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Income and Price Parities – Implications for Arkansas

“After adjusting for a relatively low cost of living, incomes in Arkansas allow for a higher standard of living than in some of the higher-cost regions of the country.”

It is widely recognized that changes in income and spending over time should be adjusted for changes in prices; i.e., inflation.  Comparisons of income across countries are also routinely adjusted for differences in prices using exchange rates or other relative price measures.  Less common is the adjustment of state and local data to account for differences in relative prices across regions within the United States.  This type of inter-regional relative price adjustment is familiar to regular readers of the Arkansas Economist — in the context of interpreting poverty rates published by the Census Bureau (see, here and here, for example).  In recent years, researchers at the U.S. Bureau of Economic Analysis (BEA) have been developing statistics on regional price differences that can be applied more generally to income and consumption data for the states and metropolitan areas of the U.S.  This year, the BEA is scheduled to publish the first set of annual updates for personal income adjusted by regional price parties (RPPs).

The baseline estimates for these regional price parties were published in the Survey of Current Business in August 2012 — Regional Price Parities for States and Metropolitan Areas, 2006–2010.   Using data on rents from the American Community Survey (Census Bureau), price data from the Consumer Price Index (Bureau of Labor Statistics), and expenditure shares from the Personal Consumption Expenditure survey (BEA), the newly-developed RPP statistics allow for the comparison of the cost of living among states and metro areas in the U.S.

Normalizing the U.S. average to have an index value of 100, the estimate of Arkansas’ relative price level is calculated to be 89.3.  That is, the overall level of prices in Arkansas is more than 10% lower than the national average.  For the calculation period 2006-2010, the highest and lowers price parities in the nation were calculated for Hawaii (116.1) and South Dakota (87.2), respectively.  The Arkansas level of 89.3 ranked our state as having the 6th lowest prices in the nation.

This as in interesting finding in its own right, but is even more important in what it tells us about relative incomes and purchasing power.  For example it is widely known that Arkansas has one of the lowest levels of average income in the nation.  But to the extent that prices are also lower than in other regions, the differences in price-adjusted standards of living are less extreme than the unadjusted dollar-values suggest.  The map below, reproduced from the article in the Survey of Current Business, shows how per capita personal income changes after adjusting for regional price parities.  Arkansas is one of the states where the purchasing power of income is increased the most by the adjustment — specifically, price-adjusted per capita income for 2010 is 12.2% higher than unadjusted per capita income.

Source: Bureau of Economic Analysis

The average per capita income in all 50 states plus the District of Columbia was $39,900 in 2010.  By construction, this is also the price-parity-adjusted level of income for the U.S.  Without price adjustment, Arkansas’ per capita income was $32,800 — approximately 82.2% of the national average.  After adjusting for the relatively low cost of living in Arkansas, however, the RPP-adjusted income in Arkansas was the equivalent of $36,800 — about 92.2% of the U.S. average.  The table below summarizes this comparison and presents data on RPP-adjusted incomes for the eight metropolitan areas that include parts of Arkansas.

Source: Bureau of Economic Analysis

The RPP figures for Arkansas are all below the national average of 100, ranging from 82.8 in Jonesboro to 94.7 in the Memphis metro area.  In unadjusted dollar terms, per capita income in Arkansas metro areas range from 75.7% of the national average in Pine Bluff to 96.5% in Little Rock.  After adjusting for regional price parities, however, incomes in Pine Bluff rise to 86.2% of the national average and incomes in Little Rock are 3.5% higher than the national average.  In fact, after re-calculating incomes to account for their greater purchasing power, the RPP-adjusted measures of personal income are above the national average in three of the state’s metro areas.

The research on RPPs is still considered to be experimental, with economists at the BEA and elsewhere working to improve the quality of regional price data and the methodology for compiling them into regional index values.  The data will undoubtedly be refined and revised as research continues.  But the overall implications of the findings are clear:  after adjusting for a relatively low cost of living, incomes in Arkansas allow for a higher standard of living than in some of the higher-cost regions of the country.

