Accounting for Growth: North Dakota’s physical capital stock

Last week, we took a close look at the components of human capital — employment, average annual hours worked, the skills each worker has arising from education, and those he or she has arising from experience — in North Dakota in an attempt to understand the state’s erratic performance in per capita GDP in recent years. Today we will look at the other factor input, physical capital.

Performance

We estimate the total stock of physical capital in each state by taking the physical capital stock in each industry in the United States and then apportioning that between the states according to each state’s share of each national industry’s GDP and summing across the industries for each state. A per capita number might move because the numerator, in this case, the physical capital stock, has changed, or because the denominator, in this case population, has changed.

Last week, we saw that the per capita growth rate of the physical capital stock in North Dakota was the fastest in the United States across the period 2008 to 2023, at an annual average of 1.4%. We also saw that there was substantial variation within that. In 2008-2014, the rate of 3.5% was the fastest in the country, the decline of -0.1% in 2014-2023 ranked 48th.

To isolate the effect of physical capital investment, we divide this total capital stock by the total number of people employed to derive a per worker number. Figure 1 illustrates what we have noted above: It shows the (unweighted) average annual growth of the per worker physical capital stock for the 50 states in two periods. We see that, in 2008-2014, North Dakota recorded average growth of 11.2% annually, comfortably the fastest rate in the United States and, while not perfectly comparable with the per capita rate, the driver of the state’s top ranking. In 2014-2023, however, North Dakota’s stock of physical capital per worker didn’t grow at all, a performance better than only Alaska and Oklahoma, and the cause of the state’s ranking of 48th in the United States.

Figure 1: Average Annual Growth Rate of Physical Capital Per Worker

As with human capital, we can break physical capital growth down into its components to determine what drove the slump in physical capital investment.

Figure 2 shows the average annual growth rate of physical capital per worker in eighteen of the nineteen NAICS industries in our two subperiods. In fifteen, North Dakota’s growth rate fell from 2008-2014 to 2014-2023, but the state saw the second largest decline – 9.1 percentage points, from 16.2% to 7.1% – in the Mining, Quarrying, and Oil and Gas Extraction /Mining and logging sector which accounted for an average of 30.6% of North Dakota’s entire physical capital stock over the period 2008 to 2023. Only Construction saw a sharper fall in its rate of per worker physical capital growth between the two periods, and that only accounted for an average of 1.2% of the state’s total capital stock. It was this sharp decline in the rate of growth of physical capital per worker in the sector accounting for the largest share of North Dakota’s overall physical capital stock that drove that steep decline in the rate and ranking seen last week.

Figure 2: Average Annual Growth Rate of Physical Capital Per Worker in North Dakota

Prospects

The state’s stock of physical capital per worker is the highest in the United States at $607,462 in 2023, as Figure 3 shows, largely due to its extractives industries, which are heavily capitalized. Here, too, there is no theoretical upper bound, so North Dakota can hope to see a greater contribution to per capita GDP growth from this source. As we noted in our report “Energy Leadership,” a more friendly attitude towards the extractives industry from Washington, D.C. will be needed to see that.

Figure 3: Physical Capital Per Worker, 2023, (2017$)

This article is based on our report “Accounting for Growth in North Dakota: Performance and Prospects.”