Commerce Lexington Research Update

In case you weren’t reachable by Commerce Lexington last Thursday or were on vacation, like I was, a new ranking for Lexington was announced by Forbes.com for the Best Places for Business and Careers. Press release excerpt as follows:

Lexington, Kentucky has been named the 9th Best Place for Business and Careers among the 200 largest metro areas by Forbes. The metrics included costs (business and living), job growth (past and projected), income growth, educational attainment and projected economic growth, as well as quality of life issues like crime, cultural and recreational opportunities as well as net migration patterns, and finally the percentage of subprime mortgages handed out over a three-year stretch and the number of highly ranked four-year colleges in the area.

VIEW THE FULL RANKINGS LIST HERE

LEXINGTON’S METRICS PAGE

People love rankings, and we here at Commerce Lexington are no exception. It isn’t every day that Lexington is rated more highly than everyone’s favorite go-to model city, Austin, TX. I’ll admit to just a little bit of pride in that regard. Austin, TX has a lot going for it and a lot of great people and businesses as well that contribute to its reputation. Unfortunately, the grass is often greener on the other side, and those of us in Lexington tend to forget that we have a lot going for us as well – not in the least our fantastic people and businesses.

I know that rankings can be a cause for joy and also skepticism. Lexington has racked up its fair share of rankings in the short time I’ve been Research Director. Some of these rankings are more than a little eyebrow raising (Best Metros to Test New Products anyone?), but in general, what they sometimes lack in statistical rigor, they often make up for in free publicity and chances to reflect positively on how great Lexington truly is.

Speaking of statistical rigor, I’ll formally introduce the research portion of the ranking story. A little history: Lexington was rated the #5 Best Place for Business and Careers by Forbes in 2008. Lexington was also rated the #33 Best Place for Business and Careers by Forbes in 2009. So how does Lexington go from #5 down to #33, back up to #9? Forbes doesn’t publish the recipe to their ranking secret sauce on the website, but they do give us a bit of insight on what makes up the overall ranking:

I’ve highlighted a couple boxes in green because I think they provide the most insight as to what happened from 2008 to 2010. We’ll get to that in a second. First, I noticed that Forbes has been changing their formula slightly, adding two new categories in 2009, Job Growth Projected and Subprime Mortgages. We did well in the Subprime Mortgage category, not well at all in the Job Growth Projected category. Our poor rank in projected job growth (one of the green boxes) and a poorer than average score in the Income Growth category (the other green box) are probably the key factors that dragged our overall rank down in 2009.
Forbes also added a new category in 2010, Economic Growth Projected. We didn’t do as well in this category either, which probably kept us out of the top five. You’ll notice that our income growth and projected job growth rebounded quite nicely, especially the projected job growth. So how does Lexington go from #151 to #32 in the course of a year?

The answer (in my humble opinion) is the “Projected” in Job Growth Projected. To quote a famous economist, “The only function of economic forecasting is to make astrology look respectable.” Our metro region sustained some heavy job losses in a few critical areas in late 2008 and early 2009, most memorably in the automotive supplier industry. I think the uncertainty of the mounting recession along with the uncertainty of the automotive industry made job growth projections more than a bit daunting. As you can tell, however they projected the job growth for our metro region, they took the worst case scenario.

A year later, albeit with high unemployment, Lexington never truly saw the sky fall. In fact, in a lot of instances, we are a metro region that is poised for growth in the recovery phase of the economy due to our diversity of industry, the presence of the University of Kentucky, and our highly educated population (among many other attributes).

It is certainly difficult to predict what next year will bring, but my core belief is that the things that make Lexington great will continue to shine through for years to come, no matter what ranking we get from Forbes or anyone else.