 

Arkansas Personal Income – 2012:Q3

Total personal income in Arkansas rose by 1.0% in the third quarter, with a particularly sharp increase in farm income.  According to today’s news release from the Bureau of Economic Analysis (BEA), Arkansas’ third-quarter growth rate was the second-highest in the nation (North Dakota had the highest growth rate).  Data for the first two quarters of the year were also revised upward — from 0.8% to 1.0% in the first quarter and from 1.2% to 1.4% in the second quarter.  Compared to the third quarter of 2011, personal income in Arkansas is up 3.8%.  For the total United States, income growth was 0.4% in the third quarter, and has totaled only 2.4% over the past four quarters.

Source: Bureau of Economic Analysis

Inflation (as measured by the price index for Personal Consumption Expenditures) rose at a rate of 0.4% in the third quarter, up from a 0.2% pace in the second quarter.  Consequently, real personal income in Arkansas rose by only 0.6% in the third quarter, and was up just 2.2% over the past year.  After this inflation-adjustment, Arkansas personal income is now slightly above its previous cyclical peak (by about 1.4%).

Source: Bureau of Economic Analysis

Arkansas was one of several agricultural states for which farm income figured prominently.  For the third quarter alone, farm income was up 19.6%, and accounted for approximately one-third of the state’s income growth.  The BEA report cited two special circumstances affecting agricultural income in the third quarter — both associated with the summer’s drought conditions.  One key factor was net insurance settlements — particularly in the states of the upper Midwest where crop damage from the drought was the most extensive.  In the south, third quarter farm income was also affected by a relatively early harvest season.  (The BEA cited Texas, in particular.)  As noted in previous posts, Arkansas farm output was not as severely affected by the drought due to the high proportion of irrigated farmland in the state, but weather conditions were such that crops were both planted and harvested earlier than usual.

Other than agriculture, earnings growth by industry in Arkansas generally mirrored the national averages.  Sectors with strong earnings growth included durable goods manufacturing, professional services, and health care & social assistance.  Transportation and warehousing fared well in Arkansas, but contributed little to the nation’s income growth.  On the other hand, earnings in the construction industry were weaker in Arkansas than for the nation as a whole (although the BEA report noted that construction income was particularly concentrated in Texas and Oklahoma).

Source: Bureau of Economic Analysis

Arkansas Personal Income – 2012:Q2

A new report from the Bureau of Economic Analysis shows that personal income in Arkansas rose by 1.2% in the second quarter of 2012, slightly higher than the U.S. average rate of 1.0%.  Growth was postitive in all 50 states, although it slowed in most states.  Arkansas growth rate was up from the previous quarter, and ranked the state as the 8th fastest-growing in the nation.  Over the past four quarters, cumulative income growth in Arkansas was 3.0%, just slightly lower than the 3.3% growth rate for the U.S.  With a CPI inflation rate of 1.9% for the same period, these figures represent postive real (inflation-adjusted) growth in incomes.

Revised data from the previous quarter also show an improved picture for Arkansas.  Previously reported at 0.3%, first quarter growth is now estimated to have been 0.9%.  The revisions show a particularly large adjustment to farm income:  The new report shows farm income expanding 1.2% in the first quarter instead of contracting by 28.6% as originally reported.

Today’s report also included comprehensive revisions for 2009 through 2011.  As shown in the figure below, the revised data show that incomes fell more sharply during the recession (-4.7%) than previously estimated (-3.3%).  The revised data also show a more variable growth path during the subsequent recovery.

Source: Bureau of Economic Analysis

The revised data continue to show that Arkansas incomes were not as hard-hit by the recession as the national average, but cumulative growth during the recovery has been somewhat slower.   As of the second quarter of 2012, incomes in both Arkansas and the U.S. were up 6.4% from the previous cyclical peak (2008:Q2).

Source: Bureau of Economic Analysis

Today’s report shows that earnings growth was up 1.0% for the quarter, compared to a 0.8% growth rate for the U.S.  Earnings growth was positive for nearly every industry in Arkansas, with only nondurable-goods manufacturing and military pay showing slight declines.

Source: Bureau of Economic Analysis

 

A Note on Poverty in 2011

This morning, the Census Bureau released new statistics on Income, Poverty, and Health Insurance Coverage in the United States: 2011.  The headline of the report was that the official U.S. poverty rate was 15.0% in 2011, little changed from the previous year.

