As mounting recession risks threaten to slow the growth of the U.S. economy, not all states are faring equally.
A recent study from WalletHub ranked the 50 U.S. states and D.C. by economic performance and health. The analysis used data from the Bureau of Labor Statistics and the U.S. Census to evaluate each state on 28 metrics, including unemployment rates, exports, and the ability to develop startup companies.
Washington topped the list of best state economies, ranking third on economic activity, seventh on economic health, and second on innovation potential. Utah and California rounded out the top three state economies.
At the bottom of the list were Louisiana, Alaska, and West Virginia.
“There actually isn't a striking regional trend,” WalletHub analyst Jill Gonzales wrote to Yahoo Finance. “The top three ranking states are in the West — Washington, California, and Utah, but they're followed by two East Coast states, Massachusetts and New Hampshire.”
As states emerge from downturns caused by the coronavirus pandemic, several experts expressed that vaccination rates and public health measures were key to stimulating recovering economies.
"The factors driving vaccination rates also drive the other economic outcomes," University of Oklahoma Professor Gregory Burge wrote to Yahoo Finance in an email, warning against drawing conclusions from correlation. "Having said all of that, the simple intuition that higher rates of vaccination are a good thing for both human and economic health in a state."
Given the availability of vaccines and booster shots, Burge also encouraged states to loosen remaining COVID restrictions.
"In my view, we are well past the point where the benefits of removing any restrictions on gatherings/travel outweigh the costs of removing those measures," Burge wrote in the report. "A thoughtful complement to embracing this full return to normalcy would be continued support for subsidized vaccines/boosters — which should help maintain these more favorable conditions for public health and safety."
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Tech and innovation fueling economic engines
According to the results, more prosperous state economies tended to balance GDP growth with attentiveness to jobs, especially in the tech sector.
New Hampshire's economy, which ranked fifth overall, stood out for its ability to increase GDP while also maintaining a low unemployment rate.
Other states like California and Washington, however, boasted strong state economies even though they experienced elevated unemployment rates.
A key factor that uplifted the overall ranking for these states was their innovation potential, which can be measured by the number of independent inventor patents.
"States that have a higher innovation potential can attract more highly skilled workers and potential entrepreneurs which have a positive impact on the economy," Gonzales said.
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That innovation potential was a differentiator for California, particularly in comparison to another economic and cultural hub: New York.
Despite having the third-best state economy, California ranked 31st in economic health and tied for the sixth-highest unemployment rate (4.6%) in April. Where California excelled, however, was in its innovation potential, which ranked third in the nation.
New York fared even worse, according to the indicators, possessing the worst ranking on economic health, second-lowest government surplus, and high unemployment.
"One of the differences between California and [No. 4] Massachusetts on one side and New York on the other is the innovation potential," Gonzales said. "This is a lot higher in the first two states, mostly due to the larger percentage of jobs in STEM and high-tech industries. California and Massachusetts also fare better than New York in terms of economic health, as they have lower unemployment and a higher growth in state personal income."
BERKELEY, CALIFORNIA - MAY 02: Diesel trucks drive along Interstate 80 on May 02, 2022 in Berkeley, California. (Photo by Justin Sullivan/Getty Images) ·Justin Sullivan via Getty Images
In some cases, poor environments for tech innovation can stymie state economies with other positive attributes such as strong exports. Struggling economies like Louisiana and Alaska may excel in exports per capita, but their economies were curbed by floundering median household incomes and environments for startup companies.
Another striking example is Virginia, where the median household income more than doubles that of the neighboring state of West Virginia — a state with a low level of startups, tech jobs, and individual patents. Limited growth potential can have a ripple effect across the middle class and upward mobility.
The benefits associated with a robust tech sector have led many states to offer incentives to attract companies within their borders.
George Mason University Professor Vincent Geloso, who contributed to the WalletHub research, wrote that "economic freedoms" such as tax cuts and deregulations "minimize downturns associated with exogenous shocks such as a pandemic" while also accelerating recovery. He attributed this to in-migration that encourages talent retention within states.
Not all experts view competition among states for businesses as a plus, however. Burge noted that this "prisoner's dilemma" leaves states "collectively worse off."
“Each state does what is in their own individual best interest, but the aggregation of those actions leads to a socially inferior outcome,” Burge wrote. “It is basically the unraveling of the invisible hand principle - and a legitimate shortcoming of the way the US taxes businesses.”
Luke is a producer for Yahoo Finance. You can follow him on Twitter @theLukeCM.
