These Fast-Growing Cities Are the New Economic Powerhouses.

These four cities vied for power and influence over one another, but more to the point, they embodied the nation’s status quo—dominating much of our economy and steering both our domestic and international agendas.

Now, though, those four legacy metro areas are being joined and, to an extent, eclipsed by a cohort of new, faster-growing power centers such as Houston with its energy economy, Dallas and its diversified base, Nashville with healthcare and tech, and Miami as a burgeoning financial center and gateway to Latin America. Competition between old legacy cities and these upstarts is both the latest incarnation of pre-existing frictions and the emergence of new elements.

The implications of this power shift are myriad and yet to be determined. It could portend in some sense a return to predigital America, where the Farm Belt and, in particular, the Industrial Belt held equal sway with New York financiers and Washington technocrats and lawmakers. As economic power flows to the middle of the country, it could make the U.S. stronger and more diversified, like a company that makes successful strategic acquisitions. Or it could further divide the U.S. along economic, political, and geographic lines.

Competition between old and new power cities is heating up. In the case of New York and Miami’s longstanding love/hate relationship—think snowbirds and tax optimizers—New York has bought billboards in cities in Georgia, Florida, and Texas advertising abortion access. (Massachusetts has a similar strategy, touting itself to LGBTQ communities in Florida and Texas.) California and Texas’ even newer rivalry might be characterized as simply hate/hate. California Gov. Gavin Newsom issues news releases and takes out newspaper ads slamming Texas, while Texas Gov. Greg Abbott buses unsolicited migrants to Los Angeles, New York,  and other cities. 

An economic shift to the Sunbelt has been taking place since Willis Carrier invented modern air conditioning in 1902. What’s different now is that newer cities are beginning to approach parity with establishment centers, not always in terms of metro area gross domestic product—at least, not yet—but certainly in terms of influence and growth. (Covid also accelerated decentralization of all sorts.) Significantly for Barron’s readers, this new dynamic informs countless transactions and business decisions every day, including everything from commodity prices to real estate moves to state tax policies.

Yes, there’s a red state/blue state dichotomy at work here, as well as a variety of domestic and global forces. These cities are emblematic to a degree: You could argue that the Bay Area technology hub extends to Seattle, home of
Amazon.com
(ticker: AMZN) and
Microsoft
(MSFT). And there are a number of other new power centers including Denver, Phoenix, and Atlanta. No one is suggesting that Manhattan, or Beverly Hills for that matter, are going to become irrelevant. But the bottom line is this: The gravitational center of economic and societal power in America is dramatically shifting, most likely for the long haul. 

“You used to have two coastal power zones where you could live your best life, never really touching down in the red states,” says historian Niall Ferguson, now at the Hoover Institution at Stanford University. “We now have much more of a multipolar America rather than a bipolar America. That reflects taxes, quality of life, cost of living, the ability to build, and incredibly striking differentials in quality of governance. If you talk to people who have done the great relocation, they’ll tell you how much better things are done in Miami or Palm Beach or Austin or Dallas.” 

Critical to the status quo, and now contributing to its undoing, has been the rise of technology—the business story of our lifetime. One marker: The value of the
S&P 500
information technology sector has grown 5.6 times over the past 20 years to $10.1 trillion and now accounts for 28% of the total value of the index, making Silicon Valley and San Francisco the most significant economic driver on the planet. You’d have to go back to the days of Standard Oil to find private sector power rivaling that of today’s Silicon Valley, whose companies are as powerful as countries. In fact, Denmark, the United Kingdom, and the  European Union have all sent actual ambassadors to Silicon Valley. Not even John D. Rockefeller got that treatment.

Tech has been a key engine of growth for New York and Wall Street, as quant hedge funds, cutting-edge trading platforms, and fintech companies are all enabled by technology—and that doesn’t even include the murky world of cryptocurrencies and the blockchain.

Consider, too, Silicon Valley’s influence on Los Angeles and Hollywood through digitization, which has resulted in the decline of theaters and the cable bundle—the latter being in a slow fade, as linear TV is just now, 28 years after the Netscape initial public offering, coming undone. All of this is understandable, given the rise of not just
Netflix
(NFLX) but also
Apple
(AAPL), Amazon, and
Alphabet
(GOOGL) as they move into providing content. 