The report did not contain any specific information on individual states, but some of the underlying data from the Current Population Survey Annual Social and Economic Supplement (CPS ASEC) are now available.  Those data tell us that here in Arkansas, the poverty rate was 18.7%.  That was the fifth highest rate in the nation (of all 50 states plus the District of Columbia).  Median Family Income in Arkansas was  approximately $51,000, amounting to 84.3% of the national median of $60,500.  Arkansas’ ranking on family income was 46th.*

These statistics are based on the Census Bureau’s measure of “money income,” which does not include income from many programs intended to alleviate poverty.  For example, money income does not include Supplemental Nutrition Assitance Program (food stamps), housing subsidies, low-income energy assitance, or the earned-income tax credit.  A new Supplemental Poverty Measure which incorporates these income sources—along with updating the methodolgy for calculating the poverty threshold—were introduced last year.  Statistics on these alternative calculations will not be available until November.

It should also be pointed out that income and poverty data for individual states are more accurately measured in the Census Bureau’s American Community Survey (ACS) and the Small Area Income and Poverty Estimates (SAIPE), which will come out later this month and in November, respectively.
_________

*Median income figures are calculated using the standard method and may differ from published Census estimates that are calculated using linear interpolation.

Arkansas Personal Income – 2012:Q1

Personal incomes in Arkansas rose slightly in the first quarter, up 0.3% from the fourth quarter of 2011 (seasonally adjusted).  According to the report from the Bureau of Economic Analysis, Arkansas’ growth rate was the slowest among all the positive growth rates in the nation — although three states showed zero or negative growth.  On a year-over-year basis, income growth was 2.4%, ranking Arkansas #40 among the 50 states plus D.C.  By comparison, total U.S. personal income was up 0.8% from the previous quarter and up 2.9% from a year ago.  As shown in the chart below, Arkansas Personal Income is now approximately 6% higher than the peak recorded at the beginning of the recession.

Source: Bureau of Economic Analysis

A sharp decline in farm incomes for the quarter–down by over 28% from the previous quarter–contributed to the overall weakness in the report.  Nonfarm incomes were  up by 0.6%.

Total earnings–which include wage and salary disbursements, supplements to wages and salaries, and proprietors’ income–were essentially unchanged for the quarter (+0.04%).  In addition to the substantial drop in farm incomes, a large decline was also evident in Real estate and rental and leasing (-13.76%).  These two sectors combined had a net contribution of -0.55 percentage points to total personal income growth.  As shown in the table below, a handful of industries generated fairly robust income gains, including Accommodation and food services, Management of companies and enterprises, Construction, and Transportation and warehousing.

Source: Bureau of Economic Analysis

Note:  Today’s income report also included data revisions for 2011.  These changes were very small for Arkansas, but did result in a slight upward revision to growth in the fourth quarter.  The new data show an increase of 0.7%, compared to a previously-reported growth rate of 0.6%.

County Per Capita Income – 2010

New estimates of local area personal income for 2010 were released today by the U.S. Bureau of Economic Analysis.  The data contain a wealth of information about aggregate income and its sources for every county in the United States.  But perhaps the best measure for comparing economic well-being in different areas is per capita income.  Previously released data showed that per capita income growth was 2.8% for the U.S. in 2010, and 2.3% for Arkansas.  The new data show that 41 of Arkansas’ 75 counties exceeded the national growth rate.   A total of 58 counties had growth rates that exceeded the rate of CPI inflation for 2010 (1.64%), implying real income growth.

County growth rates ranged from a low of -1.1% in Perry county to a high of 9.7% in Jackson county.  The distribution of growth rates by county is illustrated in the map below (and detailed in a table at the end of this article).  Northwest Arkansas has long been an area of rapid income growth, but a more remarkable observation about the 2010 data is the strong growth rates exhibited in the Delta region:  The counties of Arkansas, Asheley, Chicot, Drew, Jackson, Lee, Lincoln, Monroe, Phillips and Woodruff all had per capita income growth rates exceeding 4%.

Source: Bureau of Economic Analysis

A long-sought objective for economic development in Akansas has been to raise per capita personal income to a level equal to the national average.  Because the Arkansas growth rate was slightly lower than the U.S. average, the ratio of statewide per capita income to U.S. per capita income declined a bit in 2010, from 83% to 82%.  The two highest-income counties in the state, Pulaski and Union, remained above the national average but showed small relative declines.  The most rapidly growing county, Jackson County, showed an increase from 76% of average U.S. income in 2009 to 81% in 2010.