August unemployment figures (released a couple weeks ago) show a continued seasonal decline in the unemployment rate. Lexington dropped from 8.3% to 8.2% and the region from 9.3% to 9.0%. See picture below:

Probably the most interesting parts of the above chart are the July spikes in unemployment returning to normal. Still not entirely sure what they represent, but something happened in Scott County in late summer that I really would like to have some more information on. The funny thing is that despite the spikes from a few counties, overall, unemployment for the region was relatively unaffected overall. This would be due to the 800lb gorilla in the room, Lexington. With just under half of the labor force residing in Fayette County, large changes in Lexington’s unemployment will have a much more pronounced effect on the region than the smaller counties. Here is what that looks like visually for August:

A more comprehensive breakdown for the statistical table geeks like me looks like this:

As you can see, there is a pull between Fayette and Woodford counties and the rest of the region’s counties. Fayette and Woodford are contributing more labor force than unemployed persons, the rest of the counties, the opposite.

Big word of caution here: the program that these statistics come from, the Local Area Unemployment Survey (LAUS), measures unemployment based on residence, not place of work. Many of the unemployed in the surrounding counties could have lost a job in Lexington and vice-versa. I’ll try to dig up some way to flesh that out in a later post.

The Bureau of Economic Analysis simultaneously released their local GDP data for 2007 and 2008 this week. Usually this data is delayed by at least a couple of years, so having 2008 data before the end of 2009 was quite exciting (as far as research geeks like myself go). Knowing that the stock market crash happened right before the start of the third quarter last year, I definitely expected not-so-great news on the output front. Turns out, I was only partially right.

For the record, in 2008, Lexington’s MSA (metropolitan statistical area, more on this later) churned out $22.7 billion dollars in nominal output. This was divided between $13.7 billion in service-producing industries, $5.8 billion in goods-producing industries, and $3.3 billion in government activities.

In order to compare these numbers to past years, you need real GDP, or for inflation to be taken out of the picture. Adjusted for inflation and chained in 2001 dollars, you get the numbers in the chart below. As you can see, overall, Lexington’s output grew slightly from 2007 to 2008. Slightly equates to .8% to be exact. The closest comparison is between 2002 and 2003, when output only grew by .6%.

The biggest question mark in all this analysis is what 2009′s numbers will end up showing. My inclination is to think that if one quarter of serious recession was enough to drag down growth to .8%, then a full year of recession will show no growth or contraction. Notice the decrease in goods-producing output. This category is 5/6 manufacturing, with construction, mining, and agriculture making up the remainder. While service-producing and government activities both grew or were flat in 2008, the overall output was dragged down by goods production. It will be interesting to see if there is as serious of a reduction in services as I predict there will be in goods. If both services and goods decrease significantly, it could make for some uncomfortable numbers in 2009.

Just a note: Lexington’s MSA includes the counties of Bourbon, Clark, Fayette, Jessamine, Scott, and Woodford. Illustrating the point that governmental and political distinctions don’t always accurately describe economic activity, both Madison (Richmond and Berea) and Franklin (Frankfort) are not technically part of our MSA. Instead they are designated as distinct micropolitan areas, which (in my world at least) means that they don’t exist in BEA figures, which are only released at the national, state, and MSA level. I think it is a pretty easy assumption that both Madison and Franklin counties are part of our local economy, so it is also a safe assumption that Lexington’s economy is larger than the stated $22.7 billion.

While doing research for the upcoming revision of the Commerce Lexington business prospectus, I had the opportunity to dig a little deeper into Lexington and the Bluegrass’ economic output.

Despite a solid base of manufacturing and automotive suppliers, the Bluegrass Region is mainly a service-based economy. By itself, manufacturing is a larger employer and wage-payer than any one service sector in the Bluegrass. However, when combined, the various service sectors easily outpace manufacturing in both employment and wages. Especially strong in the areas of healthcare and education, the service sector continues to be the main economic engine for the region.

The Bluegrass is a greater than $20 billion economy marked by consistent, sustainable growth. Between 2001 and 2006, the Bluegrass’ economy grew 17% overall which translates to a real compound annual growth rate of 2.6% – higher than both the state of Kentucky and the USA. In particular, the Bluegrass’ goods-producing sector outpaced the USA as a whole by a factor of 2.

1 – The Lexington MSA includes the counties of Bourbon, Clark, Fayette, Jessamine, Scott, and Woodford.