POLICOM
addresses the condition of an economy from the viewpoint of
it's impact upon the “standard of living” of the
people who live and work in an area.
The economic strength rankings are created
so POLICOM can study the characteristics of strong and weak economies. The
highest ranked areas have had rapid, consistent growth in both size and
quality for an extended period of time. The lowest ranked areas have been in
volatile decline for an extended period of time.
POLICOM has created economic strength
rankings for all Metropolitan Statistical Areas and all Micropolitan
Statistical Areas.
Metropolitan Statistical Areas have at least one urbanized area with
a population of at least 50,000, plus adjacent territory (counties) which
have a high degree of social and economic integration with the core as
measured by commuting ties. They must have at minimum one county but most
often include several counties.
There are 366 Metropolitan Statistical
Areas (MSA).
Micropolitan Statistical Areas did not
exist prior to the new definitions.
Once looked upon as quasi rural areas, a
Micropolitan Statistical Area must have an urbanized area (city) with a
population of at least 10,000 but less than 50,000 population. They must be
at least one county and most are. The OMB has identified 576
MICROS in the United States.
Economic Strength Methodology
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The formulas used to determine economic
strength measure how the economy has behaved, not what has caused it to
perform.
The following are the data sectors used to
create the rankings.
Group 1 – These sectors reflect the
overall growth in size and quality. The “quality” of the economy is based
upon what people earn, as this influences their “standard of living” more
than anything.
All Workers - Earnings
All Workers - Jobs
All Workers – Wages
Per Capita Total Worker Earnings
Per Capita Personal Income
Earnings by Place of Residence
Per Capita Earnings by Residences
Wage & Salaried Workers - Earnings
Wage & Salaried Workers - Jobs
Wage & Salaried Workers - Wages
Group 2 – These sectors reflect how the
economy is behaving. Small businesses and the construction and retail
industries are extremely reactive to the “flow of money” coming into an
area. They typically grow or decline in direct proportion to the condition
of the economy. There are, of course, exceptions. Areas which have become
destinations for retirement age individuals will have high growth numbers in
both construction and retail, while they might not have a strong economy.
(No system is perfect.)
Non Farm Proprietors - Earnings
Non Farm Proprietors - Jobs
Non Farm Proprietors - Wages
Construction - Worker Earnings
Construction - Jobs
Construction - Wages
Retail - Worker Earnings
Retail - Jobs
Retail - Wages
Group 3 – These
sectors are negative sectors. Growth in these reflect a poor economy.
Per Capita Income Maintenance (Welfare)
Actual Per Capita Income Maintenance (Welfare)
Per Capita Medical Assistance for the Poor - (Medicaid)
Actual Per Capita Medical Assistance for the Poor – (Medicaid)
“Redundancy” and “counter balances” are
built into the criteria which compensate for anomalies which might occur in
one or two of the items.
As an example, an area might have a very
high percentage growth rate in Per Capita Income Maintenance. This might
mean the economy is on decline. However, percentages are funny things and
can sometimes be misleading. It is much easier for an area with a low basis
to have high percentage increases than an area with a high basis.
The Ames, IA MSA had the 4th highest
percentage growth rate (12.1%) in Per Capita Income Maintenance from 2000 –
2009 among the 366 areas. However, its Per Capita Income Maintenance in 2009
was $368, ranking 358th. While the rate of growth is high, “twice nothing is
still nothing.”
The reverse is also sometimes true. The
McAllen-Edinburg-Mission, TX MSA has the highest Per Capita Income
Maintenance ($1,525) among the metropolitan areas, but it growth rate of
6.5% ranked 307th.
There are, of course, the extremes. The
Springfield, MA MSA had the 19th fastest growth rate (10.8%) and also has
the 14th highest actual Per Capita Income Maintenance of $1,182.
If only these criteria were used, the
example MSA’s would be ranked in the following order: Ames, McAllen, and
Springfield.
POLICOM is also aware of anomalies in
labor data. It has found economies which are on decline sometimes have a
very high growth rate in the number of people employed in Retail Trade.
Retail is a reactive industry, which grows and declines in direct proportion
to the condition of the economy.
So how can retail jobs grow in a declining
economy? It is because labor data counts full and part-time jobs all as
“jobs.” This means two part-time jobs are counted as two jobs in the data.
