By Jock Finlayson, ICBA Chief Economist
Amid the daily deluge of economic news – much of it focused on topics such as job growth, housing markets, the impact of innovative technologies, and government budgets – it is easy to lose sight of a basic but important fact: the economy is made up of distinct industries. Most of these industries, in turn, are populated by profit-seeking business enterprises which, collectively, underpin and drive the bulk of all economic activity.
In both the U.S. and Canada, statisticians categorize industries based on the North American Industry Classification System (NAICS). The NAICS divides the economy into hundreds of very specific industries. For economists, it is common to group these into 19 or 20 aggregate categories, each of which contains multiple individual industries. Construction is one example of an aggregate industry category under the NAICS, along with manufacturing, health care, retail trade, etc.
We can use the NAICS analytical framework to help us understand the structure and evolution of the economy over time. This post looks at British Columbia through the NAICS lens.
The accompanying table shows the percentage shares of B.C.’s economic output (gross domestic product at 2017 prices) accounted for by the principal NAICS-defined sectors as of 2023. Here, the economic output of a given industry means the “value-added” attributable to that industry. “Value-added” is measured as the difference between 1) the selling prices of the goods or services produced by an industry, and 2) the cost of the “inputs” used by that industry to produce those goods or services. Because public sector industries like K-12 education and public administration generally don’t operate with market-determined “selling prices,” a different approach is used to estimate their “value-added” contribution to economy-wide output.
A few interesting points emerge from the data presented in the table.
One is the wide variation in the “size” of the 19 aggregate NAICS categories, ranging in B.C.’s case from more than 18% of GDP for the biggest sector (real estate and leasing services) to less than 1% for the smallest (arts, entertainment, and recreation).
Second, since the 1970s, the economy has become increasingly services-oriented, with service-producing industries now comprising more than three quarters of total GDP. Goods-producing industries – including construction – are responsible for the rest.
A final point: despite what some people may believe, B.C., even today, is primarily a “market economy,” in the sense that most output is generated by, and in, the private sector. Together, the three main “public sector” industries – public administration (capturing all levels of government), education, and health care – represent slightly less than 19% of GDP, and a portion of this actually captures private sector production (e.g., private education; dental and physiotherapy services). This means that around four-fifths of economic output in B.C. comes from the broad business sector. One wonders how many B.C. politicians are aware of this foundational fact.
A few key industries….
Real estate and leasing services ranks as B.C.’s biggest sector under the NAICS framework. It consists of businesses engaged in renting, managing, leasing or otherwise allowing the use of property, buildings, and other tangible assets (like vehicles and equipment), as well as businesses which act as intermediaries in the sale/rental of real estate or provide services such as appraisal. It does not include businesses involved in the construction of buildings or land assembly/development. The large size of the real estate and leasing sector underscores the economic heft of real estate-related activity in B.C.
Construction is the second largest industry in B.C., directly responsible for one-tenth of total output. Under NAICS, construction has three major sub-sectors – building construction, heavy civil and engineering construction, and speciality trades contractors. At a more granular level construction is divided into 29 individual industries.
Professional, scientific and technical services – this notably diverse sector produces almost 8% of the province’s GDP, up from less than 5% two decades ago. It employs many well-paid workers with qualifications in the hard sciences, engineering, law and accounting, and various technical fields.
Among the broad industry sectors dominated by government, health care and social services is the biggest (7.7% of GDP in 2023).
Manufacturing’s share of the province’s GDP has dropped from 9.5% in 2003 to about 6% last year. Within the manufacturing category are dozens of different industries, including some — like lumber, pulp and paper, wine production, and metal fabrication — that are focused on the further processing of B.C.-origin primary resources.
Other aggregate industries that account for at least 5% of output include energy – not shown separately in the table – along with retail trade and public administration.
Understanding the structure of the economy is a vital task for business analysts and policymakers alike. One often sees elected officials breathlessly lauding the purported growth potential of very small industries – “clean tech” being a recent example. As a matter of basic arithmetic, even if tiny industries grow rapidly, their small size will limit the quantum of “extra GDP” that results. At the same time, there is a tendency among some policymakers to ignore or discount the economic contributions of large industry sectors like construction, real estate, manufacturing, natural resources, and retail trade. Over time, this kind of blinkered vision can undermine the growth potential of the entire economy.