To a degree, though, the very success of technological innovation is eroding Silicon Valley’s leadership role, as the pervasiveness of tech is really, finally driving what AOL founder Steve Case dubbed “the rise of the rest,” meaning the emergence of centers like Austin, Texas, as technology hubs. Regional tech growth takes three forms: 1) local start-ups; 2) companies like
Tesla
(TSLA),
Oracle
(ORCL), and
Hewlett Packard Enterprise
(HPE) moving headquarters out of Northern California, in these cases all to Texas; and 3) tech giants establishing major satellite operations beyond Silicon Valley, essentially taking with them a major element of growth. 

A textbook example of trend No. 3 can be found in Nashville, which grew by nearly 100 people every day last year, and now has a metro population of more than two million. Music City has really become Healthcare City, as Nashville now has 500 healthcare companies, including 17 public companies anchored by hospital and healthcare facilities giant
HCA Healthcare
(HCA) based there. As for tech, Nashville is becoming a major hub, with new facilities completed or being built by the likes of Amazon (which plans to create 5,000 jobs);
Meta Platforms
(META), (an $800 million data center); and Oracle (a $1.3 billion facility with 8,500 jobs at an average salary of $110,000).

The strength and growing ubiquity of tech stands in contrast to the decline of Washington, D.C., and the power of the federal government. Washington’s diminution was initially intentional, as lawmakers rolled back New Deal and Great Society programs and pushed deregulation beginning with Ronald Reagan’s election as president in 1980. But a more recent, less intentional trend, the rise of dysfunction in Washington, highlighted by recent bickering in Congress, has had a powerful effect, too.

A side note, however, is that Washington’s economy has actually flourished. GDP growth in the D.C. metro area has averaged 4.3% annually over the past two decades. Sixteen companies on the Fortune 500 make their home there, including defense contractors
Lockheed Martin
(LMT),
General Dynamics
(GD), and Northrop Grumman (NOC).

But that’s just locally. Nationally, the federal government’s power has waned, creating a vacuum increasingly filled by states that have asserted themselves on issues like marijuana, abortion, guns, school curriculum, and environmental regulations. In the private sector, Washington’s abdication has allowed for the unfettered expansion of both New York’s shadow banking business, including private-equity behemoths like
Blackstone
(BX) and KKR (KKR) and hedge funds such as Bridgewater Associates and AQR Capital Management, as well as the Bay Area tech giants. Big Tech can be seen in some instances to be at cross-purposes with Washington by allowing disinformation to proliferate on X (formerly Twitter), Facebook, and YouTube, which has eroded accepted truths in our society.

Washington has tried to check the growth of Big Tech through antitrust investigations brought by Federal Trade Commission Chair Lina Khan, as well as probes into election interference and raising questions of free speech and privacy, but they have so far proved to be ineffectual. The feds haven’t had a big win against Big Tech since the 2002 settlement with Microsoft—and that was a partial victory, at best. 

Lately, though, there are signs of detente between Washington and Silicon Valley. At a recent meeting of tech CEOs and congressional leadership in Washington, both sides promised to work together on regulating generative artificial intelligence. There’s that and money. Tech companies are eager to get their hands on money from the Chips and Science Act  and the Inflation Reduction Act, which promise to hand out hundreds of billions of dollars to build semiconductor foundries and other facilities that will come loaded with technology.

“What I see coming out of Washington now isn’t at loggerheads with Silicon Valley; it’s a boon for the private sector,” says Eurasia Group founder and President Ian Bremmer. “So many of the new jobs and so much industrial policy being put forward by the Biden administration is happening in places where red states are going to benefit.”

Many of  those federally funded projects—be they solar and wind facilities in Colorado, electric-vehicle and battery manufacturing in Arizona, or semiconductors in Texas—do more than boost economic growth in the new power centers. They also dovetail with geopolitical winds. The global rise of nationalism has engendered a new reliance on secure supply chains, creating a boom in U.S. manufacturing. War in Ukraine and the Middle East, and simmering tensions with China, have made domestic oil and gas resources much more valuable—a bonanza to Texas, in particular. And finally, immigration and increased economic activity between the U.S. and South America means growth for cities like Miami.

Growth coupled with pro-business policies don’t hurt, either. Texas approved 263,054 housing building permits last year, the most in the country; also, Texas is the only large state to hit a new high for construction in 2022. (California’s peak of 207,390 permits came in 2004.) Infrastructure is a big positive, too. “Try to find a bad highway in Texas—or a good road in New York,” posits analyst Meredith Whitney, whose 2010 report “Tragedy of the Commons” on the finances of the 15 largest states anticipated some of these shifts. 