When an area is in decline, retailers
switch from full-time workers to part-time workers. A small retailer might
have four full time workers. If the retailer lays off three full time people
but hires five part-timers to replace them, there is a statistical gain in
the labor data of two jobs. The retailer now has six workers, in the data,
which is a 50% increase from when he had four full timers.
To counter balance or compensate, the
total earnings and wages are included. Under the above scenario, both
earnings and wages will decline; bringing down the area in the rankings.
The average annual increase is calculated
for each of the items for three time periods. (2010 data
was released by the Bureau of Economic Analysis in April, 2012)
Last five years: 2010-2006
– Weighted once.
Last ten years: 2010-2001
– Weighted twice.
Previous Ten Years: 2000-1991
– Weighted once.
The percentage increases are then adjusted
mathematically for consistency. Data sectors which reflect wages are counted
twice, giving equal emphasis to quality as to the growth in size.
The growth rates are then ranked. The
rankings are totaled. The areas are then ranked for economic strength based
on their total overall rankings.
Consistency of Growth
Simply identifying
the areas that have the fastest or slowest growth rates is insufficient when
trying to determine the character of a local economy. The rate, consistency,
or stability of the growth is equally important.
Areas with unstable,
boom and bust economies are difficult places to conduct business. Residents
of these areas are subject to economic uncertainty and stress.
A merchant may lease
extra floor space following three or four great years, only to go bankrupt
after a subsequent economic decline. Residents might make long term
financial commitments based upon rapid increases in earnings and employment,
only to loose everything due to a sudden downturn causing massive layoffs.
To better understand
the nature of economic stability, we will examine the consistency of the
construction industry for three areas which had the same average annual
percentage increase.
The first graph depicts a Mythical Area, which had an Average Annual
Percentage Increase (AAI) in Construction Jobs of 2.5% from 2001 through
2009 (2001 is the first year NAICS based data was published).
Mythical Area had a
2.5% increase from 2002 to 2003. From 2003 to 2004 it again had a 2.5%
increase. Each and every year, the area increased exactly 2.5%. This means
construction employers, each and every year, increased the number of people
they employed by 2.5%.
As a result, by
averaging the nine-year history, the Mythical Area, obviously, had a 2.5%
average annual percentage increase (AAI).
Most importantly,
the area had perfect consistency as depicted by the straight
horizontal line on the graph. The flow of money into the area, which
supports this industry, grew in an absolutely consistent manner. This is a
perfect situation. However, this is myth, not reality.
Let us examine the
economic stability of the Great Falls, MT MSA for the same element. Great
Falls, during the same nine years had an AAI in Construction Jobs of 2.5%.
This rate of growth ranked 35th highest among the 366 metropolitan areas for
the nine-year period.
The
graph shows the percentage increase or decline each year. You can see the
rate of growth is not absolutely stable.
While over the nine years it averages 2.5%, there are obvious
fluctuations year by year. From 2001-2002, there was a 7.5% decline in
construction employment. The next year a 6.2% increase. The next year a 6.3%
increase, so on and so forth.
For the nine years,
the average of the annual increases is 2.5%. However, the rate of growth is
not nearly as stable as the Mythical Area. The growth line is not straight
but goes up and down.
While the rate of
growth of Construction Jobs for Great Falls is not absolutely consistent, it
is considerably more stable than the Sebastian –
Vero Beach, FL metropolitan
area.
As with Great Falls
and the Mythical Area, Sebastian – Vero Beach had an average annual increase
of 2.5% over the nine years. As you can see in the graph, the rate of growth
was extremely volatile.
From 2001-2002, the Sebastian – Vero Beach area gained 11%, the next
year gained 21%, then 14% then 20%. However, in 2007 it lost 16% of its
construction jobs, then 15%, then 21%.
Yes, the average of
all of these years is 2.5%. How it happened is considerably different than
Great Falls.
Obviously, simply
relying upon economic growth percentages is not sufficient in order to
determine the character of a local economy. Economic stability must be
considered.
To measure economic
stability, the difference or deviation in each successive year's percentage
of growth is calculated (absolute number) and averaged, creating the Average
Deviation from Previous Year (DEV).
To determine the
measurable consistency of growth, the DEV is subtracted from the AAI. This
number is used for POLICOM's economic strength rankings. Inconsistent
economies area ranked lower than consistent economies.
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