Cities

Cities' Success Leaves Them Vulnerable in the Next Downturn

Urban centers, with their concentration of white-collar jobs, are not as diversified and resilient as they used to be.

City economies used to be like grocery stores. Now they're like cupcake boutiques.

Photographer: Andrey Rudakov/Bloomberg

Cities have been the big winners of this economic cycle. They suffered the least in the great recession and bounced back first. Tech jobs have clustered in cities. Millennials -- at least the well-educated ones with good jobs -- have been flocking to cities. But their strength is also their weakness. Cities have traded their historical social and economic diversity for wealth and economic specialization, making them uniquely vulnerable to future shocks.

There have been three broad phases of American cities. In the first, lasting until the early-to-mid 20th century, cities were hubs of production. They were where factories were located. In resource-rich parts of the country, they had many banks and merchants. Oftentimes there were colleges and universities nearby. They were where immigrants came to build new lives for themselves. They were social arrangements of necessity rather than choice.

In the second phase, lasting until the 1980s, cities were in decline. Factories, and their associated manufacturing jobs, left, first for cheaper areas domestically, and then in some cases out of the country entirely. The era of the automobile and the explosion of suburbia led to a hollowing out of cities as most people with the freedom to leave cities for suburbs chose to do so. The jobs that remained in cities may not have been glamorous, but they were resilient.

In the third phase, in which we're now living, cities increasingly resemble playgrounds for the wealthy and well-educated. As top talent has clustered in urban areas, housing costs have soared. Property developers have responded, in this economic cycle in particular, by building luxury apartments for young professionals. After decades of being based in the suburbs, large corporations have moved their headquarters back to downtowns and central business districts. The technology sector is concentrating not only in cities, but in a handful of cities. As city residents are increasingly wealthy and well-educated, the local business mix has changed as well, increasingly made up of high-end coffee shops, craft beer and cocktail bars, and organic grocery stores.

Cities were the best performers coming out of the last recession because the excess of the last economic cycle was concentrated in the suburbs and exurbs. It's where too much housing construction occurred, where household credit was over-extended, where local economies were over-reliant on real estate and consumption. Cities, by comparison, had more diversified economies that were less reliant on household credit and real estate, the epicenter of the crisis.

But the specialization of high-end jobs and wealth in cities could end up being their undoing. The city model of old was like a grocery store -- a balanced mix of all types of different products, from milk and bread to a pharmacy to some splurge items like cupcakes and Champagne. In tough times, cupcake and Champagne sales might fall, but people are still going to buy their milk, bread and toiletries, keeping the store afloat.

Cities today increasingly resemble endless aisles of Champagne and cupcakes. If tough times strike again -- perhaps in a tech downturn, or in a stock market crash -- the pain will be concentrated here. And while the well-paying white-collar jobs migrating to cities now are coveted, there's no guarantee the best jobs will always be urban. The next economic cycle may well bring a different pattern.

We don't have to go back very far to see an example. During the first dot-com boom, tech jobs were incredibly concentrated in the San Jose metro area. The unemployment rate fell as low as 2.7 percent. Then the tech bust occurred, and by the end of 2002 the unemployment rate in the area had soared to 8.9 percent. It took until 2012, over a decade after the dot-com bust, for the metro area's unemployment rate to stay below the national average again.

A Long Recovery

The unemployment rate in the San Jose area

Source: U.S. Bureau of Labor Statistics

We don't know when this current economic expansion will end, or why. But as cities continue to outsource their working-class and back-office jobs to other communities, and displace long-time residents for wealthy newcomers, they're more vulnerable to a shock than they've been in decades.

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:
    Conor Sen at csen9@bloomberg.net

    To contact the editor responsible for this story:
    Philip Gray at philipgray@bloomberg.net

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