CEOs have been voting with their feet. Texas now has the most Fortune 500 company headquarters of any state, with 55. The state’s two largest cities, Houston and Dallas, are delivering a one-two punch of growth. Dallas–Fort Worth–Arlington had the biggest jump in population last year (170,396 people) of any U.S. metro area, according to the U.S. Census, followed by Houston, which added 124,281 residents, making them the nation’s fourth- and fifth-largest cities, respectively.

Speaking of Dallas, “it’s on fire right now,” says Bremmer.  “Dallas is inexpensive energy, massive entrepreneurship, and a very permissive regulatory environment. They’ve now got more renewables coming out than California, which 10 years ago was insane to think about. They’ve also got all the fracking that’s going on. The U.S. is producing more fossil fuel right now than at any point in history. It’s something that Biden doesn’t like to talk about because it isn’t aligned with the progressive base, but it’s true. And if it wasn’t for that, our prices would be a lot higher.” 

With a population 7.9 million, up from less than a million in 1950, Dallas–Fort Worth not only has energy companies and
AT&T
(T),
American Airlines Group
(AAL), and
Tenet Healthcare
(THC), but also California transplants
McKesson
(MCK),
Jacobs Solutions
(J), and
Charles Schwab
(SCHW). Here’s the most recent economic weather report from the Dallas Federal Reserve Bank: “The Dallas–Fort Worth economy expanded in August. Employment growth continued at a brisk pace, and unemployment remained low.” 

Houston, with a population of 7.3 million, now has more Fortune 500 companies—25—than any city other than New York, including major oil-and-gas companies
Exxon Mobil
(XOM),
Phillips 66
(PSX),
ConocoPhillips
(COP), and
Halliburton
(HAL). Newbies have come along too, including
NRG Energy
[NRG] and Hewlett Packard Enterprises, as well as international businesses like
Orsted
(ORSTED.Denmark), a leading offshore wind developer from Denmark.

As home of the National Aeronautics and Space Administration’s Johnson Space Center, Houston is a long-standing player in space and now boasts a new spaceport. (SpaceX’s operations are 370 miles to the south in Boca Chica, Texas.) Houston also has a massive healthcare industry with 85 hospitals, including the Texas Medical Center, the world’s largest, with 13 teaching hospitals, employing more than 100,000, or almost 7% of the area workforce.

You can also track the shift to the new power cities by following the money. Bloomberg recently reported that California and New York state each lost some $1 trillion of assets as financial firms moved to lower-tax states such as Florida and Texas.

Goldman Sachs Group
(GS) is constructing a three-building campus just outside downtown Dallas, which will bring as many as 5,000 jobs to the city.
AllianceBernstein Holding
(AB) has moved its headquarters from New York to Nashville. As for South Florida, while positioning itself as a crypto hub hasn’t particularly panned out, a number of fiat-based firms have relocated to the Miami area, including hedge fund Citadel, from Chicago, and
Icahn Enterprises
(IEP) and Paul Singer’s Elliott Investment Management, which both decamped from New York to West Palm Beach, and Cathie Wood’s ARK Investment Management, which moved from New York to St. Petersburg, Fla.

This financial influx has added to an already diversifying Miami metropolis, now with a population of 6.1 million. The area attracts retirees and tourists, but just as significant and less visible is a flood of companies that have set up shop or are expanding operations as a location from which to pursue business in Latin America, such as
Cisco Systems
(CSCO), Hilton Worldwide Holdings (HLT), and
Visa
(V), plus international companies
Embraer
(ERJ), Bacardi, and Club Med. Bremmer notes that business elites from Latin America continue to expand in Miami through private companies and family offices. 

“The blue states have lost the plot,” says Anthony Scaramucci, founder and managing partner of SkyBridge Capital, a global alternative investment firm, who briefly served as White House director of communications for former President Donald Trump. “A half-million people have left New York state since 2020 because we are more interested in virtue signaling than addressing tough problems.” But, Scaramucci goes on to say, he’ll be “one of the last guys to turn the lights out on New York City,” and says he knows a number of people who have moved to Nashville, Miami, Dallas, and Houston, and they “feel like fish out of water.” They “miss the cosmopolitan nature of New York or San Francisco,” he says.

What makes a city or region appealing is ultimately a combination of factors, including culture, political leanings, and services. Right now, at least, the pull of strong economics is enough to drive the growth of these new business hubs. For our country to work best, the old power centers will compete but also share and cooperate with the new, and vice versa. And that’s not so easy to do.

Write to Andy Serwer at andy.serwer@barrons.com

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