The U.S. economy continues to sputter along with a cloudy outlook. The Federal Reserve indicated as much last week when it decided to maintain its monthly $85 billion bond buying program to prop up economic growth. “Conditions in the job market today are still far from what all of us would like to see,” said Fed Chairman Ben Bernanke at a press conference announcing the continuation of the easy-money plan.
But pockets of the U.S. are primed for growth thanks to pro-business regulatory environments, educated workforces and reasonable business costs. Leading the way is Virginia which tops Forbes’ eighth annual list of the Best States for Business. Virginia has ranked second the past three years, but returns to the head of the pack for the first time since 2009.
Our study looks at six important factors for businesses: costs, labor supply, regulatory environment, current economic climate, growth prospects and quality of life. Virginia is the only state to rank in the top five in four areas—only missing on costs and growth prospects.
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Virginia ranks first among the states in the regulatory category because of its business-friendly government policies and strong incentive offerings. The tort system is one of the best in the country for businesses, according to the Mercatus Center’s report “Freedom in the 50 States.” Virginia is also one of 24 right-to-work states, which explains why only 4.4% of its workers are in unions — fifth lowest in the U.S.
The Old Dominion State ranks second in an annual study by Park Ridge, Ill.-based Pollina Corporate Real Estate that measures states’ economic development programs and departments. “Virginia’s flexible incentive programs can be adapted to meet the needs of businesses across different industries,” says the study’s author Brent Pollina.
“We don’t lead with incentives, but we do recognize that we can use them to level the playing field,” says Virginia Economic Development Partnership CEO Martin Briley. He says that only 15% of corporate expansion or relocation deals over the last 10 years in Virginia have included tax incentive programs, but they skew toward larger companies as these deals created 40% of the new jobs.
Technology companies have been busy expanding in Virginia to take advantage of the largest concentration of high-tech workers in the U.S. (9.8% of the state’s private sector workforce is in tech, according to TechAmerica Foundation’s annual Cyberstates report). Amazon.com has added roughly 2,000 jobs in the area over the past two years for two distribution centers and its cloud computing business, Amazon Web Services. Microsoft has invested $1 billion to build and expand a data center in southern Virginia.
Virginia’s $446 billion economy held up better than most states during the Great Recession thanks in part to spending by the federal government. But the state has a diverse economy with strengths in bioscience, logistics, manufacturing and technology. There are 31 companies (public and private) with more $3 billion in sales headquartered in Virginia, the seventh largest concentration of big companies of any state in the Union. The corporate giants based in Virginia include Altria Group, Capital One Financial and General Dynamics.
However, it is hardly all clear sailing for Virginia. It faces potentially the biggest fallout of any state from sequestration and cuts in federal spending. Roughly 30% of Virginia’s economy is tied to the federal government, according to Briley, and the state is the leader in Department of Defense contracts. But Briley expects the private sector to "fill in the gaps" on any government cutbacks. “The diversity of the economy is quite huge, so we will be able to absorb anything that comes down the line,” he says.
VEDP launched a $2 million “Going Global” program last month to help defense contractors in Virginia pitch their expertise to customers overseas. Virginia-based defense firms like General Dynamics and Northrop Grumman don’t need VEDP’s help with foreign governments. They already have large international operations and expertise, but the program can help smaller defense players that are heavily reliant on the U.S. government.
[More from Forbes: The Best Countries For Business]
Our Best States ranking looks at 35 data points across six main areas. Business costs, which include labor, energy and taxes, are weighted the most heavily. We relied on 10 data sources; research firm Moody’s Analytics was the most-utilized resource (click here for a detailed methodology).
North Dakota finished a close second behind Virginia. North Dakota has boasted the country’s most robust economy over the past five years. It is tops for job growth (3.7% annually), income growth (3.8%), gross state product growth (7.9%) and employment (3.6% average jobless rate). To provide context to North Dakota’s boom, consider the second fastest growing economy over the past five years was Oregon’s at 2.8% a year, versus nearly 8% for North Dakota’s $66 billion economy.
With the nation’s third-best economic growth forecast over the next five years, North Dakota’s outlook looks strong, too. Credit the development of the Bakken oil shale fields in the western part of the state for much of that growth, as well as thriving technology and service sectors.
Last year’s No. 1 state, Utah, falls from the top spot for the first time since 2009 and ranks No. 3 overall. The state still has a very pro-business climate and companies benefit from energy costs that are 29% below the national average. Utah’s economy has expanded at 2% a year over the past five years—fourth best in the U.S., but job and income growth has slowed relative to the rest of the country, which knocks Utah down two notches.
The biggest gainer this year is Minnesota, which jumped 12 spots to No. 8 on the strength of an improved economic outlook. The Minneapolis-St. Paul metro area serves as the state’s economic hub, with companies such as Target, U.S. Bancorp, General Mills, 3M and Medtronic headquartered there. Minnesota has the second highest percentage of adults with a high school degree at 92.5%. With its good schools, low poverty rate and healthy population, the state also scores well on quality of life measurements.
