The Federal Reserve Bank of Philadelphia reported that its coincident regional economic activity indexes rose in 43 states in October from September. On a three-month moving average basis, 42 states showed improvement. Five states declined in October — Alaska, Indiana, Minnesota, Wyoming, and Wisconsin. With only five states in decline all nine divisions posted an increase ranging from 4.9% at an annualized rate in the East South Central division to 1.6% in the West North Central division. The states with the top monthly growth rates at an annual rate were Michigan (16.5%), Alabama (10.8%), South Carolina (7.1%), and Idaho (6.2%).

Growth rates are computed by Reed Construction Data economics from the state economic activity coincident indexes calculated by the Philadelphia Federal Reserve Bank based on state employment and income data, which are benchmarked to approximately track national GDP growth. Region and division growth rates are calculated by Reed Construction Data economics from the state indexes using weights derived from state gross domestic product.

The three-month moving average provides a perspective that removes some of the volatility of the month-to-month movements. The Pacific division won top honors with a 4.0% annualized growth rate. The Mountain and East South Central divisions tied for second place with a 3.2% increase. The Pacific and Mountain divisions together make up the West Region, which accounts for all the western states and had a 3.8% growth rate. The East North Central division, with its concentration of states with heavy dependence on manufacturing (Illinois, Indiana, Michigan, Ohio, and Wisconsin) had the lowest growth rate — 0.8%.

The U.S. economy continues to show improvement. Recent positive reports include employment and retail sales. The major risk to the U.S. economy remains developments in Europe. A mild recession in Europe would be a drag on the U.S. economy and hurt exports, which would particularly hurt Midwestern manufacturing states such as Michigan and Indiana. A deeper recession in Europe could tip the U.S. back into a recession through the impact on exports and European debt held by U.S. banks.

As was the case with the previous month’s report, the indexes for only four states (North Dakota, Massachusetts, New York, and Texas) have exceeded their 2007-08 peak. North Dakota, with its recent boost from the energy industry, which has also produced a construction boom in some areas of the state, is now 14.9% above its pre-recession peak index measure. Massachusetts, largely driven by its high tech industry, is a more moderate 2.4% higher than its pre-recession peak index level. Alaska and Minnesota continue to be the next states most likely to surpass their 2007-08 peak.

As already noted, Michigan was the top monthly performer and among the top performers on a three-month moving average. But although Michigan’s economy clearly is improving, it is from a low base following several years of decline. Thus, the state is second from the bottom in terms of its current index level relative to its pre-recession peak index number — down 14.9%. Only Nevada, down 25.3% from its peak, has fallen further. Idaho (-14.8%), Florida (-12.7%), and Arizona (-12.5%) round out the bottom five.

The recovery will be long and slow for these states. Each of these states has a relatively large foreclosure problem that may still be worsening and has experienced outmigration during the deep recession and subsequent subpar recovery. Nonetheless, although Nevada and Michigan have hit a rough patch here and there, all five have shown improvement over much of the past year. On a year-over-year basis their activity indexes were all up: Nevada (0.5%), Florida (1.8%), Idaho (2.0%), Arizona (2.3%), and Michigan (3.0%).