Economic Base Analysis: Reading a Market Before You Buy

Before I look at a building, I like to know what pays the bills in the town around it. Economic base analysis is the tool for that. It tells you where a local economy gets its money, how sturdy that money is, and what happens when a big employer shows up or leaves.

What Is Economic Base Analysis?

Economic base analysis is a way of studying a local economy by separating the jobs that bring money in from outside the area (basic jobs) from the jobs that recirculate that money locally (nonbasic jobs). The basic side is the engine. The nonbasic side grows or shrinks depending on how well the engine runs.

For a commercial real estate buyer, that matters because demand for space follows jobs and income. If the engine is strong and diverse, the retail, office, and industrial space that depends on it tends to stay full.

Basic vs. Nonbasic Employment

The split is simpler than it sounds.

• Basic jobs sell goods or services to people outside the area. A manufacturer shipping product across the country, a resort hosting visitors from other states, or a regional medical center treating patients from several counties all bring outside dollars in.
• Nonbasic jobs serve the people who already live there. The grocery store, the dentist, the barber, and the local accounting firm mostly move money around inside the community.

Income can be basic too, even without a local job attached. Retirees spending pension and investment income, or remote workers earning a paycheck from a company in another state, bring outside money into the local economy just like an exporter does.

The Location Quotient

Most areas do not publish a neat list of basic and nonbasic jobs, so analysts estimate it. The most common shortcut is the location quotient, or LQ.

The LQ compares an industry’s share of local employment to that same industry’s share nationally. The formula is the local share divided by the national share.

• LQ above 1.0: the area has more of that industry than you would expect, which suggests it is exporting and part of the economic base.
• LQ around 1.0: the area has about a normal share, mostly serving local demand.
• LQ below 1.0: the area likely imports that good or service from somewhere else.

The Base Multiplier

The base multiplier estimates how many total jobs each basic job supports. You get it by dividing total employment by basic employment. The idea is that every outside dollar gets spent a few times locally before it leaks out.

A Worked Example (Made Up Round Numbers)

These numbers are invented to show the math. They do not describe any real market.

1. Imagine a region with 100,000 total jobs.
2. Manufacturing is 12% of local jobs but only 8% of jobs nationally. The LQ is 12 divided by 8, or 1.5. That tells you manufacturing is likely an export industry here.
3. After running the same test across every industry, you estimate 25,000 of the 100,000 jobs are basic.
4. The base multiplier is 100,000 divided by 25,000, which is 4.
5. Now a new plant announces 500 basic jobs. Using the multiplier, the region could expect roughly 2,000 total jobs over time, about 1,500 of them in local services.

Those 1,500 service jobs need storefronts, offices, clinics, and warehouses. That is the link between an employer announcement and your vacancy rate.

Where the Method Falls Short

I treat economic base analysis as a starting point, not gospel. A few cautions:

• The multiplier is an estimate. It shifts over time, and small markets can swing a lot.
• The LQ assumes local spending habits match the national average, which is not always true.
• It counts jobs, not wages. A thousand high paying jobs support more space than a thousand seasonal ones.
• Concentration cuts both ways. A high LQ in one industry can mean strength, or it can mean the whole town rides on a single sector.

Good public data for this work comes from the Bureau of Labor Statistics, the Bureau of Economic Analysis, and the Idaho Department of Labor.

Reading the North Idaho Economy This Way

Kootenai County is a good example of why the income side matters. Part of the base is classic export work: manufacturing and distribution along the I-90 corridor, and tourism tied to the lakes that pulls visitors from well outside the region. Healthcare in Coeur d’Alene also serves a wider area than the county itself.

A lot of the base also arrives as income rather than local jobs. Retirees, remote workers, and residents who commute to jobs in Spokane all bring dollars earned elsewhere and spend them in Coeur d’Alene, Post Falls, Hayden, and Rathdrum. That spending supports much of the retail and service space along US-95 and the I-90 interchanges.

When I look at a deal here, I ask two questions. What is bringing money into this trade area, and how many different sources is it coming from? A property that depends on one employer or one season deserves a harder look at the rent roll and the exit price.

If you are weighing a purchase and want to talk through what drives demand in a specific part of the county, I am happy to walk through it with you. What part of the market are you looking at?