Source: Bureau of Economic Analysis

 

Source: Bureau of Economic Analysis

Updated Forecasts for 2012 and 2013

At the Arkansas State University Economic Outlook Conference today, we presented revised and updated forecasts for some key economic indicators for the Arkansas economy.  At the time that the original forecasts were complied in late October 2011, data for some series were available only through the first half of the year (e.g., personal income).  Some of the statistics that were available through the third quarter have subsequently been revised (particularly employment data).  Hence, the original projections for 2012 and 2013 incorporated forecast estimates of how 2011 would turn out.  Now that we have at least preliminary data for all of 2011, it seems a propitious time to revisit the forecasts.

In general, the data have confirmed our expectations that 2011 would show a slowdown in the pace of  the economic recovery overall, but with clear signs of improvement in the final months of the year.  In some cases, our expectations for improvement in the waning months of 2011 were exceeded — in other cases our outlook was overly optimistic.  Accordingly, the forecast revisions are mixed. And the outlook — in broad strokes — continues to be one of steady but unremarkable growth as we slowly emerge from the aftermath of the 2008-09 recession.

Personal Income
Yesterday’s data-release from the Bureau of Economic Analysis showed that total Personal Income in Arkansas grew by 3.7 percent in 2011 (Q4/Q4).  This fell closely in line with our forecast of 3.6% growth for the year.  Hence revisions to the outlook are minor.  Due, in part, to lower-than-expected transfer payments in the second half of 2011, the forecast for personal income growth in 2012 has been revised down from 5.1% to 5.0%.  The forecast for 2013 is unchanged at 3.9%.

Personal Income
Sources: Bureau of Economic Analysis, Institute for Economic Advancement

Arkansas Taxable Sales Including Gasoline
Our proxy for state retail sales, Arkansas Taxable Sales Including Gasoline (ATSIG), finished 2011 with a Q4/Q4 growth rate of 5.0% — slightly higher than the 4.4% rate in the forecast.  Some of this strength is expected to continue into 2012, prompting a slight upward growth revision from 3.2% to 3.3%.  (The slowdown from 2011 reflects, in part, the expectation of slightly lower inflation rate.)  Our original forecast included a (somewhat anomalous) slowdown in growth for 2013 (2.0%).  Such a slowdown now appears less likely, and we are now forecasting 2013 growth of 3.9%.

Arkansas Taxable Sales Including Gasoline
Sources: Arkansas Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

Home Sales
Arkansas home sales had been steadily improving during 2011 (on a seasonally-adjusted basis), but after having been supported by home-buyer tax credit programs in the previous two years, 2011 was still expected to be have the lowest total annual sales volume in recent memory.  Sales in the last three months of the year were fairly strong, but were somewhat below our expectations.  Compared to the previous year, total sales volume was down slightly more than forecasted: down 2.5% from the previous year’s (revised) sales figures.  Carrying this weakness forward into the projected sales trajectory, the forecasts for 2012 and 2013 have been revised downward.  Expectations of a double-digit growth rate in 2012 have given way to a revised forecast of +7.5%.  Sales are still expected to improve by 4.3% in 2013, but end the year with a lower sales volume than previously forecasted.

Home Sales
Sources: Arkansas Realtors Association, Institute for Economic Advancement

Payroll Employment
At the UALR Arkansas Economic Forecast Conference, we predicted that downward revisions to the payroll employment data would show that the year would end with a lower level of employment than the previous year — in sharp contrast to data that was available at the time.  The actual data revision was slightly larger than anticipated, showing a Q4/Q4 employment loss of 0.4%, rather than the 0.2% that had been forecasted.  Nevertheless, relatively strong job growth did materialize in the fourth quarter of 2011, as anticipated.  Accordingly, the growth path for employment has not been revised (+1.3% in 2012 and +1.5% in 2013), but the path has been benchmarked to a slightly lower starting point.

