INVESTING IN STATES

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Suppose we look at the 50 states as though each were a consumer product company. We might consider investing in a state by opening stores there, expanding existing operations, buying real estate or taking a financial stake in a business that sells consumer goods in that area.

Many investors evaluate a company using past financial data, such as earnings growth or price-to-earnings ratio. In the case of our nation's 50 states, demographic trends can be good indicators of their investment potential. Two such factors are domestic migration and household income growth. The objective of our analysis is to find states that have above-average or fast-growing household income, and that are also attracting people from other states.

The first factor, domestic migration — estimated annually by the Census Bureau — is a useful indicator of the economic health of an area. If significantly more people are moving in than moving out, it usually means that the job market is expanding or that retired people find the place attractive. If more people are moving out, it could be a sign of decreasing job opportunities or that residents find some other place more hospitable, for reasons such as lower taxes or a warmer climate. The second factor, median household income — as measured in the 1990 and 2000 Census — is a gauge of the size and health of a state's consumer economy. If household income is both high and growing, then the economy in that area is likely to be robust and to have an excellent potential for growth as well.

As of the 2000 Census, median household income ranged from a high of just over $55,000 in New Jersey to a low of just under $30,000 in West Virginia. The U.S. median was about $42,000. Two states, Georgia and New Jersey, have virtually identical numbers of households (about 3 million each). But we can infer from the $12,700 difference in household income that consumers in New Jersey are likely spending at least $30 billion more per year than households in Georgia.

So we can begin our screening of states' investment potential by ranking them on the basis of these two factors. A state where median household income is above-average and rising rapidly, and that also has a high net in-migration figure, would seem to be an attractive place for investment purposes. Only seven states fit that profile: Colorado, Minnesota, Wisconsin, Virginia, Georgia, Nevada and Washington.

Colorado ranks 10th in the nation in median household income ($47,200), but second in terms of household income growth — which increased by 21 percent between 1990 and 2000. The state also had a net of more than 41,000 in-migrants in the 15 months following the 2000 Census, the seventh highest in the nation. The Bureau of Labor Statistics (BLS) reports that the number of jobs in Colorado is still increasing (up 1.2 percent between April 2001 and April 2002) despite a jump in the unemployment rate, to 5.3 percent from 3.2 percent in the same time period.

Minnesota and Wisconsin are bucking the trend of high out-migration from the Midwest (and Northeast) to the South and the West. Also going against the grain is New Hampshire, the only state in the Northeast with above-average income and high in-migration. However, its income growth lagged the U.S. average.

Nevada will continue attracting residents from other states as long as its principal economic engine — gambling — remains popular and the state doesn't run out of water. Nevada also benefits from not having personal income tax and from its proximity to California, which has much higher tax rates.

Washington state has attracted huge numbers of young people from other areas, drawn there by the high-tech job opportunities. But with an unemployment rate running more than 7 percent and a decline in total employment in the past year, household income may not continue growing at previous rates, if at all.

Virginia's household income level grew only slightly faster than the national average. On the other hand, its largest employer is the federal government, so household income is likely to continue growing. This state's below-average personal tax rates and proximity to our nation's capital virtually assure continued growth in population.

Investors looking for future returns in the consumer market might be concerned about how rapidly median household income has been growing. A state with a high median household income but no significant population or income growth in the past decade, such as Connecticut, might not be as good a prospect in the long term as a faster-growing state. However, even without much population or income growth, no investor should underestimate the substantial wealth in Connecticut. It might have the same number of households as, say, Oregon, but it has more than 2.5 times as many households with an income of at least $200,000 a year and 8 times as many homes valued at $1 million or more.

High out-migration and declining household income are symptoms of an economic malaise that, if not addressed, may persist. By contrast, high household income growth and in-migration suggest that well-above-average economic growth is likely to continue, other factors being equal. But, of course, those other factors rarely remain the same. One or two demographic trends can't always indicate job opportunities and a robust economy for a state. How well the state government is managed, and the attitude that the state has toward businesses and taxation, also influence job creation.

And of course, people can, and do, vote with their feet: If citizens believe their state is overtaxing them or that they can find a better life elsewhere, they may just pack up and move. Therefore, states, like corporations, must remain competitive. Those states that are the most competitive are the most likely to benefit from more jobs, higher household incomes and more residents who will keep their economy humming.


Peter Francese is the founder of American Demographics. He can be reached at peter@francese.com.

STATES OF GRACE

Households in the states below had above-average incomes in 1999. New Jersey had the highest household income, but it appears that a lot of people would still rather live elsewhere.

STATE MEDIAN HH INCOME, 1999 % INCOME CHANGE, 1989-1999* DOMESTIC MIGRATION**
New Jersey $55,100 3.8% -39,200
Connecticut $53,900 -0.4% -9,600
Maryland $52,900 3.4% 12,600
Alaska $51,600 -4.0% -2,700
Massachusetts $50,500 5.3% -24,400
Hawaii $49,800 -1.1% -6,200
New Hampshire $49,500 4.9% 16,200
California $47,500 2.2% -88,500
Delaware $47,400 4.7% 5,500
Colorado $47,200 20.7% 50,100
Minnesota $47,100 17.4% 5,700
Virginia $46,700 7.9% 26,400
Illinois $46,600 11.3% -110,300
Washington $45,800 13.1% 22,400
Utah $45,700 19.6% -14,900
Michigan $44,700 10.9% -30,400
Nevada $44,600 10.8% 70,500
Wisconsin $43,800 14.6% 4,500
New York $43,400 1.4% -249,600
Georgia $42,400 12.7% 78,000
Rhode Island $42,100 0.8% 4,500
* Change in inflation-adjusted median household income. Source: U.S. Census Bureau
** State-to-state migration estimates from 4/1/00 to 7/1/01.
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