The economy of the Portland Metropolitan area has grown rapidly in the 1990s. Most area residents are aware that the region has a larger population, more businesses and more jobs than it did a few years ago. But the Portland economy of the late 1990s is not simply a larger version of the economy the region had twenty years ago, or even a decade ago. The purpose of the Regional Connections project is to explain the nature and the extent of these changes.

This technical report lays out, in detail, the economic analysis of the metropolitan region undertaken as part of the Regional Connections Project. This report is a companion to a variety of other information products produced to communicate project findings to the general public. The purpose of this report is three-fold. First, it aims to flesh out the statistical evidence that portrays the key economic changes that have taken place in the region. Second, it gives interested readers a detailed description of the methodology behind key calculations, many of which are only summarized in less technical presentations of project results. Third, this report is a resource bank and road map to regional economic analysts who may want to replicate this technical work. We've taken some care to spell out sources and include references to the electronic versions of files and databases used to calculate statistics contained in the report.

This technical report is divided into four major parts. First, we describe the background and objectives of the regional connections project. Second, we assay the region's recent economic performance, exploring a variety of measures of economic well-being. Third, we analyze the structure of the regional economy, identifying the main sources of regional economic growth. Fourth, we offer a preliminary identification and description of the regions key industrial clusters.

The Regional Connections Project has been undertaken by the Institute of Portland Metropolitan Studies at Portland State University. Initial project partners include the Metro Regional Strategies Board and the Portland Development commission. The project is guided by a steering committee consisting of more than a dozen interested representatives of public and private sector organizations.

To begin our research effort, we considered alternative definitions of the boundaries of the regional economy. Economic activity in the region spills across municipal, county, and even state boundaries. Based on our analysis of urbanization patterns and worker commuting flows, we settled on the federally-designated six-county metropolitan statistical area including Columbia, Clackamas, Multnomah, Washington and Yamhill Counties in Oregon and Clark County Washington. As of 1997, the rough economic dimensions of this region were as follows:

• 1.7 million residents
• 1 million workers
• 50,000 businesses with a payroll

We estimate that the region's gross domestic product, the value of all the goods and services produced here is approximately $60 billion annually, making the Portland metro economy about the same size as that of the Czech Republic. Closer to home, these estimates show that Portland's economy (including Clark County, Washington) is larger, measured by employment, wages and income, than the 31 Oregon counties outside the metro area combined.

Anyone who has lived in the Portland area during the 1990s has some awareness of the ongoing growth that has unfolded in the region. An analysis of economic data shows just how rapid regional growth has been.

Since 1992, the average rate of job growth in the metropolitan area has been over 4 percent per year. Over the past five years, the regional economy has added 180,000 new jobs, the equivalent of the entire economy of Lane County (the Eugene-Springfield Metropolitan Area). In 1997, the last full calendar year for which data are available, Portland metro area employment growth of approximately 40,000 jobs was equal to 80% of all of the job growth recorded in the state of Oregon.

A key factor associated with this growth has been the expansion of exports. Measured by the volume of exports through the region, Portland is the tenth largest exporting metropolitan area in the United States, with total exports of $9 billion per year. A leading factor in export growth has been high technology products, which have doubled to $3 billion per year in the past three years. The growth of high tech and other manufactured exports has transformed Oregon's export base from that of a resource-extracting economy in the 1980s (66% of exports tied to lumber, grain and other natural resources) to a value added manufacturer in the 1990s (60% of exports from high tech and manufacturing).

At a time when manufacturing employment has been weak or declining nationally, it has been growing robustly in the Portland metropolitan area. The region now has more than 150,000 manufacturing workers, and ranks as the 20th largest industrial center in the United States, outstripping historic centers of industrial production like Pittsburgh, Baltimore, Cincinnati and Kansas City.

Human capital and worker skills are critical ingredients in today's economy. One of the most dramatic changes in the regional economy has been the huge increase in educational attainment. Data for 1996 show that more than one-third of Portland area adults have a four year college degree, up from only 26% in 1990. The rate of increase over these six years is roughly triple the national rate of improved educational attainment, ranking Oregon among the top five of the nation's fifty largest metro areas for educational attainment.

