by Brianna Crandall — August 27, 2018 — Business costs in Honolulu, San Jose, San Francisco, Bridgeport (CT) and New York City all exceed the national average by more than 25 percent, according to the 2018 Business Cost Index from IHS Markit, a global provider of critical information, analytics and solutions. Conversely, business costs in the cheapest areas, including Morristown, TN; Beckley, WV; and Valdosta, GA; are more than 15 percent lower than the US average.
The Business Cost Index (BCI) shows that more expensive metros are generally clustered around the East and West Coasts; these metropolitan areas tend to have higher-than-average wages, high energy costs and high real estate costs due to high population density and land constraints. The less-expensive metros tend to be in the Midwest and South, where lower-than-average wages and greater availability of land help decrease business costs for firms.
While there are clear regional trends when it comes to costs, there can still be a large degree of variability within a region or even within a state, according to the index. Laredo, McAllen, and Brownsville, Texas, have costs among the lowest in the country, while Houston has costs above the US average. There are large cost differences between San Jose and Bakersfield, California; Springfield and St. Louis, Missouri; and Spartanburg and Charleston, South Carolina. Population densities and industry structure can differ widely within a state, driving these intrastate business cost discrepancies.
According to Karl Kuykendall, principal economist, US Regional Economics at IHS Markit:
Business costs are not the only determinant of business location decisions; labor quality and availability, conglomeration of firms/industries, proximity to markets, state/local incentives and lifestyle factors all play a role. We find that the lowest-cost metros are not necessarily the fastest growing, and vice versa. Nevertheless, business costs are an important consideration for firms, and thus we would expect hiring in costly areas to be mostly at the end of the market where superior worker productivity can offset the high costs.
Among the 50 largest metros, many of the fastest growing have costs near or below the US average, showing the advantage of being a large market without a premium price tag. However, there are high-cost metros, especially in California, where growth has been very strong despite its costs.
The BCI summarizes businesses’ major costs, which vary across the country: labor (including wages, unemployment insurance, and health insurance), energy, real estate, and business taxes; and ranks all 381 metropolitan statistical areas (MSAs) in the United States.
Fastest-growing large metros (ranking among 50 largest):
|Employment growth, 2012-17|
|Metro||Avg. ann. rate||Rank||Costs relative to US, %|
|Riverside-San Bernardino, CA||4.2||1||+9.4|
|San Jose, CA||3.5||5||+30.9|
|Las Vegas, NV||3.4||6||+0.9|
|San Francisco-Oakland-Hayward, CA||3.3||8||+29.4|
|Dallas-Fort Worth-Arlington, TX||3.1||11||-0.7|
|San Antonio, TX||3.1||12||-5.5|
The top 10 most expensive metros for conducting business:
|Rank||Metro||BCI (100 = U.S. Avg.)|
|1||Urban Honolulu, HI||135.7|
|2||San Jose-Sunnyvale-Santa Clara, CA||130.9|
|3||San Francisco-Oakland-Hayward, CA (MSA)||129.4|
|5||New York-Newark-Jersey City, NY-NJ-PA (MSA)||125.2|
|6||Santa Cruz-Watsonville, CA||124.5|
|7||Washington-Arlington-Alexandria, DC-VA-MD-WV (MSA)||122.4|
|9||San Diego-Carlsbad, CA||120.7|
|10||Los Angeles-Long Beach-Anaheim, CA (MSA)||120.4|
The top 10 most affordable metros for conducting business:
|Rank||Metro||BCI (100 = U.S. Avg.)|
A score above 100 indicates the metro is more expensive for business than the country overall, while a score below 100 means the metro is less expensive. For example, a score of 125 means the metro’s cost of doing business is 25 percent higher than the national average.
Learn more about the IHS Markit US Regional Service.