by Daniel Newman and Connor O’Brien
The pandemic had a silver lining: it partially rekindled the U.S. economy’s famed—but more recently flagging—dynamism.
Economic dynamism in the average state rose to a 13-year high in the latest edition of EIG’s Index of State Dynamism (ISD). The ISD assesses state performance on eight core measures of dynamism going back 30 years.
What is Economic Dynamism?
The ISD offers a simple and comprehensive way to understand one of the most important concepts in economics. Dynamism is the process through which an economy renews itself. It captures the underlying rates of churn in the economy—the startup rate, the changing composition of firms, the movement of workers across businesses and geographies, and the pace of innovation. Without dynamism, economies trend toward stagnation.
Americans’ response to the pandemic rejuvenated some of these forces in the form of increased worker turnover, an historic boom in new business applications, and the accelerated adoption of new technologies. Nevertheless, the country’s dynamism rebound remains fragile, and its continued progress is not guaranteed. Dynamism scores may have climbed to post-Great Recession highs, but they remain far below levels observed in the 1990s or early 2000s.
Five of the 10 Most Dynamic State Economies are in the Mountain West
The country’s most dynamic state economies are predominantly fast-growing places in the West and South, with five of the top 10 concentrated in the Mountain West alone.
Utah stands out as the country’s dynamism leader. The state has topped the index for five of the last seven years and it has routinely appeared at or near the top of ISD rankings going back three decades, never falling out of the top five.
An Economy Abuzz: Utah’s Dynamism Dominance
The Beehive State ranks highly on each of the eight component metrics that go into the overall score, leading the nation on three:
- Strong core startup rate: Utah’s nation-leading 11.8 percent core startup rate means that more than one of ten businesses in the state were started in 2021. Entrepreneurs founded 7,100 new firms, pushing the state to its highest startup rate since before the Great Recession.
- Stellar firm growth: Overall growth in the number of firms was similarly strong at 5.8 percent—the state’s best performance since 2006—and nearly eight times higher than the national average.
- Housing permits per capita: The state issued 11.7 housing permits per 1,000 people, more than double the national average. The fact that Utah has the highest rate of new home construction in the country on a per-capita basis is closely related to its longtime status as one of the fastest-growing states in the nation.
Several other western states landed on the top 10 list, including Idaho, Colorado, Arizona, Nevada, and Washington. California is notably absent from the list this year, falling out of the top states for the first time since 2007. The state has struggled with an exodus of workers to other states during and immediately after the pandemic, high levels of business closures, and lackluster housing construction. While still host to a strong startup and innovation ecosystem, cost of living is clearly undermining California’s overall economic dynamism.
Outside of the West, other dynamic state economies are centered in Texas and along the South Atlantic in Georgia and Florida. The Sunshine State shot up the rankings from 12th to 5th amid strong migration and business growth. These states have been among the winners in the post-pandemic economy as workers, retirees, and firms have flocked to them in recent years.
Many of the Least Dynamic State Economies Straddle Appalachia
The country’s least dynamic state economies are largely centered around Appalachia and the Deep South. Most struggle with low population growth and other challenges, such as aging or poverty. Even as many of these states are perennial laggards on economic indicators, New York clearly stands out: its economy is the country’s third largest, yet the state posted its lowest level of dynamism on record.
The Empire State’s national ranking fell more than any other state from 34th to 46th, its lowest standing since the mid-1990s. The state’s dynamism doldrums are a complete reversal of the relative progress it was making more than a decade prior, reaching its peak rank of 17th in 2010.
Go Under the ISD Hood to Explore How Each State Ranks on the Underlying Metrics Of Dynamism
The Index of State Dynamism (ISD) uses eight core metrics to produce a comprehensive score for each state and DC, tracking overall dynamism at the state level over the past 30 years.
The component metrics reveal how the nascent uptick in dynamism is largely due to three trends.
- A strong rebound in business growth
- The average core startup rate reached a post-Great Recession high point in 2021, with entrepreneurs starting more than 476,000 new businesses. Despite its troubles, California’s startup rate (9.5 percent) remains among the nation’s leaders.
- Increased mobility and migration across states
- The average level of migration rebounded from a low point in 2020. Desirable remote work locations in the Mountain West, such as Idaho (2.81 percent) and Montana (1.94 percent) led the charge, often at the expense of more expensive coastal places, like California (-1.05 percent) and Washington, DC (-0.73 percent).
- Up-and-coming retirement destinations such as Delaware (1.38 percent) and South Carolina (1.39 percent) were also leaders.
- A healthy increase in housing permit issuance
- After tanking in the wake of the 2007-09 financial crisis, housing construction has trended upwards, with the average number of permits per capita issued reaching a 15-year high.
- Many states with strong migration rates are also leaders in building housing. In addition to Utah (11.7 permits per capita), neighboring Idaho (11.4) stands out, along with Florida (9.8) and South Carolina (9.8), for expanding their housing supply.