States and the business cycle

We model the U.S. business cycle using a dynamic factor model that identifies common factors underlying fluctuations in state-level income and employment growth. We find three such common factors, each of which is associated with a set of factor loadings that indicate the extent to which each state?s business cycle is related to the national business cycle. According to the factor loadings, there is a great deal of heterogeneity in the nature of the links between state and national economies. In addition to exhibiting interesting geographic patterns, the factor loadings tend to be related to differences in industry mix. Finally, we find that the common factors tend to explain large proportions of the total variability in state-level business cycles, although there is a great deal of cross-state heterogeneity.