Kansas City: Economic competitiveness has slumped

06/12/2014 5:01 PM

06/13/2014 12:52 AM

The Kansas City area can no longer rest on its reputation as a diversified economy with a well-educated population. The region has fallen behind in growth and competitiveness compared to its peer cities and it needs concerted focus to improve.

Those are the stark conclusions of a report released Thursday by the Metropolitan Policy Program at Brookings and the Mid-America Regional Council.

Kansas City’s regional economy has struggled since the Great Recession to generate more economic output relative to national standards. That resulted in weaker job and wage growth, particularly in the last two years, researchers found.

Titled “Prosperity at a Crossroads,” the 38-page report is a call to arms: It’s time to coalesce around regional economic development goals and build on the area’s existing industry strengths.

“Hats off to this community for taking this on,” said Amy Liu, a Brookings senior fellow who led 18 months of research. “It’s not a crisis yet. But it is a pause.”

The report goes a step beyond MARC’s traditional twice-a-year economic reviews delivered by senior economist Frank Lenk. It outlines the harm of splintered economic pursuits by the area’s municipalities and two states and calls for a unified strategy to grow the regional economy.

“The highly visible competition between Kansas and Missouri for jobs and firm has distracted focus away from the core assets in Greater Kansas City,” it says.

“We hope this is the start of a sustained conversation,” said MARC executive director David Warm, noting than an alternative to the economic development “border war” is needed. “We need to be much more intentional.”

On the plus side, the report complimented the region for strong, involved civic and business leaders. The Ewing Marion Kauffman Foundation and the William T. Kemper Foundation provided support for the analysis and about 20 other civic entities assisted the report’s preparation.

But Brookings and MARC economists, joined by researchers from the Center for Economic Information at the University of Missouri-Kansas City, also noted that many of the area’s entrepreneurial support efforts are in “silos” and don’t work in concert.

The region’s high-tech “startup density” exceeds the national average, the report said. But the area’s big companies, entrepreneurial ventures, research institutions and universities must generate more “patented breakthroughs” and create innovations that spill over into growth or creation of other firms.

“In 2012, the nation averaged 25.4 patents per 10,000 workers, while Greater Kansas City produced only 9.6, or 38 percent as many,” researchers found.

Furthermore, “In 2011, the average large metropolitan area in the U.S. created 61 new business establishments per 10,000 jobs, but Greater Kansas City generated only 52. Had the region kept pace with the nation, it might have added 900 more businesses in 2011.”

Some danger signals from the analysis:

The area’s economic output, employment and wages are all slightly below the national average.

In 1990, the region accounted for 0.78 percent of national output and 0.73 percent of the nation’s jobs. By 2011, the respective shares were 0.76 percent and 0.72 percent — 20-year lows.

The area’s jobs peaked at 990,000 in 2007, fell by nearly 60,000 in the recession, and regained only about 30,000. Among 15 “peer cities,” only St. Louis and Milwaukee have had weaker job recoveries. The metro area’s unemployment rate remains about 1.2 percentage points higher than before 2008.

The region’s historic “productivity advantage” has declined relative to the nation.

In 1990, the Kansas City area produced about 6.6 percent more per worker than the national average. That grew to 8.1 percent more by 2002 but has declined steeply since 2008.

Real wages of the area’s workers haven’t kept up with national standards, making it harder to get and keep workers, especially in STEM — science, technology, engineering and math — jobs.

Average annual wages in greater Kansas City grew in the 1990s compared to the national average and were 3.1 percent higher by 2002, but that edge has been erased. Average hourly wages for about 7 in 10 area workers are declining at an inflation-adjusted 5.2 percent a year, and median household income shrank by about 11 percent over the past decade.

Data also suggest that “the region may be suffering from ‘brain drain’ as other regions in the country offer attractive opportunities to talented, mobile workers.”

The region’s key industries — including information and software development, auto manufacturing, finance and insurance — have lost market share in jobs and output compared to their peers.

Growth in the telecommunications industry, particularly at Sprint, fueled the area’s job and output gains in the 1990s, but that reversed after 2000. Regional economic output of the telecom industry fell 17 percent, and the area’s share of the U.S. telecom industry dropped by a percentage point to 1.6 percent by 2011.