Coupled with the increase in jobs and the improving education of the workforce, the region's average wages have grown rapidly. Over the past decade, wages in Portland have risen by 9%, after adjusting for inflation, compared with only a 1.6% increase in the remainder of the nation's metropolitan areas. The average worker in the Portland metro area now earns nearly $30,000 per year, about $6,500 more than workers in Salem and Eugene, and about $7,500 more than workers in other parts of the state. While Portland wages have always been higher than in the rest of Oregon, the gap between Portland wages and rural Oregon has widened from 13% in the late 1970s to 32% today.

The region's rapid growth has helped push unemployment rates down to levels not seen since the late 1960s. Portland's 1997 unemployment rate was just 4.3%, well below the national and state averages.

Rising wages and low unemployment rates have engineered a significant rebound in the region's relative per capita income. During the long recession that struck Oregon in the early 1980s, state and metropolitan per capita incomes declined sharply relative to the nation. As recently as 1988, Portland's per capita income was slightly below the US average. Since then, income has risen rapidly, and Portland's per capita income is now 7% above the US average, and slightly above the average for all US metro areas.

The region's strong economy and income growth has played a critical role in helping to pay for the costs of state government services. While the region accounts for less than 40 percent of the exemptions claimed on income tax returns (a proxy for the taxpaying population), it pays more than 52% of all state income taxes. This contribution has been particularly important as Oregon has shifted from property taxes to income taxes to pay for K-12 education since the passage of Measure 5 in 1990.

A major objective of the Regional Connections project is to build the basis for a better understanding of the region's recent economic performance. Our research efforts focused on examining the region's economic base and beginning the process of identifying key industry clusters.

The project's underlying economic framework draws on economic base theory. Traded sectors of the regional economy--businesses that sell goods or services in markets for which their is national or international competition--draw income into the region, which in turn is respect in local sectors of the economy, fueling the region's economic growth. Over time, the growth (or stagnation) of traded sectors plays a key role in determined whether, and how fast the region's economy grows.

To begin to understand the breadth of change in the region's economic structure, we analyzed the direct hiring impact of job changes in the region's fifty largest firms. We tracked the employment records of the region's fifty largest employers in 1986 for ten years. Over that decade, these fifty firms accounted for only about 2 percent of the region's economic growth.

A cursory examination of regional employment statistics classified by industry shows that a few industrial classifications account for the bulk of the region's traded sector employment. Among the region's largest traded industries are high technology (SIC 357, 36, 38 and 737), with xx,000 employees, metals, machinery and transportation equipment (SIC 33, 34, 35 and 37) with xx,000 employees,

Our performance analysis showed that Portland's economy was growing faster than the nation as a whole. To determine which sectors were driving that growth, we examined patterns of employment and earnings growth by sector in the region and the nation. This analysis showed that in six major sectors-- electronics, air transportation, construction, transportation equipment, agricultural services and business services--Portland's growth outpaced national counterparts. Other segments lagged behind national growth patterns, including utilities, government and health care.

We also undertook a shift-share analysis of industrial sectors. Shift-share looks at how Portland's share of national earnings in any industry changes over time, and is roughly analogous to market share in a private sector context. Overall, Portland's share of national earnings declined slightly from 1975 to 1985 and increased sharply from 1985 to 1995. Declines in wood products, construction, and transportation equipment led the downturn from 1975 to 1985. A huge increase in electronics (Portland tripled its share in a decade) and smaller increased in construction, air transportation and other sectors led the rebound in the latter period.

Location quotients show which industries are most concentrated in a particular area relative to the nation. An industry with a location quotient of 1 makes up the same share of a local economy as it does the national economy. Portland has high location quotients in several industries--footwear wholesaling, electronics, computers, nursery products, wood products and others.

We combined our analysis of employment levels, growth rates and location quotients into a strategic analysis of the contribution of various sectors to regional growth patterns. In general, electrical equipment, nursery products, software and machinery segments seem to be key drivers in growth, while some traditional sectors like primary metals, instruments and lumber and wood products are lagging.