Payroll Employment
Source: U.S. Bureau of Labor Statistics, Institute for Economic Advancement

Unemployment Rate
Unemployment rate data for 2011 were also recently revised.  The updated statistics showed that unemployment was not quite as high in mid-2011 as previously estimated.  Moreover, the rate dropped over the last three months of the year much more rapidly than expected.  Consequently, our unemployment rate forecasts have been revised downward significantly.  2011 ended with a rate of 7.9%, instead of the expected 8.2% rate.  The downward trajectory of unemployment has been adjusted downward from this lower starting point.  We now expect the unemployment rate to average 7.4% in the fourth quarter of 2012 (instead of 7.9%) and to fall to 7.0% by the fourth quarter of 2013 (instead of 7.6%).  These would be welcome developments, if realized.  The risk to this revised forecast is that new entrants and re-entrants to the labor force might put upward pressure on the unemployment rate as the labor market continues to improve.

Unemployment Rate
Sources: U.S. Bureau of Labor Statistics, Institute for Economic Advancement

# # #

Methodological Note:  The original forecasts of November 2011 were produced using the Moody’s Economy.com Arkansas model, benchmarked to a composite of national economic forecasts.  The revised projections presented here represent adjustments to the original forecasts in light of new and revised data.   Underlying forecast assumptions and model estimates were not generally re-evaluated as a part of this exercise, but updated model forecasts for the unemployment rate and retail sales were factored into the analysis.

Arkansas Personal Income in 2011

According to the latest statistics from the U.S. Bureau of Economic Analysis, Arkansas personal income rose 0.6% in the fourth quarter of 2011 — a somewhat smaller rate of increase than the U.S. average rate of 0.8%.   The new data release also included upward revisions to Arkansas personal income in the first three quarters of 2011.  From the fourth quarter of 2010 through the end of 2011, the latest figures show that personal income was up 3.7% in Arkansas and up 4.6% for the U.S.   Farm income was particularly weak in 2011:  Although it accounts for less than 2% of total personal income in the state, farm income declined 17.3%  from the fourth quarter of 2010 through the fourth quarter of 2011.  Arkansas nonfarm income was up 4.0% over the same period.  As shown in the figure below, total personal income in Arkansas ended the year approximately 5.5% higher than its previous cyclical peak in 2008:Q2.  U.S. personal income was 4.6% above the previous peak.

Source:  Bureau of Economic Analysis

Excluding government transfer payments, the decline in incomes during the recession was substantially larger than for total personal income, and the recovery has taken correspondingly longer.  The latest data show that Personal Income Less Transfers (PILT) rose by 4.8 percent in Arkansas during 2011 (Q4/Q4).  For the U.S. overall, PILT was up by 5.8% over the same period.  For both Arkansas and the U.S., a slowing pace of transfer payments was a factor dampening total income growth over the second half of 2011.  As measured by PILT, Arkansas remains somewhat ahead of the nation in terms of economic recovery:  At the end of 2011, PILT was 2.5% above its previous cyclical peak in Arkansas, and only 1.7% higher for the U.S.

Source: Bureau of Economic Analysis

Because this release was the first to include data for the entire year, the BEA report also summarized per capita personal income figures for 2011.  In Arkansas, per capita income rose 3.7% to $34,014.  For the entire U.S., per capita income was up 4.3% to $41,663.  As of 2011, therefore, per capital personal income in Arkansas stood at 81.6% of the national average — leaving the state’s ranking among the 50 states plus District of Columbia unchanged at #45.

Source: Bureau of Economic Analysis

One consideration to bear in mind when evaluating personal income statistics is that they are not adjusted for inflation.  Typically, the the national price index for personal consumption expenditures is used to adjust the nominal figures for inflation.  By this measure, prices rose 2.5% in 2011, so the 3.7% increase in nominal per capita personal income correponds to a real (inflation-adjusted) increase of only 1.2%.

Arkansas Personal Income – 2011:Q3

New figures from the U.S. Bureau of Economic Analysis show that total personal income in Arkansas declined slightly in the third quarter, down $57 million or 0. 06%.  In addition, data for the first two quarters of 2011 were revised downward.  Previously-released data showed growth rates of 1.4% and 1.3% in the first two quarters of the year, while the new data show growth of only 0.9% and 0.7%.

Nationwide, personal income growth slowed considerably in the third quarter, growing at only 0.1%.  This represents a sharp deceleration from the 1.3% pace of the previous four quarters.  The chart below shows the growth slowdown for the U.S., and illustrates that income growth in Arkansas has been slowing relative to the national average over the past year.  As of the third quarter, total personal income for both Arkansas and the U.S. are 3.1% higher than the previous peak (in the second quarter of 2008). 