“Educational achievement gaps,” particularly among blacks and Hispanics, “contribute to higher income inequality” and “threaten the region’s ability to field an educated workforce.”

The Kansas City area’s workforce continues to be slightly more educated compared the nation as a whole. In 2012, 30.8 percent of the area’s workers had at least some college education versus 29.3 percent nationally.

But researchers said the region “has not produced enough highly educated or STEM-qualified workers to keep pace with employers’ demand, and its ability to attract talent from elsewhere has diminished.”

The report warned that these overarching trends “are not temporary. They mark a fundamental shift toward a ‘next economy’ that is more global, dynamic and knowledge intensive.”

“It’s good to be known as a low-cost place to do business, but we need to be more cognizant of the value-added component,” Lenk said in reference to the global competition.

The report emphasized that Kansas City’s trade surplus is shrinking as a share of its total economy. What’s needed is a focus on developing the area’s high-tech startups, predominantly in the information sector, to produce patents and exportable goods and services, researchers said.

Warm said strides have been taken in that direction in the life sciences industry. But the area is broadly wanting in other ways. Most glaringly, it needs more big players in the trade sectors that comprise Kansas City’s leading exporters, Liu said.

The report noted a “relatively sparse number of large firms” — such as Sprint, Cerner and Garmin — that compete worldwide.

“Many companies in the region’s trade sectors appear to be losing ground to their competitors elsewhere, at least in the aggregate,” the authors said.

The report specified that “difficulties experienced by some locally-based companies since 2000 caused the region’s information sector to grow more slowly in Greater Kansas City than elsewhere,” referencing AT&T and Sprint.

The area’s transportation sector and wholesale trade sector also lost their national shares of output and employment over the last two decades. The only two regional sectors to increase market share in output and employment have been professional services and manufacturing, but that wasn’t entirely good news.

“In essence, the manufacturing jobs retained in Greater Kansas City were those producing cheaper goods,” the report said, and regional manufacturing jobs actually fell.

The brightest spot in the regional economy is in the productivity of the professional services sector, which surpasses national productivity.

“However, professional services represented just 9.2 percent of the region’s jobs and 10 percent of the region’s output in 2011,” the report said. “Its growth and competitiveness alone cannot support a region…”

“A strong service economy is a strength to build on, but it isn’t enough,” Liu said.

The report concluded that traditional economic development tactics “are no longer enough to move the needle on growth” and “one-time tax incentives have become only marginally useful and at best zero-sum.”

“Don’t confuse real estate development with economic development,” Warm said.

Moving the needle requires investment in “good schools, safe and quality neighborhoods, reliable public services and infrastructure, and arts and cultural amenities,” but that isn’t sufficient, the report said.

It recommends:

Drop “fragmented, uncoordinated” economic development efforts in favor of a shared plan that focuses on the area’s existing industry strengths.

Focus on “market drivers” to help exiting industries innovate and export.

Align the region’s economic strategy with state policies and investments.

“Greater Kansas City stands at a crossroads,” the report said. “The rapidly changing nature of globalization, technology and demographics is shifting — and testing — the fortunes of the region. While the region has relevant traded sectors, robust innovation assets and a strong workforce, global macro forces have revealed weaknesses in all of these drivers of growth.”

To reach Diane Stafford, call 816-234-4359 or send email to stafford@kcstar.com.

Small ‘cluster’ of firms drives Kansas City area innovation

Only four large companies generate most of the region’s patents, a useful measure of innovation.

Among the area’s 2011 patent grants, Sprint and its former subsidiary Embarq accounted for 45.2 percent, Cerner, 3.4 percent, and Garmin, 2.4 percent.

Honeywell, BHA Group, General Electric, Johnson and Johnson, and HNTB together accounted for another 5.2 percent of patents granted local investors that year.

One-third of the patents were for communication technologies; nearly one-fifth for computer hardware or software, and about 5 percent for biotechnologies and medical devices.

Fewer than 20 companies own 62.8 percent of the 908 patents granted to local investors in 2011,

“In addition, no area research university comprises more than two percent of the region’s patents,” the report said. “In combination, thin clusters and universities without a strong track record of patenting limit the region’s ability to create a larer system of innovators and entrepreneurs than can more activelytest and scale new inventions.”

Source: Metropolitan Policy Program at Brookings and Mid-America Regional Council

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