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As Vaccination Rates Improve, States with Large Leisure & Hospitality Sectors May Rebound Strongly

May 7, 2021

The recession and recovery resulting from the Covid-19 pandemic are unprecedented for a number of reasons. The abrupt, sharp drop in real GDP was larger than in any recession since the Great Depression. With the closure of non-essential businesses at the onset of the pandemic, the unemployment rate rose to never before seen levels. As non-essential businesses and sectors were allowed to gradually reopen, the recovery took on a different shape. Unlike most recessions, the goods-based economy bounced back quickly as consumers invested funds from fiscal relief and pandemic-era savings in new vehicles, home improvement projects, and an assortment of durable goods. But the services sector—and particularly leisure & hospitality—continues to struggle as many businesses that require close personal interaction remain closed or in modified operations. Consequently, states with larger concentrations of economic activity in services are likely to experience a different economic recovery than in previous recessions as this sector returns to full strength.

Typically, the consumption of services holds up better relative to goods consumption during recessions. During the Great Recession of 2007–09, for example, goods consumption fell –5.6% while services consumption increased 5.1%. Only two states (North Dakota and West Virginia) saw spending on goods increase during that period.

However, the Covid-19 induced recession is the first in a century in which consumers weren’t able or willing to consume services in their usual amounts because of closures, capacity restrictions, or health concerns. The leisure & hospitality sector is comprised of two subsectors: arts, entertainment & recreation (AER) and accommodation & food services (AFS). AER includes casinos, music venues, spectator sports, museums, amusement parks, golf courses, fitness centers, and bowling alleys. AFS includes hotels, bars, and restaurants, and is the larger of the two subsectors.

Clearly, the leisure & hospitality sector doesn’t naturally lend itself to the social distancing and other measures required during the pandemic, resulting in many of these businesses having to close while health restrictions were in place.

In this blog post, I examine the gaps created in real gross state product (GSP) in the subsectors of leisure & hospitality from the pre-pandemic peak in economic activity (2019:Q4) to the pandemic trough (2020:Q2). I compare the recent experience with the real GSP gaps created during the Great Recession, from peak (2007:Q4) to trough (2009:Q2).

Table 1 shows the overall real GSP gap in the states most highly concentrated in leisure & hospitality, as well as the real GSP gap created in AER and AFS and the percentage of overall real GSP these subsectors comprise. A GSP gap is defined as the percentage drop in real GDP over a certain period (in this case from 2019:Q4 to 2020:Q2).

Table 1: AER and AFS Real GSP Weights1, 2019; Real GSP2 Gaps, Select States: 2020:Q2 vs. 2019:Q4

State Covid‑19 Real GSP gap (%) 2019 AER + AFS Real GSP Weight Rank 2019 AER Real GSP weight (%) Covid‑19 AER Real GSP gap (%) 2019 AFS Real GSP weight (%) Covid‑19 AFS Real GSP gap (%)
Nevada –4.3 1 2.8 –31.0 12.4 –13.0
Hawaii –8.8 2 1.2 –52.1 9.3 –43.2
Vermont –4.5 3 1.1 –49.7 5.2 –20.9
Florida –2.8 4 1.6 –25.6 4.1 –20.3
Tennessee –4.3 5 1.9 –57.6 3.5 –20.3
Source: Author’s calculations using data from the Bureau of Economic Analysis.

Nevada’s leisure & hospitality3 contribution to its gross state product (GSP) is the largest of all 50 states. The GSP gap created in the two leisure & hospitality subsectors is significant given their importance to Nevada’s economy. Hawaii’s leisure & hospitality contribution to its GSP ranks second, but the state has suffered more severe drops in activity. Add in the decline in air travel and the Hawaii economy has experienced a uniquely severe shock. Other states also stand out for the substantial drops they’ve seen in their leisure & hospitality subsectors. Tennessee’s AER activity, which includes Nashville’s music venues, fell a remarkable 58%. Vermont suffered a 21% drop in AFS activity. Even though Florida’s economy has stayed relatively more open than most states, a hesitancy to travel among consumers has resulted in significant activity gaps there as well.

These states have experienced relatively more adverse impacts because of the higher levels of employment and wages workers in these sectors enjoy relative to the rest of the U.S. Table 2 below shows the location quotients4 for the five states in table 1.

Table 2: Leisure & Hospitality 2019 Employment and Annual Wage Location Quotients (LQ)

State Employment LQ Employment LQ Rank Annual Wage LQ Annual Wage LQ Rank
Nevada 2.27 1 3.59 1
Hawaii 1.73 2 2.75 2
Vermont 1.08 11 1.23 6
Florida 1.27 4 1.55 3
Tennessee 1.03 16 1.12 13
Source: Bureau of Labor Statistics.

All five states have a location quotient above 1, meaning employment and wage levels are higher in each of these states relative to the U.S. The real GSP gaps created in the Leisure & Hospitality sector have negatively impacted employment and the earnings from that employment more in these states than in the majority of U.S. states. But as more people are willing or able to engage in leisure & hospitality related activities, we would expect employment and earnings levels to bounce back considerably in these states.

