Measurement of Local Economic Growth as a Critical Part of Market Analysis

By Epley, Donald R. | Real Estate Issues, Summer 2003 | Go to article overview

Measurement of Local Economic Growth as a Critical Part of Market Analysis


Epley, Donald R., Real Estate Issues


An important part of local market analysis is the measurement of economic growth that can be used to track progress in the economy through time and assess the relative productivity of the local base in comparison to other areas. This information is a critical part of the analysis to determine if a market has the potential for sufficiently increasing rents and equity to justify an investment. One analytical approach is to derive a local indicator that is consistent with the concepts and tools used by the federal government to measure growth for the national economy.

The purpose of this article is to suggest that a useful local indicator is the median family income statistic that is produced annually by the U.S. Department of Housing and Urban Development. It is a measure of local income that results from the skills of the area labor force that have been employed by the historical accumulation of regional capital. Also, it is consistent with the federal and state governments' emphasis on the measurement of various income accounts as proxies for growth. The gross domestic product (GDP), gross national product (GNP), and personal income (PI) accounts have been published for a number of years under the label of "economic growth."

An accurate measurement and approximation of the economic health of the local economy should be of interest to every real estate analyst and counselor. The potential for maximum future income and appreciation will be directly influenced by the rate of economic growth, and these measurement tools will be a useful and essential part of every counselor's toolkit.

ECONOMIC GROWTH AND MEASUREMENT

Economists have traditionally labeled an increase in productivity from the traditional factors of production of land, labor, and capital, as economic growth. One method to measure the production function can be in goods and services which means that a heterogeneous combination of units of production must be aggregated. The current method used by the U.S. Department of Commerce is to total the dollar income generated from the demand or sale of all units produced. This income has been reported regularly as gross domestic product (GDP) and personal income (PI).

Two difficulties arise when the GDP or the PI measurements are used at the regional and local level. First, the income figures produced by the federal and state agencies typically are two years old. Second, the local income account data often does not exist, and if it is produced locally, may not be reliable or compatible with state totals.

Five methods are discussed typically for the measurement of economic growth and to project the economic future (Sullivan, 1990, pp. 134-154). One is to measure the amount of basic employment that produces primarily for export compared to the number of non-basic employees who produce primarily for local consumption. Economic growth is viewed as an increase in the base employees only as the sale of the products they produce generates new fresh dollars that are used in a multiple effect on the non-basic workers. Further, the number of basic workers can be expressed relative to total population which creates a ratio that can be used to project employment and the resulting impact on the economy.

The second method is to construct an econometric model that finds the best relationship between a dependent variable, such as personal income, and other independent variables such as employment and retail sales (Gordon, Mosbaugh, and Canter, 1996). The typical approach is a regression model that can be used to find the best historical relationship among these variables that can be used for projections, if desired. The regression model relies on the skills of the analyst to accurately identify and update the variables and the equation(s).

The third approach is to rely on an input-output table that shows the relationship between the products that have been produced by local industries and the industries that supply the factors of production that are purchased (Epley, 1972-73). …

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Measurement of Local Economic Growth as a Critical Part of Market Analysis
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