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A history of scary volatility since 1864

Tricks and treats for Nevada's undiversified economy

Today is October 31. Obviously that means the FRED Blog, like every other news and social media outlet, is celebrating Nevada’s admission to the Union on October 31, 1864. What’s so spooky about Nevada’s economy compared with, say, the economy of its neighbor California? Nevada’s economy is much smaller and much less diversified: Mining, entertainment, gambling, and hospitality services are outsized sectors compared with elsewhere. And, as with any portfolio, a lack of diversification brings big risks that typically manifest in volatility. Some find that scary.

Our first FRED graph, shown above, compares real GDP growth in Nevada and California. It’s easy to see it fluctuates much more in Nevada. In this state, one major sector affected by an adverse shock can send shivers through the whole state. This isn’t the case for a larger, diversified state such as California.

The story is similar for the growth of median household income—that is, the income for a household in the middle of the income distribution of all households. There’s more variability, up and down, in Nevada.

Our last graph shows per capita income. Note that the wild fluctuations even way back to the Great Depression were stronger in Nevada. Lesson: Although Nevadans may enjoy higher levels of risk and a good scare now and then, if you don’t have the stomach for economic volatility, then diversify!

How these graphs were created: Search FRED for each Nevada series, click on “Edit Graph,” and use the “Add Line” tab to search for the same California series. Apply units “Percentage change from year ago” to all lines.

Suggested by Christian Zimmermann.

Real returns on major asset classes since the start of the pandemic

In the beginning of 2020, as the COVID-19 pandemic seemed likely to spread in advanced economies, financial markets entered a period of turmoil. Some even thought the world was headed for a financial crisis. But after the deployment of major fiscal and monetary policy interventions around the world, among other factors, such a crisis never materialized. In fact, financial markets performed exceptionally well by historical standards in the periods following the pandemic recession of the second quarter of 2020.

The FRED graph above plots the cumulative real returns on three major classes of assets held by U.S. households—stocks, real estate, and corporate bonds—since the last full month before the pandemic, December 2019. It’s useful to unpack this definition. First, these returns are cumulative: At each date, they measure the return obtained by someone who purchased the asset at the initial date (December 2019) and sold it at that given date. Second, these returns are real, meaning they’re adjusted for inflation.

Stocks (in blue). The graph shows that stocks, measured by the S&P 500, did not perform well in the early stages of the pandemic: The blue line falls below 1 in the first few quarters. But stocks boomed in the following periods. At its peak at the end of 2021, the real cumulative return on the S&P 500 index was around 36%. Cumulative returns have fallen since then, but were still equal to 5% as of September 2022.

Real estate (in red). Cumulative returns on housing rose steadily until May, peaking at over 27%, and had fallen slightly as of the last available observation.

Corporate bonds (in green). Finally, corporate bonds have not done so well: Their cumulative return peaked at 8% at the end of 2020, but has fallen ever since: It was –20% as of September 2022. Bond returns typically underperform in high-inflation situations.

How this graph was created: Search FRED for “S&P 500” and click “Edit Graph.” For “Units,” select “Index (Scale value to 100 for chosen date)” and set the date as 2019-12-31. Add a series, “Consumer Price Index for All Urban Consumers: All Items in U.S. City Average,” and apply the same transformation (Index set to 100, date 2019-12-31). Modify the frequency to monthly, using “Average” as the aggregation method. In the formula field, type “a/b.” At the top, click on “Add Line” and repeat these exact steps for “S&P/Case-Shiller U.S. National Home Price Index.” Repeat one final time for “ICE BofA US Corporate Index Total Return Index Value” and set the starting date of the graph to 2019-11-30 and the final date to 2022-09-01.

Suggested by Miguel Faria-e-Castro.

State and local government finances during the pandemic

State and local governments play an important role in the U.S. economy by providing residents with services such as public education, law enforcement, and road building and upkeep. These subnational governments pay for their services largely through taxes on property, sales, income, and corporate profits.

At the start of the pandemic, there was tremendous concern that subnational governments would receive less tax revenue (with the possible exception of property taxes) and be put in a very difficult position. If the federal government loses revenue, it can issue debt to cover the losses and continue operations; but state and local governments largely cannot. For example, nearly every U.S. state government is prohibited from financing ongoing expenses by borrowing.

The FRED graph above shows us what happened with state and local tax revenue during the pandemic by plotting four series from the U.S. Census Bureau’s Quarterly Summary of State and Local Tax Revenue survey: the national total of state and local government tax revenue and revenue specifically from property taxes, individual income taxes, and general sales and gross receipt taxes (three of the largest components).

The graph tracks revenue from the first quarter of 2009 through the second quarter of 2022.

  • Before the pandemic, total revenue had been growing over time at a fairly steady rate.
  • At the onset of the pandemic in 2020, total revenue fell sharply, consistent with the expectations described above: Second-quarter revenue fell nearly $64 billion below first-quarter revenue. But the losses didn’t persist.
  • By the third quarter of 2020, total revenue had bounced back and surpassed first-quarter revenue.
  • From this point on, total revenue has continued on a generally upward path.

There were two major reasons for the rebound: the brevity of the recession and the magnitude of the federal response.

The recession lasted just 2 months, as shown by the shaded area in the graph. The National Bureau of Economic Research Business Cycle Dating Committee, the unofficial arbiter of recessionary periods, established February 2020 and April 2020 as the start and end dates. Many observers had forecasted a much longer recession.

The federal response boosted subnational governments’ income and sales tax revenue. Many people lost their jobs in the second quarter and remained unemployed for a time afterward, but the federal government augmented regular state unemployment benefits with a $300 weekly add-on. In fact, many people were making more income while unemployed than they had made while they were working. Since unemployment benefits are taxable income, this federal response contributed to the boost in individual income tax revenue seen in the graph. Also, sales and gross receipt tax revenue increased after dropping in the second quarter, although this change is less dramatic. In part, this increase was likely related to payments to households legislated through the CARES Act, the Tax Relief Act of 2020, and the American Rescue Plan of 2021.

State and local government finances were further boosted by the injections of billions of dollars from the federal government. For example, in the second quarter of 2020, the CARES Act increased intergovernmental transfers by about $700 billion more than in the preceding quarter. See more data on federal transfers to subnational governments in this FRED blog post.

How this graph was created: Search FRED for “National Totals of State and Local Tax Revenue: T01 Property Taxes for the United States” and click on the entry to see the series in a FRED graph. Note that searching some suitable subset of those words, such as “national totals state local property,” will also bring up the relevant series. Next, click on the orange “Edit Graph” button just above the upper right corner of the FRED graph. From the dialogue window that opens, click on “ADD LINE.” From here, enter “national totals state local total taxes” into the keyword search box. Click on the entry that is returned to add the data series to the chart. After adding this data series, you will see both the total taxes and the property taxes series in the same graph. To finish creating the chart, repeat the step from the preceding paragraph two additional times: for individual income taxes and for sales and gross receipts taxes.

Suggested by Bill Dupor.

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