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Another Small City Loses Another Corporate HQ

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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Caterpillar Inc., the pride of Peoria, Illinois -- and, despite its troubles over the past few years, one of the most successful manufacturers in the U.S. -- is moving its headquarters to an as-yet-undetermined location in the Chicago area. Only 300 people will work there; the mining- and construction-equipment maker employs about 12,000 in the Peoria area, and Chief Executive Officer Jim Umpleby told the Peoria Journal Star that the city "really will still be, in my view, the center of the universe for Caterpillar."

Except that, you know, the highest-paid people and chief decision-makers will be in Chicago, a two-and-a-half-hour drive away.

Chicago, despite its many troubles, has been attracting a lot of corporate HQs lately. Food processing and commodities trading giant Archer-Daniels-Midland Co. moved in from the small city of Decatur, Illinois, in 2014. Competitor Conagra Brands Inc. came from Omaha, Nebraska, last summer. McDonald's Corp. is planning a move from the suburbs into the city.

In a Q&A with the Journal Star, Umpleby named access to flights as the main reason for Caterpillar's move:

About two-thirds of our business over the last five years has come from outside the United States. We see a lot of growth coming in the international markets, and we believe that speed and agility for our senior leadership team to be able to travel around the globe is very important.

There are other benefits to having your headquarters in a big city: Highly educated workers, especially younger ones, tend to prefer being there. The restaurants are better, the cultural offerings richer, the opportunities to meet other people with similar interests greater, etc. It's also easier for both members of two-income couples to find good jobs.

I wouldn't be so presumptuous as to say the quality of life is better -- I don't know Peoria, but I've spent a lot of time in the Quad Cities, a metropolitan area of similar size (metro Peoria has 378,018 people, the Quad Cities 383,606) about 90 miles to the northwest, and it's really nice there. But economic trends generally aren't going the way of such places. In 2016, U.S. metro areas with 500,000 people or more experienced employment growth of 1.7 percent, according to Jed Kolko, chief economist of jobs website Indeed. In the rest of the country (sub-500,000 metros and rural areas), job growth was just 0.7 percent.

Thanks to a long boom in commodity prices and emerging-market economic growth that probably benefited Caterpillar more than any other major U.S. company, job growth in metro Peoria actually kept up with the national average (and beat Chicago's) from 2000 through 2012:

Jobs Have Been Disappearing in Peoria
Change in nonfarm employment since December 1999
 
Source: Bureau of Labor Statistics

Since 2012, though, commodity prices are down, emerging-markets growth has slowed, and things have been pretty tough for Caterpillar and Peoria. The company's annual revenue fell from $65.9 billion in 2012 to $36.7 billion last year, and Peoria-area employment fell to 174,500 from 185,400 over roughly the same period.

So if moving the headquarters to Chicago and making it easier for executives to fly around the world to drum up new business helps Caterpillar, it might help Peoria, too. Still, the move feels like a microcosm of a larger political and economic trend that has been pulling the country apart.

The Atlantic's Alana Semuels has an informative account this week of the diverging fortunes of two Indiana cities -- big, growing, increasingly cosmopolitan Indianapolis and small, struggling Connersville. She writes:

For a century leading up to 1980, poorer regions were catching up to richer regions of the country in terms of wages, as an oversupply of workers in richer regions drove wages down, while an undersupply in poorer regions drove wages up. But this “convergence,” as economists call it, petered out with the rise of computers, according to research by the University of Chicago doctoral candidate Elisa Giannone. Beginning in the 1980s, as computers made certain people more productive and valuable in the labor market and made other people obsolete, wealthy regions with educated workers began to do better and better. Between 1940 and 1980, wages in poorer U.S. areas grew faster than wages in richer places by 1.4 percent per year. But starting in the 1980s, wages in poorer places stopped catching up to those in richer ones, Giannone says.

Those richer places tend to be large metropolitan areas, which have been increasing their share of the country's people, jobs, wealth and economic power while smaller metro areas (except for college towns) and the countryside lose out. For the moment, thanks to the way the country's population is distributed, and the way political institutions such as the Electoral College and the Senate are designed, it's the parts of the country outside the big metro areas that have the political power. Lots of people in big cities think this is unfair. It is! But so, from the perspective of a smaller city, is having the corporation that set up shop in your town in 1910 move its headquarters to the big city.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
Brooke Sample at bsample1@bloomberg.net