The objective of the regional connections project is to go beyond simply cataloguing employment growth rates by industry to developing a clear understanding of the interconnections between different segments of the regional economy. Traded sectors of the local economy contribute to local economic expansion, not only by wage payments to workers, but by purchases of inputs from local suppliers. In some cases, where there4 is a sufficient concentration of firms in a single industry and their suppliers, there may be an agglomeration or a cluster of businesses. Drawing on the work of Michael Porter at the Harvard Business School, we begin the process of identifying the region's key industry clusters.

Porter's analysis, summarized in The Competitive Advantage of Nations, argues that groups of similar and related firms concentrated in a small geographic area, often a particular city, can exhibit what he calls a diamond of competitive advantage. There are four aspects to this diamond: the structure of the industry and rivalries between firms; the presence of demanding local customers; the availability of world class suppliers; and access to specialized inputs, particularly labor. Where all of these elements are present, Porter finds, a cluster generates a dynamic process of ongoing improvement and innovation that can sustain the cluster's success for a prolonged period.

To identify Portland's clusters, we combined Porter's diamond model with our own analysis of the regional economy. We set out four criteria for what constitutes a cluster: that the industry should export (outside the region) much of its output, that it should consist of multiple firms, that it display some evidence of concentration in Portland compared to other locations, and that it demonstrate each of the aspects of a cluster in Porter's diamond. Based on these criteria, we identified two groups of candidate industry clusters. The first is evident clusters, groups of firms that our currently available data show meet the cluster criteria. The second group is latent clusters, groups of businesses that meet some criteria, but will require further analysis to determine whether they are truly a cluster.

Evident Clusters

Our analysis shows that Portland has five evident clusters of economic activity. They are as follows:

Electronics and High Technology: Embracing computers, electrical equipment, instruments and software, this cluster of firms directly employs nearly 60,000 in the region. Portland has high location quotients in many electronics sub-sectors and important concentrations of suppliers in business services, engineering, chemicals, plastics and fabricated metals.

Metals, Machinery and Transportation Equipment: The region has nearly 41,000 workers in these sectors, with significant concentrations in primary ferrous and non-ferrous metals, titanium, heavy trucks, railcars, shipbuilding and specialized machinery.

Lumber and Wood Products: Despite the restructuring of production in rural Oregon, Portland remains an important administrative, manufacturing and wholesaling center for the wood products industry. Wood products firms employ more than 23,000 in the region, and Portland has high location quotients for secondary wood products and wood products wholesaling.

Nursery Products: The fastest growing component of the state's agricultural sector, nursery products production--including greenhouse plants, ornamental trees and shrubs, and flowers and bulbs--is concentrated in the metropolitan area. This sector employs over 5,000 in nursery products, and nearly 3,600 more in related landscaping.

Specialty Food/Craft Beverages: Portland is an important center for a variety of specialty food products, including fresh and processed fruit, premium wines, craft beers and ales, and other niche products. Collectively firms in these segments employed nearly 3,500 workers.

Latent Clusters

Creative and Professional Services: More than 40,000 regional residents work in legal, engineering, accounting, management, and creative services. Portland has a significant location quotient for engineering and architectural services, motion picture production, and advertising. Many of these, and other professional services are closely related to other clusters, and the boundaries and size of this cluster cannot be determined based solely on published data.

Transportation and Distribution: Nearly 100,000 of the region's workers are employed in transportation and wholesaling activities. The region has high location quotients in many aspects of the transportation and wholesale sectors. It is clear however, that important segments of the wholesale sector are part of other clusters--i.e. wood products wholesaling, electronics wholesaling, metal service centers and scrap. Ascertaining the boundaries and role of this cluster will require further analysis.

Temporary Employment: Nearly 24,000 people work as temporary employees in the metro area. Temporary employment is one of the region's fastest growing categories, and the region has a high location quotient for this sector. It appears that many of these workers are employed in other clusters. Temporary employment is an important supplier of labor in the region; determining its role will be a future task.

Tourism: Slightly fewer than 10,000 people work in the region's hotels and motels. Location quotients for this sector suggest that Portland is relatively weak in this area. Important elements of demand for tourism are related to other clusters--business travel and conventions, for example. Again, connecting this sector to other clusters will be a future research task.