Leisure & hospitality in the Seventh District

As with the previous group of states, the declines in the Midwest states were larger in AER than in AFS. Access to sporting events, museums, live entertainment, gyms and movie theaters was much more limited than the ability to stay in a hotel or eat at or takeout food from a restaurant, despite the capacity limitations around in-person dining. However, the leisure & hospitality sector, while important, isn’t a large part of the Seventh District’s economy. The Seventh District states’ respective leisure & hospitality sectors rank in the middle to bottom of all 50 states as a share of real GSP.

Table 3: AER and AFS Real GSP Weights, 2019; Real Gaps, Select States: Seventh District States; 2020:Q2 vs. 2019:Q4

State Covid‑19 Real GSP gap (%) 2019 AER + AFS Real GSP Weight Rank 2019 AER Real GSP weight (%) Covid‑19 AER Real GSP gap (%) 2019 AFS Real GSP weight (%) Covid‑19 AFS Real GSP gap (%)
Illinois –3.0 20 1.1 –48.7 2.6 –20.6
Indiana –2.3 27 1.0 –28.2 2.4 –13.5
Michigan –4.6 33 0.7 –43.3 2.6 –25.1
Wisconsin –3.6 42 0.7 –28.0 2.2 –21.1
Iowa –1.0 48 0.6 –30.7 2.0 –18.5
Source: Author’s calculations using data from the Bureau of Economic Analysis.

Midwest states, which are much more heavily represented in goods manufacturing than in leisure & hospitality sectors, suffered steep declines in economic activity during the Great Recession and then rebounded at a stronger pace than the U.S. for multiple years, and in a few cases, for most of the past decade. The states with the largest durable goods real GSP gaps stemming from the Great Recession were Michigan, Indiana, Ohio, and Kentucky. One thing those states have in common is their concentrations of automotive manufacturing. Those states (and others) heavily involved in automobile manufacturing experienced the roller coaster ride of vehicle production falling by almost 50% in 2007–09 before it more than doubled to its post-recession peak in 2016. That rebound allowed those states to enjoy recoveries that outpaced the U.S. for long periods. For example, the average post-Great Recession real GSP growth rate in Michigan was higher than the U.S. for nine years. While their respective performances didn’t match Michigan’s, Indiana, Kentucky, and Ohio also enjoyed lengthy, above-average rebounds.

However, because consumers continued to purchase goods during the Covid-19 pandemic and reduced their services spending, the Midwest states may not enjoy the same kind of recovery this time around. Instead, states that rely heavily on leisure & hospitality may outpace the rest of the U.S. in the recovery phase.

Table 4: Construction and Durable Goods Manufacturing, Covid-19 Real GSP Gaps and Weights (2019)5

State Covid‑19 Real GSP gap (%) 2019 Construction + Durable Goods Mfg. Real GSP Weight Rank 2019 Construction Real GSP weight (%) Covid‑19 Construction Real GSP gap (%) 2019 Durable Goods Manufacturing Real GSP weight (%) Covid‑19 Durable Goods Manufacturing Real GSP gap (%)
Indiana –2.3 1 3.4 1.2 16.2 –0.8
Michigan –4.6 2 3.6 –3.7 14.7 –6.2
Wisconsin –3.6 6 3.6 –1.6 10.9 –0.7
Kentucky –3.2 7 3.6 1.5 10.8 0.3
Ohio –3.5 11 3.2 –1.8 9.3 –2.7
Iowa –1.0 12 3.4 –3.8 9.0 7.6
Washington –0.2 18 3.6 –1.6 8.2 –4.2
Source: Author’s calculations using data from the Bureau of Economic Analysis.

From the table above, the states that have relatively high concentrations of activity in the sectors that normally struggle during recessions have seen slight to moderate drops in those key goods-based sectors. Some states have actually seen activity levels rise above pre-pandemic levels. Typically, when recessions end, the construction and durable goods sectors are among the first to start rebounding. With goods-based activity not dropping off considerably and staying relatively close to pre-pandemic levels, once pandemic effects start to fade away, it seems unlikely that a strong post-pandemic bounce will occur. The post-pandemic recovery will likely be more widespread across different sectors.

Unlike the majority of recessions, the Covid-19 induced recession created large real GSP gaps in sectors that typically don’t experience large declines in economic activity during recessions. Thus, we could see slower recoveries in states where economic activity held up, including states that have high concentrations in construction and manufacturing, because of the shift in consumer preferences toward goods during the pandemic. That would also be the opposite of a typical post-recession recovery.


Notes

1 Real GSP weight = (Arts, Entertainment & Recreation (or any other Real GSP sector)/Total Real GSP)*100 or what percentage of GDP is comprised of Arts, Entertainment & Recreation activity

2 Real GSP gap = 1-2020Q3 Real GSP/2019Q4 Real GSP (pre-pandemic peak). The difference in Real GSP between the most recent data and the most recent peak in Real GSP.

3 Arts, Entertainment & Recreation + Accommodation & Food Services

4 See QCEW Location Quotient Details : U.S. Bureau of Labor Statistics (bls.gov)

5 States included in table 4 had weighted real GSP shares of durable goods manufacturing of 10% or higher in 2007 and at least three years post-Great Recession of average real GSP growth higher than the U.S.


The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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