U.S. Cities: The Secret Engine of the Global Economy
Business + Economy

U.S. Cities: The Secret Engine of the Global Economy


The 21st century has been called the century of cities, and while much has been written about the explosive growth of urban areas in China, a new report from the McKinsey Global Institute shows just how crucial a role U.S. cities will play in driving the global economy over the coming years and decades.

“Large U.S. cities are expected to generate more than 10 percent of global GDP growth in the next 15 years, a larger contribution than all of the large cities of other developed countries combined,” write the authors of the report. That means 259 U.S. cities will contribute more than 355 cities from all other developed countries combined, with the 30 largest U.S. cities alone accounting for 7 percent of global GDP growth from now until 2025, according to the report.

The key advantage for the U.S. over Europe lies beyond the mega-metropolitan areas of New York and Los Angeles. While those U.S. giants might not have huge advantages over the European capitals of London and Paris, the next tier of what the authors call “middleweight cities” – those with populations between 150,000 and 10 million – have economic and size advantages over the second tier of European cities.

“The U.S. has a broad base of cities such as Boston, Chicago, Washington, D.C., and San Francisco that are very large and important cities and contribute much more than their counterparts – let’s say No. 3 to No. 30 in Western Europe,” says Jaana Remes, a senior fellow at the McKinsey Global Institute and co-author of the new report. “It’s the strength of the middleweight cities across the U.S. that really is the differentiator.”

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U.S. cities carry such economic weight for a couple of reasons. First, they are home to a huge proportion of the country’s overall population – 80 percent, compared to 58 percent of European residents who live in 186 large urban centers. But even so, U.S. cities are responsible for a disproportionately large amount of overall economic growth – nearly 85 percent of U.S. gross domestic product in 2010, compared to 78 percent for China and 64 percent for Western Europe, according to the report.

That’s because U.S. cities, besides being home to the vast majority of the population, are also more productive than other regions. “The average per capita GDP of large U.S. cities is almost 35 percent higher than in smaller cities and rural areas; in Western Europe, this premium is about 30 percent,” the report states. (Large urban areas in China are, not surprisingly, nearly 300 percent more productive than towns and rural areas there.)

Yet while the U.S. enters the century in what the authors call “strong initial position,” American cities will face both short-term and long-term challenges. Most immediately, they must still deal with the lingering aftereffects of the Great Recession and, in most cases, figure out how to rid themselves of burdensome debt loads while still delivering necessary services. Cities hit hard by the housing bust, like Las Vegas, Orlando, Fla. and Phoenix, will of course be even harder pressed to get back on a path of strong and sustained growth. “How well—or poorly—the cities of the United States perform as the economy recovers is critical not only for their host nation but also for the global economy,” the McKinsey authors write.

Beyond that fiscal threat, demographic changes – and how cities respond to them – will be critical in determining which cities fare best. Population growth has often been a main driver of economic expansion in cities like Houston, Dallas, Atlanta and Phoenix. “We find that differences in the growth of populations were responsible for the lion’s share of the differences in the GDP growth performance of individual cities in the United States from 1978 to 2010,” the McKinsey authors note.

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That type of growth may be more difficult to come by. “Demographic trends suggest that expanding through population growth may not be as easy for cities in the future as it has been in the past,” the report notes. So as the U.S. population ages and the mobility of the workforce declines, some cities that once relied on an expanding population to generate their economic growth may have to find ways to lure educated and talented people to further spark productivity.

The McKinsey report suggests that there is no single right formula for dealing with these changes. Instead, urban leaders will need to assess the strengths and vulnerabilities of their cities and steer a path that’s right for them – all while competing on a global stage, rather than just within the U.S. But it makes clear that the health of America’s cities will determine the health of its economy. Or as President John F. Kennedy told Congress in 1962: “We will neglect our cities to our peril, for in neglecting them we neglect the nation.”