Economic Base Analysis Part II: Location Quotients and Industry Growth Forecasts

In my blog from July 4, 2007, I presented data on the nine county Metro Denver and City and County of Denver location quotients which evaluated which industries are part of the areas' economic bases. In this blog, I combine Metro Denver location quotient data with forecasts of average annual growth rates by industry from 2004 through 2014 from the Bureau of Labor Statistics. This allows me to plot location quotient against economic growth forecasts and create a two by two matrix (see Figure 1 below).

Within the matrix two of the quadrants are particularly useful. Those industries which have location quotients greater than one and positive economic growth forecasts are likely to be positive drivers of the Metro Denver economy (see Quadrant I in Figure 1 and Figure 2 below). Those industries which have location quotients greater than one and negative economic growth forecasts are likely to negatively impact the Metro Denver economy (see Quadrant II in Figure 1 and Figure 3 below) and should be cause for concern among civic leaders and local government officials due to their risk of decline. Note I did not label the specific industries plotted in Figure 1 because the plots are too dense to allow for labels to be legible but the industries in Quadrants I and II with the highest location quotients are listed in Figures 2 and 3 below.

From a high level perspective, the good news for Metro Denver is that there are a lot more industries in Figure 1 Quadrant I/Figure 2 than there are in Figure 1 Quadrant II/Figure 3 which indicates that based on the composition of its economic base, Metro Denver is poised to benefit more from industry growth than it will be harmed by declines.

Figure 1: LQ versus Average Annual Growth

Figure 2: Growth Industries (from Quadrant I)

Figure 2 above shows that the Denver Metro Area economic base is well positioned in a range of knowledge-based, service sector industries which are poised for economic growth including professional and technical services, internet related employment and several financial services sectors among others. It is notable that the BLS forecasts for growth in the air transportation sector are proving to be accurate as shown by the strong performance of Denver International Airport (see my July 30, 2007 blog about DIA's expansion plans).

Figure 3: Industries at Risk for Decline (Quadrant 2)

According to Figure 3, the oil and gas extraction, telecommunications, postal, computer and electronic product manufacturing, and miscellaneous manufacturing sectors are forecasted to decline from 2004 to 2014. The forecast for declines in the oil and gas extraction sector appear to be quite wrong given that the sector has enjoyed a boom throughout the Rocky Mountain West, the nation and the world due to high energy prices and strong global demand.

However, the telecommunications and computer and electronic product manufacturing and miscellaneous manufacturing sectors appear to be sectors that pose the highest risk for declining in the near term and harming Metro Denver's economic health (the Postal sector is very small in terms of total employment). The Metro Denver Economic Development Corporation has correctly recognized the risk to these sectors by identifying “Broadcasting and Telecommunications” and “Information Technology – Hardware” as two of the three “industry clusters” it has “targeted for retention.” (see http://www.metrodenver.org/DenverProfiles/IndustryClusters/IndustryClusters.icm).

I believe, even high technology manufacturing will be increasingly hard to sustain in the Metro Denver Area and the United States as a whole and that manufacturing sectors have the highest risk of contraction of any sector within the metro area economic base. Increasing global competition in manufacturing will continue to take share from U.S. based manufacturers. If this belief is true, this implies that, over the long term, economic development officials should focus their efforts on retention and recruitment of telecommunications related companies, as opposed to companies in other at risk sectors, to achieve maximum benefit for the Denver Metro Area.