showed states that were more dependent on tourism have had a harder time restarting their restaurant industries. Hawaii, for example, depends on both domestic and international tourism, which in turn injects the local restaurant economy with an influx of consumer spending.

The challenge Hawaii, Florida and other tourism-reliant states have moving forward is the uncertainty of travel.

As we’ve seen in previous recessions, negative consumer sentiment tends to be a leading signal for discretionary spend across multiple tourism-related segments. This recession-minded consumer believes they are in the midst of a recession and the nature of the pandemic is encouraging people to stay closer to home, so less spending on tourism overall, and less of the dollars are spent away from a day’s drive.

Given the nature of this recession, consumers are likely to feel uncertain for some time. As such, it is likely that consumers will be wary of plane travel beyond the health crisis, which will have lasting ramifications for tourism.

The Energy Industry

With many businesses shut down and millions of citizens required to shelter in place, energy consumption took a big hit. For example, North Dakota, which relies heavily on profits from shale oil extraction, was severely impacted. The question becomes, what will energy consumption be moving forward and will that continue to hurt oil production-heavy states?

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