U.S. States with Exposure to a European Recession(15-Nov-2011)

The growing financial turmoil in Europe has raised questions about how the U.S. economy is likely to be affected. Our October monthly outlook noted that we believe Europe is sliding into at least a mild recession.1 while much of the immediate concern has dealt with the potential effect on the U.S. financial markets and broader economy; this report goes a step further by investigating the potential effect on specific states within the United States. Our findings suggest that while the effect of a European recession may be relatively modest on the U.S economy as a whole, there are a handful of states that may be more vulnerable.

States with the Highest Export Exposure to Europe

We begin by breaking down the top trading partners for all fifty states. The map below shows each state’s goods exports to Europe as a percentage of GDP. The darker shaded areas represent the states with the largest exposure to Europe. It should be noted that one shortcoming of this dataset is only exports of goods are represented in the figures below. Our findings suggest that while the effect on goods exports may not be significant, given that only 1.97 percent of U.S. GDP is dependent on European goods exports, the effect on a handful of states will be more severe.

Among the states with the highest exposure to Europe include Utah, South Carolina, West Virginia, and Louisiana.

One noticeable trend is that there is not a specific geographical concentration of states with direct export exposure to Europe. Among the states with the highest exposure to Europe include Utah, South Carolina, West Virginia and Louisiana. The common thread among many of the top states on the list is that many of these states are exporters of commodities.

Utah’s gold and silver exports account for the largest share of the state’s total exports at 52 percent, much of which is exported to the United Kingdom. The sharp run-up in the price of gold in recent years accounts for much of the recent growth in exports. Utah also processes gold and silver produced in neighboring states and exports much of that to other countries. Although the state relies more on European exports than any other state, with 5.56 percent of Utah’s economy tied to exports going to that region, the United Kingdom accounts for the bulk of that trade. Other key trading partners include Canada, India, Hong Kong and Switzerland. Excluding gold and precious metals, the largest exports include computer memory, miscellaneous food preparations, molybdenum, a silver byproduct, aircraft engines and automotive safety bags.

West Virginia is also among the states that will likely be affected due to commodities exports to Europe, particularly in coal production, with nearly 4 percent of the state’s economic growth tied to Europe. Demand for coal tends to move closely with GDP growth, so some softening in sales seems likely. Demand has increased over the past year, however, as Germany has stated its desire to move away from nuclear energy. Other major exports include plastics, medical products and aerospace components. Trade is also becoming less dependent upon Europe, with growing trade ties with Canada, Brazil, India, Japan and China.

Other areas likely to be affected by a European recession include states that export automobiles and automobile parts along with aircraft and aircraft parts. South Carolina and Alabama are among the auto producing states that have somewhat strong ties to Europe. Some of the vehicles and parts that are shipped to Europe, however, are re-exported to other markets around the world. Aircraft and aviation parts production in Kentucky, Connecticut and Washington also have trade ties with Europe. Air travel is also correlated with GDP growth, and a slowdown will cut into demand for replacement parts. As long as the European recession does not become prolonged, however, the risk of aircraft order cancelations will not likely be as great. The automobile producing states, on the other hand, will likely face some slowdown in the pace of output as European demand for automobiles slows.

 

 

More Challenges Ahead

With many states continuing to struggle with the effects of the sluggish U.S. economic recovery, the prospect of some additional challenges as the European Union slips back into a recession over the next couple of quarters represents another hurdle. Slower demand from the Euro zone will likely slow production among the country’s commodity, aircraft and automobile producers and may have been a factor in the recent slide in many of the regional manufacturing surveys, including the Empire and Philadelphia Fed survey. With orders slowing, production and employment will likely moderate as well. In addition to a slowdown in demand for exports of goods, demand for key services, including tourism, finance, entertainment, software and engineering, could also slow, which would weigh most heavily on New York, California, Washington, Florida, Texas and the Carolinas.

The depth and length of a European recession will also play a key role in determining the potential effect. Many states have significant trade flows with the United Kingdom, France, the Netherlands and Germany, which are not likely to be affected as severely by the austerity moves underway in Greece, Italy, Spain and Portugal. A deeper and more prolonged downturn would weigh more heavily on northern Europe, however, and might also spill over into other nations with key trade ties to Europe, including China and Brazil. Such a scenario would then have an effect on virtually all states.

The depth and length of a European recession will also play a key role in determining the potential effect.

By

M.Zohaib Gadit

Forex Trading Consultant