BUSINESSWEEK ONLINE : OCTOBER 16, 2000 ISSUE
ECONOMICS

High-Tech Hustle Sweeps the Nation
New Economy productivity gains are taking hold in surprising places

Seattle, Silicon Valley, Austin, Charlotte--these are the areas with a reputation for being on the leading edge of the New Economy. All four are located in the West and the South, regions that saw the largest gains in output and population in the 1990s.

Yet new figures from the Commerce Dept. show that the productivity gains of the New Economy are far more widely spread than anyone would have expected. Output per employee hour rose at a 2% to 2.4% annual rate in every region of the country from 1995 to 1998 (chart). In addition, the difference in job growth and unemployment rates between regions is lower than ever before. ''This is the most evenly distributed expansion since World War II,'' says Stephen P. Brown, director of microeconomic policy analysis at the Federal Reserve Bank of Dallas.

The primary reason for this remarkably uniform regional performance: High-tech industries and products are everywhere. Silicon Valley may be the epicenter of the tech boom, but technology industries--from semiconductor manufacturing to software development to Web hosting--are sweeping the nation. Moreover, information technology has contributed greatly to the Northeast's productivity surge in finance and to the manufacturing revival of the Midwest, the region that saw the greatest productivity-growth improvement in the 1990s. Meanwhile, the West's economy was hurt by the Asian crisis, and in the South, productivity gains are held back by a less-skilled workforce and the region's dependence on such low productivity industries as tourism.

Nevertheless, the key factor in the deregionalization of the U.S. economy is the spread of tech from coast to coast. States in the West used to depend heavily on mining, food processing, and timber. Manufacturing played a central role in the Northeast and Midwest. Defense spending was a driving force for employment and growth across the South and West. And prosperity in much of Texas and nearby states was determined by the price of oil.

Today, tech-oriented businesses are a mainstay of every region. Since these jobs tend to have higher output and faster productivity growth than other types of work, employment gains in the tech sector push up state and regional productivity levels. An example is Illinois, which added 43,495 tech jobs from 1993 to 1998--a jump of 25%. Productivity in the state rose by 2.5% per year over the period. Minnesota and Georgia also enjoyed tremendous tech growth and strong productivity growth.

DRAMATIC EFFECT. In some cases, the effect of technology is being felt indirectly. In the Northeast, finance may be the region's main engine of growth and productivity gains, but the computer helps make these gains possible. ''Computers have dramatically increased productivity throughout this sector,'' says Rae D. Rosen, a senior economist at the Federal Reserve Bank of New York.

Information technologies are also contributing to the Midwest's tremendous productivity comeback--one driven by gains in the auto industry and other segments of manufacturing. Computers, electronic tracking systems, color-coded display boards, and even cell phones are now widely used inside manufacturing plants to allow instant information sharing and production monitoring. ''The goal is to cut waste and increase productivity by connecting suppliers, employees, and customers,'' says Arthur C. Wheaton, a high-performance workplace specialist at Cornell University.

Indeed, severe labor shortages in the Midwest are forcing manufacturers there to focus even more on using technology to boost productivity. While the current expansion has generated strong product demand for companies in all regions, it has also meant especially tight labor markets for Midwest employers. That's because huge numbers of workers left the area during the economic difficulties of the 1980s, says regional economist Mark D. Partridge of St. Cloud State University. And since labor markets are ''red-hot'' everywhere, he says, people have little incentive to return. ''Midwest companies have simply been forced to get more out of their existing workers.''

DIFFERENT KICK. In contrast, productivity gains in the South, the region with the biggest increase in population growth, have been held back by a less-educated workforce and a high concentration of jobs in tourism. A number of Southern states lag in measures of educational performance and attainment. Mississippi, Louisiana, Alabama, and South Carolina rank near the bottom, according to eighth-grade math and science scores. And tourism ''just doesn't give you the same productivity kick as some other sectors,'' says Donald Ratajczak, who directed the Economic Forecasting Center at Georgia State University from 1973 until his recent retirement. ''You can do some things with new technologies to deliver a meal to a table faster, but you still just don't get the same increases you get in financial areas and a lot of manufacturing.''

It's not just productivity growth that seems relatively even among regions-- it's labor-market performance as well. The region with the highest unemployment rate, the West, is only 1.1 percentage points higher than the Midwest, the region with the lowest unemployment. ''It's the smallest difference in unemployment rates since the data has been collected,'' says Jim Campbell, an economist with the Local Area Unemployment Statistics program at the Bureau of Labor Statistics. Unlike the past, ''we don't see any states with particularly high unemployment.''

While the West shows no special advantage in productivity growth in the just-released data, that may change once figures become available for 1999 and 2000. ''The Asian Crisis tempered growth more in this region than elsewhere,'' says Mary C. Daly, a senior economist at the Federal Reserve Bank of San Francisco. Certainly, there are signs of recent strength. Dennis Meyers, principal economist for California's Finance Dept., notes that high-tech jobs in manufacturing and services rose 9.5% for California during the year ended in March, 2000, which should add to productivity growth.

Nevertheless, regions have never been so closely linked by commerce--or so similar in economic makeup and performance. The era of region-specific booms and busts may be a thing of the past.

By Charles J. Whalen in New York

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