A business manager, to assess the risk of a regional recession, needs to monitor: The national economic cycle. The National Cycle of the most important industries in the state or the region. *The internal growth cycle or the regional economic cycle of the state (construction swings).
Although a regional economic cycle is not perfectly synchronized with its national counterpart, it tends to move up and down with the national economy. In addition to the broader national economy, two other factors influence a regional economy: the national cycle of its most important industries and its internal growth cycle associated with construction swings.
There are two different perspectives to consider in analyzing a regional economy: when a company sells into a distinct local market and when a company primarily produces in a local market and sells into a national or global market.
A business manager needs to know how similar the state economy is to the national economy. Of the 50 states in the country, the state that is most similar to the national economy is California. The least similar state is Wyoming. New Hampshire is almost top 10, with 77, while California is 88,4. The national economy usually has a bigger effect on every region than any other factor. The composition of a region’s output, in conjunction with the composition of national economic growth, is the next greatest factor on a region’s economic performance. A business manager also needs to know the most important industries in the state, or the major drivers of the local economy. We can figure this out by using a metric called the location quotient.
Changes in a region’s population growth rate can cause the state’s economy to accelerate or decelerate. Population growth is the largest driver of internal cycles. The factors that cause business cycles usually operate across all of the regions of a country. This can be factors like monetary policy, oil shocks or waves of optimism and pessimism.
People follow good jobs. People are more willing to migrate to a state and stay there if the state has many good jobs. This is known as the Alaska answer because this happened in Alaska. You could also argument that jobs follow people. Jobs follow people who move for a better quality of life. This is the Arizona answer because people moved here to seek better quality of life, which then led to jobs following the people. *Nowadays, the dominant answer is the Arizona answer, which is jobs follow people. If you provide a better quality of life, people will come which will lead to jobs.
State or local economic policy has little effect in the short run. State or local economic policy cannot change any of the big factors behind business cycles. *A local recession will likely resist the government’s efforts to buck up the economy.
*Good economic policy does matter in the long run. Examples of good economic policies include no state income tax, which is true for New Hampshire. We also don’t have general sales tax, but we do have some sales tax but they are very small compared to other states. Other examples of good economic policies include a transparent and easy to comply with regulations.
Regional producers benefit from weak local conditions, and they are hurt by economic strength. Economic cycles have a different impact on the producer than on the seller. A business selling goods in a certain region will suffer when this area goes into recession. The business that only produces goods in this region will benefit from local recessions.
For regional companies, add to your dashboard the measures of the industries that are important to the region, as well as current employment data. Personal income is a common measure of state economies, but it is published with about a three month time lag. The national indicators are equally important for a regional business as they are for a national company. A regional early warning system must watch local economic data.
| indicators | |
|---|---|
| national economy | |
| national cycles of the industry | national automobile sales for car dealers |
| local economy |
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| population and migration | housing permits, drivers licenses |
| consumer spending | state sales tax: drill down to exclude construction materials |
Dealing with a regional downturn
| the local economy is similar to the national economy | the local economy is different from the national economy | |
|---|---|---|
| a company selling into the local market | Follow the pattern described in chapter 7 with no additional local considerations. |
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| a company only producing in the local market | Follow the pattern described in chapter 7 with no additional local considerations. |
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Explan each of the following terms in your own words. The author explains the terms in the textbook. If necessary, you may also Google the term on the Web. Good resources include:
Explain the terms in your own words briefly.
*A location quotient is an analytical statistic that measures a region’s industrial specialization relative to the nation. If the location quotient is equal to 1, then the industry has the same importance regionally as it does in the nation.
A leakage describes capital or income that escapes an economy or system in the context of a circular flow of income model. Leakages are transactions that take money out of the economy, because the money is not being utilized elsewhere.
*The marginal cost is the change in total production cost flow that comes from making or producing one additional unit. Calculating the marginal cost allows companies to see how volume output influences cost and profits.
Describe the characteristics of the following events briefly.
The case of Idaho in 1986 was about how the state was growing rapidly but there was a risk due to a potential decline in population growth. In Idaho, the population had been growing rapidly, around 3% per year in the 1970s. Growth began to decline in the 80s, and construction employment fell from over 19,000 to just over 13,000. Construction activity declined by 1/3 as population growth slowed. This pulled total employment down by 2%, just from construction alone.
Many people will say that a state mimics the national economy. However, this is not always correct. Hawaii suffered four years of declining employment in the 1990s even though the national economy grew steadily. The problem was that Japan has entered a severe recession, which reduced tourist spending in Hawaii.