Wyoming had the biggest fall, down eight places to No. 23. The nation’s least populous state ranks sixth best for business costs, but the economy has slowed and is expected to expand at just a 1.5% annual clip through 2017, worst in the U.S.
Maine ranks last for the fourth straight year. Not much has changed. It is still burdened with an aging population and a weak economic forecast. Job growth projections are the worst in the U.S and only Vermont is expected to have slower household income growth over the next five years, according to Moody's Analytics.
Here are the top 10 states for business:
2012 Rank: 2
Gross State Product: $446 billion
5-Year Annual GSP Growth: 1.0%
Governor: Bob McDonnell
Back on top for the first time since 2009, Virginia has ranked among the top two during each of the eight years of our annual Best States for Business study. The state ranks on top of the regulatory category because of its strong incentive offerings and business-friendly government policies. Virginia has a widely diverse economy that includes local and federal government, military, farming and manufacturing.
#2 North Dakota
2012 Rank: 3
Gross State Product: $46 billion
5-Year Annual GSP Growth: 7.9%
Governor: Jack Dalrymple
North Dakota has boasted the country’s most robust economy over the past five years. It is tops for job growth (3.7% annually), income growth (3.8%), gross state product growth (7.9%) and unemployment (3.6% average). Credit the development of the Bakken oil shale fields in the western part of the state for much of that growth, as well as thriving technology and service sectors.
2012 Rank: 3
Gross State Product: $130 billion
5-Year Annual GSP Growth: 2.0%
Governor: Gary Herbert
Utah falls out of the top spot after three straight years at No. 1. The state still has a very pro-business climate and companies benefit from energy costs that are 29% below the national average. Utah’s economy has expanded at 2% a year over the past five years—fourth best in the U.S.
#4 North Carolina
2012 Rank: 4
Gross State Product: $456 billion
5-Year Annual GSP Growth: 0.7%
Governor: Pat McCrory
With one of the highest net migration rates in the U.S., people have been flocking to North Carolina for the past decade. North Carolina has the smallest union workforce in the U.S. in terms of percent of total employment. The resulting benefit is labor costs that are 19% below the national average—third lowest in the country.
2012 Rank: 5
Gross State Product: $274 billion
5-Year Annual GSP Growth: 1.0%
Governor: John Hickenlooper
Colorado is the rate non-right-to-work state near the top of our Best States rankings. Credit an educated labor supply and a migrating population that is attracted to its robust economy and outdoor recreational opportunities. Colorado is expected to have the third fastest growth for both jobs and household incomes over the next five years.
2012 Rank: 6
Gross State Product: $100 billion
5-Year Annual GSP Growth: 1.6%
Governor: Dave Heineman
Though Lincoln is the state capital, Omaha stands as Nebraska’s largest city and economic center. Omaha is home to Berkshire Hathaway, whose CEO and founder, Warren Buffett, is the third richest person in the world. The city is also home to ConAgra, Mutual of Omaha, InfoUSA and TD Ameritrade. At 4.2%, Nebraska’s unemployment rate is the third lowest in the country.
2012 Rank: 7
Gross State Product: $1.4 trillion
5-Year Annual GSP Growth: 2.5%
Governor: Rick Perry
The $1.4 Texas economy is the second biggest in the U.S., behind only California. Texas is the only state that ranks in the top five for both current economic climate and growth prospects. The Texas economy is expected to expand 4.2% annually over the next five years, which is second best in the nation. One of the only things holding Texas back is the education rate among its labor supply. Only 81% of adults have a high school degree, which is lowest among the states.
2012 Rank: 20
Gross State Product: $295 billion
5-Year Annual GSP Growth: 1.2%
Governor: Mark Dayton
Minnesota’s overall rank jumped 12 spots on the strength of an improved economic outlook. The Minneapolis-St. Paul metro area is home to 62% of the state’s population. It is also serves as the state’s economic hub, with companies such as Target, U.S. Bancorp, General Mills, 3M and Medtronic headquartered there. Minnesota has the second highest percentage of adults with a high school degree at 92.5%.
2012 Rank: 11
Gross State Product: $376 billion
5-Year Annual GSP Growth: 1.2%
Governor: Jay Inslee
A cradle for innovation, Washington is the birthplace for a spectrum of iconic companies, including Microsoft, Amazon.com, Nordstrom, Starbucks, Boeing and Costco. Venture capitalists are always searching for the next great Washington company, pouring $2 billion of VC money—sixth most in the U.S.—into the state between 2010 and 2012. Though Washington does not collect personal or corporate income taxes, the business and occupation tax (B & O) affects most businesses.
2012 Rank: 8
Gross State Product: $434 billion
5-Year Annual GSP Growth: -0.2%
Governor: Nathan Deal
Georgia’s once robust economy has slowed in recent years, but the state still maintains a pro-business climate. Big companies headquartered in the state include Home Depot, UPS, Coca-Cola and Southern Company. Union workers make up only 4.4% of Georgia’s employment base, which is one of the lowest rates in the country. One drawback: 19% of the population lives below the poverty line, which is one of the highest rates in the U.S.
See more of the Best States for Business.
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