Real Income Growth across Metropolitan Areas

Article excerpt

06.06.08

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A standard measure of regional economic performance is per capita income growth. Typically, analysts try to remove the effects of inflation on the raw data for income growth by converting nominal per capita income for an area into real or constant-dollar income. The Consumer Price Index (CPI) is often used to make such adjustments. The chart below shows the real per capita income growth rates for a number of metropolitan areas from 2000 to 2006. (Note that the Bureau of Economic Analysis releases an adjusted income growth series, but it uses the PCE price index to deflate the raw data. We use the CPI here because of some comparisons we make below. Using the CPI instead of the PCE doesn't affect the rankings of cities with respect to their growth, although it does affect the magnitude of the real growth rates.)

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In our adjusted series, real income growth was highest in San Diego, Miami-Fort Lauderdale, and Honolulu and lowest in Atlanta, Detroit-Ann Arbor-Flint, and Portland-Salem. With respect to Fourth District metropolitan areas, Cleveland-Akron experienced very modest growth of 1.1 percent over the period, ranking it sixth-lowest among the 26 metropolitan areas. Cincinnati had a growth rate of 2.7 percent, placing it in the middle of the distribution, and Pittsburgh's growth rate was 7.6 percent, the highest in the Fourth District.

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This standard approach to measuring real income growth assumes that the changes in price levels experienced in metropolitan areas are similar to the change in price levels at the national level. No adjustments are made for differences in inflation rates across metropolitan areas. But inflation rates are not necessarily identical in different regions. For the areas in the figure above, the Bureau of Labor Statistics (BLS) produces region-specific CPI's, which provide estimates of how price levels have changed over time within a particular region. Comparing changes in regional price indexes across regions shows which region has experienced a more rapid change in prices--not which region has a higher price level or higher living costs. The distribution of metropolitan average CPI growth rates indicates considerable variation in inflation across regions. …