Fitch: Burden of Federal Cuts Will Vary By State

News Release from Fitch Ratings November 19, 2013

Fitch Ratings-New York-19 November 2013: As budgetary pressures mount and the likelihood of federal furloughs and shutdowns remains high, Fitch Ratings believes entities like Washington, D.C., and Hawaii will experience varying degrees of pressure given their relative lack of workforce diversification.

Washington D.C. is the most extreme example of federal workforce concentration relative to all U.S. states. According the Bureau of Labor and Statistics (BLS), 28.4% of the population was employed by the federal government in 2012. Federal jobs have been resistant to the ebb and flow of the business cycle and helped the district outperform the U.S. during the recession.

Fitch's recent study of the variation of state economies shows that both the district's gross state product growth and employment growth had the lowest correlation and sensitivity to the national economy of any state. However, Federal employment declined over the past year, contributing to a rise in the district's unemployment rate so that it now trails the U.S. average. Per capita personal income grew 0.4% in 2012, much slower than the national growth rate of 3.4%. Fitch expects these trends to persist.

If budget cuts continue, Hawaii's economy should be better positioned to manage them. It is dominated by leisure and hospitality, government and the military, which accounted for nearly one third of the state's 2012 real gross domestic product. According to the BLS, 5.8% of Hawaii's workforce was employed by the Federal government in 2012. While cuts would put some pressure on the state, Fitch expects that pressure would be manageable. Hawaii's unique location gives it a strategic role that we believe would limit some military cuts. And, from our view, the effects of the recent shutdown were modest. In our study, Hawaii's personal income growth had the lowest correlation and sensitivity to changes in national income levels.

In ten states (including Washington D.C. and Hawaii), 3% or more of the population worked for the federal government in 2012. Our study suggests that the impact of cuts, and their effect on the national economy, would vary by a wide range as absolute growth rates and sensitivities to the national cycle differ considerably from state to state.

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