A New Look at Economic Dynamism of Small Cities

Larger cities and metropolitan areas tend to dominate discussion and research on regional economic dynamism. Economic dynamism is churning in an economy that creates the potential for positive economic performance. The Small City Economic Dynamism Index provides a snapshot of the economic trajectory of small and midsized cities across the United States. The updated version of the index has several new indicators and now includes data on 400 metro and micropolitan areas with populations between 50,000 and 500,000.1

The index and its underlying data set are tools for leaders in community and economic development who work in or with small and midsized cities. The index comprises 13 indicators across four categories: demographics, economics, human and social capital, and infrastructure. A detailed description of the new version of the index including its component indicators, sources, literature, methodology, and references is described here.

Why develop a measure of economic dynamism in small and midsized cities?
Economic dynamism is a concept often described as akin to the process of creative destruction, which precedes and accompanies economic growth. Old firms are replaced by newer, more productive ones, which absorb talent and create new growth. In this vein, much has been written recently on declining business formation and startup activity at the national and metropolitan levels (see, for example, Kauffman Foundation and Economic Innovation Group). Measures such as initial public offerings, patents, and the establishment of new (small) businesses suggest a narrative of declining dynamism in the U.S. economy.

However, in smaller sized cities, these narrow metrics may not fully capture a broader churn in the economy that creates the potential for local leaders to improve community and economic development outcomes. Our new index provides a snapshot of the economic trajectory of small and midsized cities by measuring changes in a selection of 13 indicators that correlate with economic growth or development. Importantly, leaders act on (or respond to) economic dynamism—through policy, programming, and investment at the local level—to realize positive economic performance (and thus improve community and economic development outcomes).

What did we find?
Three broad observations can be drawn from the index and its underlying data:

  • Most small and midsized cities are growing. In fact, 78 percent of the 400 cities in our data set experienced population growth between 2005 and 2015. Chart 1 summarizes median population growth by quartiles determined by a city's economic dynamism ranking. Cities ranked as having high economic dynamism grew most quickly (the median city in this quartile experienced 12.1 percent population growth), but even a majority of cities ranked as having low economic dynamism experienced some population growth, albeit much slower than others'.

  • The data on small and midsized cities reflect a paradox between economic growth, on the one hand, and broad-based opportunity, on the other. Opportunity refers to the possibility that low-income residents can advance economically within a city or region, based on their own effort and ability. A place can appear to thrive according to certain metrics, which, in some cases, mask a reality that many residents increasingly struggle to benefit from local economic growth. While we see positive momentum across common measures of economic growth (employment, building permits, population densification, and educational attainment), indicators of broad-based opportunity in these same cities suggest a more challenging reality (see chart 2). In the median city, for example, median household income, income inequality, the poverty rate, and startup rate have trended negatively.

  • Although the tool was not designed to identify the predictive factors for increasing or improving economic dynamism, a few anecdotes stand out. In particular, small and midsized cities in the top quartile of economic dynamism tend to have one or more of the following characteristics:
    • The nearby presence of large industry or a military base
    • Home to a college or university
    • Proximate to or part of a tourism or second-home market
    • Located in the shadow of a larger city.

How to use this information?
The index and its underlying data set are tools for leaders in community and economic development working in small and midsized cities. The interactive charts enable peer comparisons and visualization of trends across time. The information can be used to support development of local policy, strategies, or funding proposals related to community and economic development in small and midsized cities. For additional information on local policy and approaches to improving economic and community development outcomes, refer to these works:

Looking for Progress in America's Smaller Legacy Cities: A Report for Place-Based Funders summarizes a study tour undertaken by representatives from four Federal Reserve Banks and more than two dozen place-based funders. The study tour fell under the auspices of the Funders' Network–Federal Reserve Philanthropy Initiative. The report documents visits to Chattanooga, Tennessee; Cedar Rapids, Iowa; Rochester, New York; and Grand Rapids, Michigan—all cities that experienced some revitalization after long periods of economic decline. The report's aim is to help guide representatives of organizations that fund projects in specific geographic areas, often referred to as "place-based funders." These funders can play an important role in helping residents of growing cities access broader economic opportunity.

Experts Offer Strategies for Promoting Economic Growth and Mobility, in a recent issue of Cityscape, details successful strategies for promoting economic growth and mobility, giving local planners, policymakers, and funders new evidence and approaches to put into practice to address the changing landscape of spatial inequality. The issue leads with an introductory essay, "Transforming Communities for Inclusive Growth," that discusses the growing spatial concentration of opportunity and the forces behind that trend. The articles synthesize the factors that cause economic stagnation and offer potential solutions to unequal opportunities across the nation.

By Will Lambe, senior CED adviser, and Mels de Zeeuw, research analyst II in the Community and Economic Development group

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1 The original version of the index was released in 2015. Based on feedback from program partners and peers, we made several changes to this 2.0 version of the index. First, the new version includes both micropolitan and metropolitan areas. We made this change so the index and its underlying data set could be useful to a broader audience of practitioners and policymakers in smaller cities. The addition of micropolitan areas, however, meant that we had to change several of the original indicators based on data availability. Second, we added the most recent data available for each indicator. In most cases, this meant adding data for 2015 and shifting the time frames in our analysis to reflect newer data. Importantly, the trade-off associated with these changes (new indicators and new data) is that it is not possible or appropriate to compare economic dynamism scores for any particular city from the first to second version of the index, because the component parts of the index have changed.