Economic diversity index puts Pennsylvania first, Indiana next to last

Pennsylvania edged out Texas to claim the title of America’s most diverse state economy. Meanwhile, Indiana finished next to last in economic diversity, but held its status as a manufacturing hotbed.

Bloomberg’s inaugural “Economic Diversity Index” shows Pennsylvania is a lot more than U.S. Steel Corp. and Hershey’s chocolate. The variety within the nation’s sixth-largest state economy puts it ahead of silver- and bronze-medalists Texas and Colorado.

Bloomberg analyzed the contribution to gross domestic product by industry and government in all 50 states to create the diversity index. It’s modeled on the Herfindahl-Hirschman method, a mathematical measure used to detect monopoly in marketing and biodiversity in ecosystems. Theoretically, scores can range from 0—representing maximum diversity—to 1, which signals single-industry domination. The lower the score, the more well-represented the sectoral GDP.

A diverse economy can help build resiliency against market fluctuations and trade vagaries, whether global or domestic. The index can be an indicator of which states—and their workers and government tax coffers—are best insulated from (or exposed to) sudden swings in a single industry, company or even aggregate demand.

Real estate was the largest GDP component in 20 states in 2018, with Hawaii’s economy getting the highest proportion (21%) of its output from related activities. A decade earlier, the property sector was the top industry in just 10 states, reflecting volatility from the great recession. From 2008 to 2014, the No. 1 spot was held by the “government” sector.

Manufacturing was supreme in 16 states, with Indiana’s proportion highest at 28%, making the state most dependent on production at factories and plants. Meanwhile, the Hoosier state had the smallest portion of GDP from government (9%) and second-lowest from real estate (9.7%). It finished 49th in economic diversity, ahead of Delaware at 50th and behind Hawaii at 48th.

“Indiana maintains the highest employment share in manufacturing in the U.S.,” Ryan M. Brewer, associate professor of finance at Indiana University, said in a report on the state’s economy. That’s an advantage when the U.S. economy is strong, he wrote, adding that the main causes of current uncertainty are “retaliatory” tariffs related to trade conflicts and “the opioid crisis,” which has tightened the state’s labor market and raised health care costs.

Three states—Delaware, New York and South Dakota—counted finance and insurance as their largest industries. Bottom-ranked Delaware was the only state where a single sector accounted for more than 30% of annual GDP. In contrast to the concentration in Delaware was the balance in Pennsylvania: real estate (12.2%), manufacturing (11.9%) and health care (9.9%).

“Pennsylvania’s proximity to large population centers and more affordable real estate remains fertile ground,” Toronto-Dominion Bank said in a recent research note. “Health care has been leading job creation for the past half-decade,” while “Pittsburgh is in the process of making the transition from steel city to tech town.”

“Big government” was the No. 1 component in eight states, topped by New Mexico (23%), whose overall 46th ranking underscores the benefits of a balanced economy. Excluding government contributions to GDP, Colorado would rank No. 1 in economic diversity, followed by Texas and Pennsylvania.

Resource-rich North Dakota ranked 5th overall, as the benefits of its mining industry had “spillover” effects throughout the state. Young adults moved to the state following the fracking boom.

“Higher incomes increased demand across many sectors, though few had the sustained growth and expansion of extractive industries,” said David Flynn, an economics professor at the University of North Dakota. Mining revenue has contracted 40% since its peak of $10 billion in 2014. North Dakota was the only state to see a decline in its median age this decade, from 37 years in 2010 to 35.2 in 2018.

Wyoming placed 44th in the nation, and was the only state where mining/energy was the top industry (20%).

Alaska earned the highest proportion from transportation (13%), reflecting its vast and remote geography. And Nevada led in two categories—accommodation/food (13%) and the arts/entertainment (3.2%)—as hotel-casinos lured tourists and gamblers, many of whom took time out to see shows by singer Celine Dion, magicians Penn & Teller and comedian Carrot Top.

Washington, home to Microsoft Corp. and Amazon.com Inc., was the only state where the information sector was the largest contributor (13%) to GDP. The benefits of that fast-growing industry helped Washington achieve the fastest economic expansion in 2018 among the 50 states—though it ranked only 31st in the diversity index.

America’s biggest economy, California, ranked 30th in the Economic Diversity Index, in part due to its oversized real estate and information sectors which jointly contributed 27% to its $3 trillion GDP in 2018, eclipsing the 19% level for the nation.

The dichotomy of industry concentration was also apparent in New York. The third-largest state economy and headquarters to 60 Standard & Poor’s 500 companies—20 of which are financial giants, was ranked 40th in diversity.

The financial service sector grew 73% in the past decade—fastest in the U.S. economy. New York accounted for 27% of that growth.