Friday, April 11, 2014

County by County Economic Diversity

Mark Knold, Supervising Economist

In the Summer 2013 issue of Statewide Local Insights, the feature article addressed the industrial diversity of the Utah economy. The analysis concluded that Utah has a very diverse economic base. This means its distribution of employment is desirably spread out across various industries. In other words, Utah has its industrial eggs in many different baskets. Through a grading tool called the Hachman Index, Utah’s economic diversity measured 97.6, meaning the Utah economy is 97.6 percent as diverse as the United States economy. The United States economy is viewed as the most diverse standard against which to measure a local economy and its industry employment distribution.

Peering more deeply into the Utah economy shows where that diversity is located. Taken as a whole, the Utah economy is quite diverse, but when you dissect the Utah economy by individual counties, you instead find more industrially-concentrated economies. The majority of the state’s diversification comes from Salt Lake County alone, which accounts for nearly half of all Utah employment. Add in the industrial diversity of fellow metro counties Davis, Utah and Weber—now 80 percent of the state economy—and the state’s overall diversity emerges. These four counties are the chief contributors to Utah’s economic diversity.

Click graph to enlarge
The graph lists Utah’s counties in descending order of their Hachman Index. Saying exactly where a county goes from being diverse to non-diverse is open to debate. Here we use a general rule that an economy at 80 percent (0.8 on chart) or more of the United States diversity will be labeled as diverse. This is a loose criterion, but is based upon observing the variation in economic performances across time. Economies at 80 percent or above have less economic variation; they weather the ups and downs of the business cycle better. Given this threshold, 23 counties are below, ranging from Tooele County’s 77 percent to Duchesne County’s 9 percent.

A diverse economy is an outcome of market factors of a given region. Rather than being artificially created, a local economy’s industrial diversity is developed organically depending on the size of the population and the endowment of natural resources. Thus, it is less likely for small population counties to be economically diverse given that they simply have a smaller distribution of residents and resources. So naturally, Utah’s numerous small counties will have less diverse economies.
Mapping the diversity reveals a regional look. The core of high diversity in the Wasatch Front metropolitan counties stands out. The counties surrounding those within the Wasatch Front then offer the first lower level of industrial diversity as part of their proximity to the urban population mass.

Click map to enlarge

As one pushes out into Utah’s rural areas, the economic concentration increases. Many of these counties have only small, scattered communities that do not have a surrounding population base large enough to create a highly diversified or sizable economy. In the cases of Duchesne and Uintah counties, they are dominated by a single industry—mining (oil and gas)—where the employment share in that industry vastly exceeds that same share at the national level.

Local economies with one or two primary industries are more susceptible to boom and bust cycles. Over the past ten years, Duchesne and Uintah counties have had the best performing county economies in the state. Their energy concentration has caused them to boom as that industry has boomed. They have also had past periods of setbacks that mirror that industry’s setbacks. Fortunately, the energy industry appears strong for the foreseeable future.

Whether local economies are diverse or specialized is merely a result of their population and resources. This analysis points to areas within the state that are prone to larger ebbs and flows over time within their local economies.

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