The economist: What’s the most important industry in Colorado?

Economic development activities focus on expanding basic industry jobs

Half a dozen different industries claim to be the most important to the Colorado economy – manufacturing, energy, tourism, agriculture, financial services, real estate, to name a few. Although some claims are silly by any measure, for most it depends on whether you define importance as the value of output, number of jobs or wages paid.  Each yields a different result.

The most common way to measure an industry’s importance is to look at the new dollars it brings into the state when its output is sold.

Consider a factory selling the widgets it manufactures across the U.S. and around the world.  These dollars not only create jobs at the factory (direct jobs), they also create jobs at the utility that sells electricity to the factory (indirect jobs) and jobs at gas stations, grocery stores and retail shops as the direct and indirect job holders spend their income in their community (induced jobs). This is the multiplier in action, with each manufacturing job creating about 2.5 additional jobs in other parts of the economy.

The broadest measure of the Colorado economy is the state’s Gross Domestic Product (GDP), the value of the final goods and services produced in the state. In 2008, it amounted to about $248.6 billion, 1.7 percent of the nation’s $14.3 trillion economy.  Real estate and government accounted for the largest portion of Colorado’s GDP last year, at 12.7 percent and 12.3 percent respectively. However, these sectors sell primarily to state residents, so they aren’t bringing in new dollars. Agriculture, manufacturing, mining and tourism are the largest basic sectors, selling primarily outside the state.

Manufacturing is the primary driver of the Colorado economy, although less important than it used to be. It accounts for 6.4 percent of output and 5.8 percent of jobs. This is almost all basic industry, since most of the goods manufactured in Colorado are exported from the state.

Mining is another important basic industry, 4.8 percent of output and 1.2 percent of jobs.  With each job in oil and gas extraction supporting an additional 4.2 indirect and induced jobs, its importance goes far beyond its size. Agriculture comprises only 1 percent of production and less than 2 percent of jobs. It also has a very low multiplier, about one additional job per farmer.

People often lament the loss of goods-producing jobs to low-wage countries. However, there are many basic industry jobs in the service sector. It doesn’t matter if new dollars come from a manufacturer selling a widget to a customer in New York or a ski resort selling lift tickets and lodging to a customer from France. One industry sells goods, the other services, but both bring new money into Colorado.

Tourism is an important basic industry in the state. It accounts for about 5 percent of state GDP and 11.3 percent of jobs. Of course, many sales in the tourist industry – accommodations, food service, attractions and the like – are made to locals. But a significant portion are to people who fly to our resorts to ski or drive to our mountains to vacation. Business tourism – sales meetings and conventions – is also an important component of the tourist industry.

Other service-sector businesses are important basic industries. If an out-of-state student studies at a Colorado university or a patient travels to Colorado for medical services, he brings new dollars into the state. Attorneys, accounting firms and business consultants sell their services around the country and around the world. Software designed in Colorado is sold worldwide. Business cycles are less violent in the service sector, and there is less negative environmental impact.

Economic development activities focus on expanding basic industry jobs. But the businesses that provide the indirect and induced jobs are equally important, since companies are unlikely to relocate or expand in states that don’t provide the infrastructure and support their business and employees require.

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