September 18, 2002

There is no question that Atlanta has suffered more economic weakness than most metro areas in the past year.  After all, employment is down 2.9 percent here as compared to only a 1.0 percent drop for the nation over the past twelve months.  What is not clear is why Atlanta is struggling so much.

Atlanta is an air hub, a communications center and a convention city, all of which were severely impacted by national changes in the past year.  Is that enough to explain why jobs vanished three times as fast locally as in the nation?

One economic device that regional economists use to determine the importance of economic activity in a local area is the location quotient.  This is derived as follows:

Determine what percentage of local employment is in each economic sector.  Do the same for the nation.  Then divide the local percentage by the national percentage. 

If the result is greater than one, the local area has relative importance in that sector.  A number below one means that the local economy is dependent upon external sources for meeting its local needs. 

For example, in July, the latest monthly data available for Atlanta, employment in transportation services was 5 percent of Atlanta's jobs.   For the nation, transportation services were only 3.3 percent of all employment.  As a result, Atlanta's location quotient in transportation services is 1.51. 

Several assumptions must be used about comparable consumer spending patterns and similar production methods used locally as in the nation.  If those assumptions are reasonably valid, then Atlanta is providing substantial transportation services to the rest of the nation. 

Atlanta's largest location quotient for any major sector is in communications, verifying that Atlanta is a major communications center.  As communications has suffered dramatically nationwide, being a center of a weak sector means substantial employment loss for Atlanta. 

However, Atlanta does not appear as a significant convention city, at least as measured by employment in hotel and lodging.  The location quotient for lodging is a paltry 0.76.  Greater  detail to determine business versus leisure lodging needs might reveal the importance of conventions, but also would expose the absence of tourists to our city. 

 Aside from printing and publishing, manufacturing is not that important to Atlanta.  Surprisingly, construction no longer is reflecting the concentrations of a growing metropolitan area.  The location quotient there is only 0.97.  When Atlanta was experiencing more underlying growth, construction location quotients were regularly in the 1.2 to 1.3 range.  This suggests that underlying growth may have suffered during the recession and Atlanta will be slow to rebound in the recovery.

An alternative explanation is that Atlanta was seriously over-built and has experienced an unusually large construction correction to remove the excesses.  The fact the construction employment has fallen about the same in the remainder of Georgia (where overbuilding is less troublesome) suggests that a slowing in underlying growth is the more likely explanation. 

What may surprise many observers is that Atlanta not only is a transportation, communications and distribution center, but it also is a gatherer of skilled people.  The location quotients for employment agency workers and data processing workers are 1.54.  Even engineering and management consulting has a strong 1.19 location quotient. 

And of course, Atlanta is a federal government center with a location quotient of 1.13.  However, little employment benefit appears to be generated from being a state capital.  That quotient is a surprisingly small 0.71, far less than for the state as a whole. 

Atlanta is not an important financial center, although insurance and real estate are stronger than in the nation. 

About half the poor performance for Atlanta is the result of heavy concentrations in sectors that have suffered disproportionately in this recession.  However, the rapid decline in wholesale trade suggests that Atlanta is losing significance as a distribution center.  The plunge in transportation services is twice as rapid as in the nation.  Fundamental loss of competitiveness may be developing in these important sectors of Atlanta's economy. 

Then there is clear evidence that retail over-building is requiring a larger adjustment in this recession than in the past.  Unlike construction, which reflects reduced underlying growth, this may be merely excess expansion that must be pared back during a recession. 

At the end of the day, I have reached several conclusions.  First, the 5.5 percent employment gains of the 1990s probably will be followed by less than 3 percent annual gains in this decade.  Second, transportation and distribution is losing its competitiveness in Atlanta.  Why requires further analysis.  Third, we are in danger of losing our newest competitive advantage, the gathering of skilled workers, if we cannot provide easier access to jobs. 

That simple process, the location quotient, can lead to powerful insights.  Unfortunately for Atlanta, those insights are not now painting a pleasant picture. 


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