(By Mani) The fallout from the European financial crisis and resulting recession in Europe appears to be weighing even more heavily on global economic growth. The International Monetary Fund (IMF) now sees a slightly deeper recession in Europe this year, weaker growth in China and much of the developing world, and slower growth in the United States.
The slowdown is clearly evident in recent economic data, which have shown manufacturing activity and consumer spending weakening.
In this backdrop, let's examine the potential impact to U.S. states from the Eurozone recession. The most direct measurable impact comes from a pullback in exports from these states to Europe. However, the impact is not limited to reduced exports to Europe.
"Europe's recession is also weighing on growth in China and other parts of emerging world, reducing the demand for U.S.-produced goods there as well. Besides the direct effect on exports, regional economies may also be affected by a slowdown in international tourism," Wells Fargo economist Mark Vitner said in a client note.
Through the first five months of this year, U.S exports to Europe have risen just 2 percent compared to a 15.8 percent rise for the first five months of 2011. The -13.8 point swing in U.S. exports to the Eurozone sliced around 0.3 percentage points off of the already sluggish U.S. GDP growth over the past year.
U.S. states with the highest risk have exports heavily weighted in one of three categories: transportation equipment, commodities and chemicals.
Transportation equipment is a mixed bag. The demand for commercial aircraft and aircraft engines remains strong, but shipments of cars, SUVs and minivans have slowed. Aircraft and parts make up the bulk of exports from Washington and Connecticut, at 71 percent and 61 percent, respectively, and exports have held up relatively well.
Meanwhile, Alabama and South Carolina also export a large amount of transportation equipment, mainly automobiles and parts. Both states have seen exports moderate over the past year.
The effects of the Eurozone slowdown are clearly evident in South Carolina's export data. Overall, exports from South Carolina, which were up 27 percent year over year through the first five months of 2011, have slowed to just a 5.7 percent gain for the same period this year.
"While the sting from slower export growth hurts, South Carolina benefits from international trade and investment in many other ways. The state is one of the largest recipients of foreign direct investment (FDI) per capita in the country," Vitner said.
Other states with outsized exposure to Europe include Utah, West Virginia, Louisiana and Nevada, all of which are major commodity producers. Elevated gold and silver prices have bolstered the value of exports from Utah and Nevada, which may overstate their vulnerability.
"Swings in commodity prices also tend to dominate swings in exports from West Virginia and Louisiana. Exports from both states, however, are also closely tethered to global economic conditions," the economist added.
In addition, chemical shipments have been a real soft spot over the past year. The demand for many chemicals tends to rise and fall with overall industrial activity, and the slowdown in the Eurozone and the broader global economy has taken a toll on chemical exports.
Europe's problems have clearly weighed on the sector, and declines in sales to Europe account for a large portion of the slowdown in export growth from Louisiana. Overall, exports to the Eurozone from Louisiana were down 30.6 percent through the first five months of this year.
From a cyclical perspective, the regions that seem to be the most vulnerable to Europe's slowdown are the Midwest and Northeast. Indiana, Kentucky, Ohio and Illinois have more exposure to Europe via their dependence on exports to that part of the world, as do New York, New Jersey and Massachusetts.
The composition of export goods produced in these states also tends to be more cyclical, so they have proven more susceptible to the global economic slowdown. Moreover, exports have been a strong source of economic growth in recent years.
"The region's outsized exposure to industrial machinery, computers and electronics and steel and chemicals makes them more vulnerable to swings in global demand and capital spending, which tend to get hammered when global demand weakens and uncertainty increases," Vitner added.