Economics

The U-Haul Index

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Forbes magazine just released its fourth annual ranking of the best states for business (see full article here and full data set here). According to Forbes:

Our Best States ranking measures six vital categories for businesses: costs, labor supply, regulatory environment, current economic climate, growth prospects and quality of life. We factor in 33 different points of data to determine the ranks in the six main areas. Business costs, which include labor, energy and taxes are weighted the most heavily.

Virginia nabbed the top spot with the best business climate in the country for the fourth straight year. Relative to the rest of the country, Virginia is booming. Its 6.5% unemployment rate is fifth lowest in the country with the four states ahead of it all having dramatically smaller economies and employment bases. Virginia is the only state ranked in the top 20 in each of the six broad categories we examined. The state finished in the top three in half of those categories (labor supply, regulatory environment and quality of life).

The two worst states for business this year were Rhode Island, which dropped five full places from last year to finish in last place in 2009, and second-to-last place Michigan, falling from 47th in 2008. Other highlights of the Forbes study include Texas ranking first for “economic climate,” Virginia ranking first for “quality of life,” and some states, such as North Dakota, Oregon, Montana, and Iowa, gaining six places or more from last year’s rankings.

One outcome of the huge differences in business climate among states documented in the Forbes study is that we should expect to see a movement of business, employment and people away from the worst states such as Rhode Island and Michigan to business-friendly states like Virginia, Texas, and North Dakota. Interestingly, one-way truck rental rates from U-Haul confirm this exact movement—see the chart above.

Each of the six paired quotes in the table shows the one-way rental rate for a 26-foot truck from cities in the two worst-ranked states (Detroit, Michigan and Providence, Rhode Island) to cities in some of the highest ranked states (Fairfax, VA; Fargo, ND; and Houston, TX), and rental rates in the opposite direction: from the cities in the business-friendly states to the cities in the business-unfriendly states.

In each of the six city pairs, the one-way truck rental rates going to cities in the business-friendly states are much higher than the rental rates in the opposite direction, by a factor of about 2 to 1 on average. Since the equipment is exactly the same for a one-way rental in either direction (a 26-foot truck), and since the distance is exactly the same, we can assume that U-Haul dynamically prices its one-way rentals based largely on the relative demand for trucks in each direction. If there are about 360 people moving and renting one-way trucks from Detroit to Houston for every 100 people moving from Houston to Detroit, we could then explain a pricing differential of $2,215 for a truck from Detroit to Houston (high demand) that is about 3.6 times higher than the $617 to rent a truck going in the reverse direction (low demand). The other pricing differences in the chart would explain differences in relative demand for the other city pairs.

Therefore, the significant differences in U-Haul one-way truck rental rates complements the Forbes rankings, by suggesting an outmigration of trucks and people from the lowest ranked states, with those people and trucks heading towards the most business-friendly states. Fortunately, the American people and businesses can vote with their feet, and with their one-way truck rentals, and that is apparently what the U-Haul data show they are doing—moving away from places like Detroit and Providence with high unemployment and business-unfriendly environments, to cities like Fairfax, Fargo, and Houston that rank high for business climate in the Forbes study.

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