Source: Bureau of Economic Analysis

Many of the important components of Arkansas personal income were positive, although the magnitude of the changes were very small.  Nonfarm income was up slightly (+$ 25 million or 0.02%), while the overall downturn was concentrated in farm income, which was down $81 million — a 12.5% drop from the previous quarter.  The decline in farm income was, in turn, concentrated in proprietors’ income, which was down $84 million or 24.3%.

The only other components of Arkansas income that contracted in the third quarter was personal current transfer receipts.  This component, which includes all sources of transfer payments to individuals from government entities, was down by $141 million, or 0.6%.  As discussed in previous posts, transfer payments tend to provide temporary support for incomes during economic downturns, so a measure of total income that excludes transfers provides a better indication of the underlying growth of the private-sector economy.  The chart below compares Personal Income Less Transfer Payments for the U.S. and Arkansas.  By this measure, the relative slowdown in growth for Arkansas is even more pronounced. 

Source: Bureau of Economic Analysis

 Given the weak performance of Arkansas’ labor markets this year, it is not surprising that personal income growth has lagged behind the rest of the nation.  When it comes to potential drivers of this slowdown, the extraordinary weather events of 2011 are a likely culprit.  The tornados and floods in the spring, followed by the summer drought, had measurable impacts on Arkansas agricultural sector.  The good news is that weather is a temporary factor:  This year’s weakness in agricultural incomes (along with their ripple-effects on the rest of the Arkansas economy) are unlikely to have lasting effects on income growth.

Personal Income – Second Quarter 2011

Arkansas personal income growth in the second quarter was 1.3%, slightly above the national average rate of 1.1%.  According to the latest statistics from the Bureau of Economic Analysis, Arkansas’ growth rate ranked 15th among the 50 states.  Each of the three major categories of incomes — Net Earnings; Dividends, Interest, and Rent; and Transfer Payments — contributed to the increase. 

Source:  Bureau of Economic Analysis
Source: Bureau of Economic Analysis

The latest state personal income release incorporated recent revisions that were published for the national data in late August.  For Arkansas, total personal income was revised upward by 1.0% for 2008 and downward by 0.8% and 1.2% in 2009 and 2010.  As a result, the decline in income during the 2008-09 recession is now estimated to be considerably larger than previously reported.  From a peak in 2008:Q2 to a trough in 2009:Q3, Arkansas personal income declined by 3.5%.  Previously published data had shown a peak-to-trough decline of only 1.5%.

Source:  Bureau of Economic Analysis
Source: Bureau of Economic Analysis
In comparison to revised data for the U.S., however, the recessionary decline in income in Arkansas was still less severe.  The figure below compares indexes for the U.S. and Arkansas, normalized to the peak quarter of 2008:Q2.  The peak-to-trough decline in income for the U.S. was over 5.5%.  Arkansas income growth since the low point of 2009:Q3 has generally kept pace with national growth.  As of the second quarter of this year, total personal income in Arkansas was 4.3% above the 2008 peak.
 
Source:  Bureau of Economic Analysis
Source: Bureau of Economic Analysis
As reported in previous posts, personal income during recessions tended to be boosted by government transfer payments — through both “automatic stabilizers” that tend to increase when the economy weakens (e.g. unemployment insurance payments) and activist “stimulus” programs.  Consequently, measures of personal income net of government transfers provides a more accurate view of the strength of the underlying private-sector economy.  As shown in the chart below, personal income declined more precipitously during the recession and has been slower to recover when measured net of government transfer payments.  Without transfers, the peak-to-trough decline in  personal income was 6.8% in Arkansas and 8.8% for the U.S.  In both cases, the second quarter data show that personal income less transfer payments have only now recovered to their pre-recession levels.
Source:  Bureau of Economic Analysis
Source: Bureau of Economic Analysis
The fact that Arkansas fared better than many other parts of the country has meant that our relative position in terms of per capita income has improved from pre-recession levels.  In 2008, Arkansas’ per capita income was 80% of the national average.  In 2009 and 2010, it had increased to 82%.  As a result, Arkansas’ relative ranking rose from 47th to 44th.
Source:  Bureau of Economic Analysis
Source: Bureau of Economic Analysis