Utah and Texas are the nation’s two youngest states by median age, and both are ranked triple-A.
Maine and Vermont are the two oldest states, with ratingscredits in the double-A category for Maine and two triple-A ratings in the case of Vermont.
While there’s much more to a state’s credit ranking than its relative youth, rating analysts view demographics as key elements in their review.
“Demographics are a significant input into our analytical process, as they ultimately relate to the future growth prospects of state and local government revenues and expenses,” Fitch senior director James Batterman wrote in a July report. “Fitch will likely examine additional factors such as industry concentration and educational attainment as we continue to explore and refine the manner in which we view and incorporate demographics into our analytical process.”
Taking a long view of demographic trends, Fitch analyzed data over 20 years based on eight factors: population, percentage of population under the age of 64, crime rate, home prices, unemployment rate, GDP, poverty rate, and household income.
"Our goal here is to track various trends effectively," Batterman told The Bond Buyer. "It’s important to look not only at current levels of various indicators, but also their progression over various time periods -- not any one period in isolation -- to provide proper context. Looking at the change over very short periods, say five years or less, is informative as to recent developments but generally too short to define a trend."
The data was translated into a series of interactive maps, the first time Fitch had reduced the numbers to such a graphic format.
For the decade from 2007 to 2017, Colorado, North Dakota and Texas ranked in Fitch’s strongest category. California was in the top rank from 1997-2007, but fell a notch, as did Utah. Texas retained its top ranking in both decades, while Colorado and North Dakota moved up a level.
States in the weakest category for 2007-17 were Mississippi, New Mexico and West Virginia. Louisiana, Michigan and Ohio climbed out of the doghouse in the second decade.
“Ohio has seen one of the more significant shifts up in strength over the past 10 years after hovering near the bottom of the list over a longer horizon,” Batterman said.
The Great Lakes states have generally enjoyed a better decade after the Great Recession than before, based on the data. Fitch analyst Michael D’Arcy said Michigan suffered a decade of recession after the dot-com bust of 2001.
“Demographically, I think Michigan has seemed to have stabilized,” said D’Arcy. Fitch rates the state AA with a stable outlook. “It was one of the few states to lose population between 2000 and 2010. Since 2010 they have grown 1%. Most of that is immigration into the state, mostly foreign immigration.”
The diversity of a state’s economy is often reflected in its demographics and vice versa, Batterman noted.
“North Dakota has seen tremendous growth with regard to various demographic and economic indicators, but its focus on energy means that it may be subject to greater volatility in these going forward.”
Alaska and New Jersey produced nearly identical economic growth over the past 10 and 20 years, Batterman noted. But the year-to-year volatility in GDP is two to three times higher for Alaska than New Jersey, given Alaska’s more narrow industrial focus on energy.
“The point is, the breadth of a state’s industrial base can be a significant consideration with regard to formulating a forward looking view,” he said.
New York, the fourth-largest state in population and certainly one of the most diverse, saw its economic-demographic ranking shift toward the negative end of the spectrum in the last decade, with high marks only in household income.
Illinois, which carries the lowest credit rating among states at BBB on the Fitch scale with a negative outlook, has seen its economic-demographic ranking improve between decades, though not dramatically. The Land of Lincoln’s highest marks over the past decade are for percentage of population under age 64, crime rate and median household income. Its lowest marks are for home prices.
California, the most populous state, gets high to average marks across the board with the exception of its poverty rate. High housing costs in California are seen as a significant growth hurdle.
Texas ranks among the second worst tier of states for its crime rate but enjoys positive to average marks in other categories. The days when the energy sector dominated the state’s economy ended with the last crash in the late 1980s, most analysts say.
“Texas’ economy has grown immensely in the last 35 years,” D’Arcy said. “It’s very different than the 1980s when the oil slump hit Texas on the head. It is a really big and complex economy. So, one sector stumbling is probably not enough to hurt the overall economy.”
D’Arcy notes that the Texas economy continued to grow after oil prices began a 60% drop in mid-2014.
Today, the biggest macroeconomic threat to Texas may come from a developing trade war and the possibility that President Trump will abandon the North American Free Trade Agreement, under which Texas does business with its largest trading partner Mexico.
“I think that the trade-war issues are a concern for Texas, but I think the economies of Texas and Mexico are so interrelated, there would have to be high tariffs for a long time before it really started to have an appreciable slowing effect,” D’Arcy said. “If the Mexicans are angry and want to find substitutes, that’s going to take time. That takes months, if not years. It would happen in a phased-in staggered process over three-to-five years.”
The impact of a prolonged trade war would likely show up mostly in local credits such as that of Laredo, the nation’s largest inland port and a major crossing point for cross-border manufacturing.
The direct impact of the tariffs and retaliatory responses would shave 0.2% to 0.6% from the nation’s GDP growth in 2019 and 2020, according to S&P Global Ratings' estimates.
“Of course, any such fallout is going to have an uneven effect on states and localities,” S&P analysts Gabriel Petek and Jane Ridley wrote in a July 26 report. “Those with greater concentration in the manufacturing and agricultural industries, such as in the East North Central or East South Central regions, would sustain more of the brunt than diversified services-based economies.”
More serious might be long-term effects such as dimming of consumer confidence and disrupted global supply chains, which could shake investor sentiment and, in turn, precipitate financial market volatility, the analysts said.
By 2020, the secondary effects of a more serious trade war could push GDP growth to below its underlying trend rate of 1.8%, according to S&P.
Regionally, S&P sees the west south central states of Texas, Oklahoma, Louisiana and Arkansas positioned to lead all others with a growth rate of nearly 4.1% for the calendar year. Texas, is estimated to realize roughly 4.7% growth in 2018 while Oklahoma, Arkansas, and Louisiana are estimated to trail with growth ranging from 2% to 2.2%.
“Contributions to the region's gross state product from the mining sector--which consists predominately of oil and gas activities--is expected to grow a resounding 10% and 8% in 2018 and 2019, respectively,” S&P said. “Every state in the region but Louisiana is estimated to see a healthy bump in GDP from the mining sector in 2019.”
Elsewhere, four of the nation’s oldest states – Maine, New Hampshire, Vermont and West Virginia – have below-average employment growth and will see slower revenue growth over the next decade compared to younger states, according to Moody’s Investors Service. Despite that projection, Vermont carries Moody’s top rating, while New Hampshire is one step behind at Aa1. Maine and West Virginia are a notch lower at Aa2.
The fifth-oldest state and the third-largest, Florida, enjoys population growth from all ages while serving as a haven for elderly retirees, many of whom have above average wealth. The breadth of the state’s economy helped it land triple-A ratings across the board, following a Moody's upgrade from Aa1 in June. .
A state’s high median age can develop through aging of the existing population, out-migration of younger residents, or in-migration of older residents, Moody’s analyst Pisei Chea said.
“In the five states with the highest median ages, the first two causes are associated with economic stagnation, while the last can help drive economic growth,” Chea said. “By 2027, Moody's Analytics projects that Maine, New Hampshire, Vermont, West Virginia and Florida will all have more than 23% of their populations aged 65 years or older, the highest proportions among the 50 states.”