Economic output in the United States is increasingly revealing a geographic divide, with a greater share of gross domestic product being concentrated in the nation’s largest metropolitan areas. In 2018, 31 counties generated 32% of U.S. gross domestic output, according to a report in Bloomberg based on data from the Bureau of Economic Analysis.
In 2018, 31 counties generated 32% of U.S. gross domestic output, according to the B.E.A.
The shift is a reflection of the continuing flight of workers away from rural or less-populated areas toward regions that offer more jobs and opportunities. There are benefits that come to employees and employers when working in these counties, including building strong networks, gaining career capital within top industries, being around educated populations, and having better job portability.
The middle market
As middle market technology companies look to expand operations and grow into new markets, they will need to consider this growing concentration of labor and output. According to the Bloomberg study, these same counties harness 22% of the U.S. population and 26% of the overall U.S. employment. In an economy where the competition for skilled workers is more intense than ever, companies increasingly have to go where the talent is.
The biggest metro areas produce 32% of U.S. economic output
The network effect
The benefits of this concentration of talent are particularly evident in the technology industry, in which 60% of output is derived from these 31 counties – a figure that has been on the rise over the past decade. Compared to other industries, the output from the technology industry is the most concentrated from a geographic perspective. Some of this concentration is also seen when tech companies are raising venture capital funding.
Many technology companies are burning cash and require funding to sustain their operations while they scale their offerings. Over the last several years, 75% of venture capital has been invested in four primary markets: San Francisco, Los Angeles, New York and Boston. For this reason, we expect that companies will experience the most success in these key tech hubs across the United States.
Companies benefit as well
The benefits of locating in a top economic county or metropolitan area extend beyond those for employees. Companies also benefit. The output per employee increases when a company is situated in a top metropolitan area. The Brookings Institution looked at the top 20 metro areas and identified significantly more output per tech employee when a company operates in that area.
Source: Brookings Institution
Opportunity zones provide some great benefits to companies within the technology, media and telecom industry. They were created under the 2017 Tax Cuts and Jobs Act to spur economic growth in lagging geographic areas.
The combination of tax deferral and potential tax avoidance on certain capital gains can be attractive, especially to real estate investors. But the investment does not have to be an outright purchase; leases, leasehold improvements and actual lease payments all qualify, making the new regulations particularly attractive to the technology, media and telecom industry.
For example, Queens and Kings counties in New York show a large disparity between GDP output and opportunity zones within the county, but these two New York boroughs do still have significant GDP output and access to talent in the New York metropolitan region. We also noted significant opportunities within Los Angeles, which has large GDP output with a great amount of opportunities for technology, media and telecom companies to establish corporations within opportunity zones.
Source: Bureau of Economic Analysis, Bloomberg
These top counties will source job growth in the coming decade. There is little to suggest that this shift of human capital will change anytime soon, as the majority of job growth is anticipated within these cities. Small-town America may face limited or no job growth, which will cause the divide between the haves and have-nots to widen. Zip code and industry will be more important than ever.
The takeaway: Small and midsize technology companies need to consider the seismic shift when considering expansion plans. Companies may be able to attract outside investment by situating their business expansion in one of the many opportunity zones aligned to the 31 counties identified in the Bloomberg report.
More than ever, continued growth in the technology industry could be reliant on the old real estate adage: Location, location, location.