Oregon Office of Economic Analysis

Last month we examined industries and regions in Oregon that grow faster (or slower) and are more volatile (or stable) than the overall economy. Today we follow up with a look at industrial diversification and how that has changed over time in Oregon.

First, when we look at industrial diversification, economists typically look at how many jobs are in each sector of the economy. A more diverse region has a smaller number of jobs in a lot of different sectors (e.g. manufacturing, health care, etc) while a less diverse region has a large number of jobs in just one or two sectors (think oil in North Dakota today, or timber in Oregon in the 1970s).

Second, in and of itself, industrial diversity is not necessarily good or bad. If a regional economy has one big industry, like North Dakota today or Oregon in the 1970s, the region can do extremely well when that one industry is booming. The problem arises when your one key sector is down. Then your regional economy suffers more as there are fewer other types of businesses to drive growth. This tends to make less diverse economies more boom-bust. Depending upon the duration of the cycles, this is either a net win or net loss relative to the rest of the country.

Third, it is hard to predict what type of shock will hit the economy in the future. Depending upon what exactly is the catalyst for recession — think technology in 2001 and housing in 2007 — a regional economy may do better or worse depending upon how reliant the region is on that particular sector. For example here in Oregon during the 2001 recession the Portland region was hit particularly hard due to its high concentration of tech manufacturers. The rest of the state experienced significantly smaller recessionary impacts. Similarly during the Great Recession Bend and Medford were hit especially hard given they experienced two of the nation’s biggest housing bubbles. Other parts of the state were not spared, but saw relatively fewer losses.

Overall a more diverse economy is better able to withstand different types of recessions, especially given we cannot accurately predict the nature of the next shock years in advance. Spreading a region’s eggs across more baskets tends to be more resilience over the long run.

The next two charts try to show how Oregon and some of our regions are doing on diversity. What the charts measure is the local mix of industries relative to the mix of industries nationwide. A value of 1.0 means the local mix is perfectly aligned with the U.S. mix. The U.S. overall does have a broad-based economy when compared internationally. A given region will never perfectly match the U.S. given we do have some regional specialization (autos in the Midwest, timber in the PNW, finance in NYC, etc). But values closer to 1.0 mean a more diverse economy overall.

Across Central Oregon, industrial diversification is at record highs. Bend’s evolution from a small timber town to a fast-growing metropolitan area is clearly seen in the data. Keep in mind that the U.S. overall (the baseline comparison here) is continuing to evolve, so when a region’s line increases in the chart, that region is diversifying at an even faster pace than the nation.

In Prineville (where I am giving a presentation this morning) they do see lower levels of diversification being a smaller, rural economy. They have higher rates of natural resources and federal government (land management), and lower rates of more urban industries like finance and professional and technical services. Crook County’s lower levels of diversification are also seen in manufacturing. Overall Crook’s manufacturing sector is nearly identical in size to the U.S. (proportionately). However 75% of Crook’s manufacturing is wood products, while the U.S. as aerospace, autos, metals, semiconductors and the like. All of that said, Crook County’s industrial diversification has nearly quadrupled in recent decades. Hopefully this bodes well for future business cycles.

On the other hand, the Portland regional economy is pretty diverse and broad-based today, more so than many parts of the country. However from this high level of diversity, Portland is not increasingly becoming more like the nation. Now, Portland does retain some specialities like semiconductors, the outdoor apparel cluster, and the like. But overall, Portland’s evolving industrial structure is matching trends with the country.

Finally, it is important to keep in mind that there are good and bad ways a regional economy can become more diversified. The good way is when a new business opens up and brings with it jobs and investments from a sector the region didn’t have before — think of the software jobs in Portland or the data centers in Prineville. These communities are more diverse today due to these newly created jobs.

Conversely, a region can become more diversified and more like the U.S. if it loses its specialty industries — think of the timber decline here in Oregon. Today we are more like the U.S. mostly due to growing jobs in other sectors, but also in part due to the loss of timber jobs which mathematically makes us more like the nation as a whole. You can literally see the old mill closure in the Bend chart above. In Crook County back in 1978 a full 50% of private sector jobs were logging or wood products, whereas today it’s closer to 12% of private sector jobs.

Overall, a diverse regional economy is better able to withstand different types of recession and be more resilience over the long run. Even so, it is clear that diversification can be a two-edged sword.

Stay tuned as we will highlight some new research that touches on the impacts of this bad type of diversification and also ties in with the educational attainment, wages and migration discussed earlier this week.