Industry Market Trends

How U.S. Cities Boost the Global Economy

May 10, 2012

Urban areas in the U.S. contribute proportionally more to the nation's economy than any other region in the world, with so-called "middleweight" cities in particular driving growth.

Urbanization is on the rise worldwide, but new research shows that the United States derives more economic benefit from its cities than any other country. As metropolitan areas in the U.S. continue to expand, densely populated zones are expected to play an even larger role in strengthening innovation and commerce both domestically and on a global level. Midsized cities are especially well-positioned to drive much of the future growth.

According to a recent report from the McKinsey Global Institute, large U.S. cities - defined as having a population of 150,000 or more residents - generated close to 85 percent of the country's gross domestic product (GDP) in 2010, compared to 78 percent generated by large cities in China and approximately 65 percent by cities in Western Europe.

Over the next 15 years, the 259 large U.S. cities are expected to generate more than 10 percent of global GDP growth, a share larger than that provided by similarly sized cities in all other developed countries combined.

"Cities and their surrounding metro regions are the real economic engines of our time. Bringing together talented, ambitious people and the assets they need to succeed, cities propel the innovation and enterprise that spur long-term prosperity," The Atlantic's Cities blog notes. "Economists increasingly argue that clustering, concentration and density stand alongside land, labor and capital as key features that shape economic growth."

Per capita earnings also tend to be higher in urban areas. Roughly 80 percent of the U.S. population lives in metropolitan areas, compared to just 58 percent of Europeans, and the McKinsey study argues that this gap accounts for three-quarters of the difference in per capita GDP between the two regions. In other words, Americans seem to be wealthier than Europeans on an individual basis because the U.S. has a larger share of its population in large productive cities.

Much of the strong performance among the fastest-growing cities in the U.S. is due to a favorable mix of industry sectors, accounting for 15 percent higher GDP growth than the average urban GDP growth rate.

Broader economic trends also play a major role in differences between cities.

"Changes in the economic environment help explain why some cities thrive and others don't," an executive summary of the McKinsey report explains. "We have seen the rise and decline of manufacturing cities; the lift that Sun Belt cities in the South and West have received from their favorable climates; and the impact on Eastern and Western cities from a shift in global economic activity, away from Europe and toward Asia, and from the Atlantic to the Pacific."

While the metropolitan areas of New York City and Los Angeles top the list of economic performance among U.S. cities, so-called "middleweight" cities - such as Austin, Atlanta, Dallas and Detroit - are forecast to drive most future growth. In fact, these cities generate more than 70 percent of the nation's GDP, roughly 20 percentage points more than the 183 cities of similar size in Western Europe.

"The extent to which the middleweight cities contribute to the strength of U.S. economic clout was surprising," Jaana Remes, a co-author of the McKinsey report, told Bloomberg News. "It's really these cities and their high per-capita income that drive U.S. economic strength."

Despite the positive economic performance among the nation's 255 middleweight cities and 28 largest cities, metropolitan areas still have a range of challenges to overcome in the short-term future.

"U.S. cities face turbulent times ahead as the economy strives to recover from deep recession. Policymakers must also confront the dampening impact of deleveraging on economic activity, cope with persistently high pockets of unemployment, and manage an aging population over time," McKinsey noted in an announcement of the findings. "Business and government leaders need to find ways through these difficulties if cities are to play their part in the US economy's growth and renewal."

For businesses to take advantage of U.S. cities' economic strengths, McKinsey recommends companies focus on actively finding talented staff and determining which cities offer the most attractive workforce and production assets. Firms should also try to collaborate with cities, many of which are looking to attract new businesses, by reaching out to local leaders and explaining the policies that would be most beneficial to a competitive landscape.