Hard Times? Depends on Where You Live

Alan Berube
Alan Berube Interim Vice President and Director - Brookings Metro

June 28, 2009

Are we experiencing the worst economic downturn since the Depression? In most California cities, it looks that way. In most Texas cities, probably not.

That’s one story emerging from a new Brookings Institution analysis examining the performance of the nation’s largest metropolitan areas over the course of the current recession.

Notwithstanding the attention lavished on the national economic figures emanating from Washington each week, we’re not undergoing one uniform recession nationwide. The effects on our 100 largest metropolitan areas — the combined city/suburban labor and housing markets that collectively represent three-quarters of the U.S. economy — have ranged from glancing blow to body slam.

Let’s start with the Riverside-San Bernardino metro area. As of March 2009, jobs there are down nearly 8% from their peak, and home prices have dropped 28% in the last year alone. On these and other indicators, Riverside ranks among the five hardest-hit metro economies in the nation. The Los Angeles and Oxnard metro areas rank among the bottom 20 in a broad index of recent economic performance.

By comparison, the economy in San Antonio is humming. Jobs are down less than half a percent from their peak, and home prices have risen over the last year. Austin, Dallas, Houston and even the border cities of McAllen and El Paso have seen only small effects from the downturn.

How can these areas perform so differently? It turns out that a lot depends on what a metro area’s firms and workers do, and what its housing market did in the lead-up to the crash.

In the nation’s manufacturing belt, which rings the Great Lakes from upstate New York to eastern Minnesota, many metro areas have suffered job declines over multiple decades. This recession has accelerated those losses dramatically in areas that depend most on the auto industry. Detroit, for instance, has lost a stunning 12% in just the last five years. In Ohio, Toledo and Youngstown have been similarly battered.

But at the other end of the region, Rochester, N.Y., is faring relatively well. It still has a lot of manufacturing jobs, but they’re in areas in which demand has remained fairly strong, such as imaging technologies and healthcare devices. And the area benefits from the presence of major universities — nationally, the education industry has added jobs over the course of the recession.

A similar story plays out across the metropolitan map based on underlying economic specialization, both positive (Pittsburgh in healthcare; Washington in government) and negative (Orlando in tourism; Charlotte in banking).

Meanwhile, the Sun Belt was home to the building and lending boom that eventually turned sour and shook the foundations of the world economy.

In Riverside, the outer parts of Los Angeles County and nearly every metro area in the Central Valley, home prices rose rapidly during the first half of the decade. In Modesto, a house that sold for $175,000 in 2000 was valued at $359,000 by 2006, and one-third of jobs added during that period were in construction and real estate. When the subprime mortgage crisis emerged in 2007, whole segments of the Central Valley’s economy crashed — as did those in much of the state of Florida and some Western cities, such as Las Vegas and Phoenix.

Yet not every Southern and Western metro area got caught up in the bubble. A $175,000 house purchased in Houston in 2000 was valued at just $200,000 by 2006. That meant less speculative lending, and less fallout from the mortgage crisis. Indeed, while home prices nationally dropped about 6% over the last year, they rose by 5% in the Houston area.

The uneven downturn points to the likelihood of a highly uneven recovery. Washington shouldn’t hang the “Mission Accomplished” banner when national jobs, GDP and home-price figures begin to improve, but rather when a broad-based set of metro economies see persistent gains. Ensuring such a recovery will probably require more than the general monetary and fiscal policy measures applied thus far.

For instance, the work of the president’s auto recovery team will be crucial for helping a dozen or more metro areas wracked by the decline of the Big Three, which may not ever fully bounce back from this downturn.

It will not be enough to simply steer more federal grant dollars to these communities. Instead, a longer-run vision for what these metro areas will do in the new economy — how best to make use of their existing business and technological capabilities, worker skills and place-specific institutions like universities and civic organizations — should guide investment. So too should a strategy for achieving more rational growth patterns that reflect the population and job loss these areas have suffered over decades.

In Riverside, Modesto and other metro areas heavily affected by the housing crisis, we must evaluate whether new programs to help homeowners avoid foreclosure are stabilizing housing prices, and whether the stimulus package is helping to reduce vacant and abandoned properties.

Large, economically diversified cities such as Los Angeles and San Francisco may recover as the housing market stabilizes and consumer confidence rebounds. The Inland Empire, Central Valley and other metro areas that over-relied on housing for recent growth may take longer to adjust, and public policy may have to actively assist in stimulating new business investment and worker training.

Stabilizing the macro-economy is a necessary first step. More purposeful steps to reinvigorate metro economies are now needed to put the country back on the road to sustainable long-run growth.