What it means
The designation is set by a federal agency that defines areas around a core city with a substantial population. An MSA includes the central county or counties and neighbouring ones that have strong commuting ties to the centre.
This means the boundary follows how people live and work, not just city limits. Because a metropolitan area reflects a single economic region, it is a useful unit for analysis.
Government statistics on jobs, income, house prices and population are published by MSA. Businesses can compare, say, the employment growth of one region with another.
In real estate and mortgage lending, MSAs matter a great deal. House price indices, rental trends and construction activity are tracked by MSA, and some lending limits and reporting rules use these areas.
Lenders use the data to judge local risks, such as whether prices in a region are rising unusually quickly. Retailers and service companies use MSAs to choose locations, set sales targets and plan advertising.
Recruiters use them to compare wages and the supply of workers. Because the definitions are standard, the numbers are comparable across the country.
The definitions are reviewed from time to time, so an area's boundaries can change. Analysts working with long time series must check that they are comparing like with like, because a county added to an area changes its totals.
In other settings, the letters MSA can also stand for a master services agreement, a contract that sets general terms for ongoing work between two companies. Always check the context to see which meaning is intended.
In practice
Real-world examples.
Example
A mortgage lender studies house price growth by metropolitan area. It finds that prices in one area have risen 25% in two years, far faster than incomes. It tightens its lending rules for loans in that area, for example by asking for larger deposits until prices settle.
Example
A restaurant chain plans to open five new sites and compares population growth and average income across several metropolitan areas. It chooses the area with the strongest growth in young professionals, and it uses the same figures in its business case to the bank.
Example
A manufacturer looking for a new factory compares wage levels and the number of skilled workers by metropolitan area. The finance team calculates the savings from lower wages in one region, which come to about $2,000,000 a year across 400 workers. It selects that region for its $30,000,000 investment, after checking that transport links and the local training colleges also meet its needs.
Formula
Calculation
Location Quotient = (Local Industry Share of Employment) / (National Industry Share of Employment)
Suppose 12% of jobs in a metropolitan area are in software, while nationally the share is 4%. Location Quotient = 12 / 4 = 3.0. A value above 1 means the area has a higher concentration of that industry than the country as a whole, so this area is three times as concentrated in software as the national average. A value below 1 would mean the industry is under-represented, and a value near 1 means the area looks like the country overall.Case study
Seen in the real world.
Brightwell Furniture is an illustrative, fictional retailer with 12 stores in one metropolitan area. Its finance director wanted to expand to three more regions and needed a way to compare them.
She used data by metropolitan area on household income, housing starts and existing store sales. One region had 15% income growth and strong housing construction, while another had falling population and flat incomes. The third was somewhere in between.
The company opened in the stronger region first, and sales per store reached the target in 14 months. It then used the same method to decide the timing of the other two openings. The illustrative lesson is that using standard metropolitan areas allows like-for-like comparison, which makes expansion decisions less of a guess.
Watch out
Common mistakes.
- Assuming an MSA is the same as a city, when it includes surrounding counties tied to the city's economy.
- Comparing figures from different years without checking whether the area boundaries changed, which can make growth look higher or lower than it really was.
- Forgetting that MSA can also mean master services agreement in business contracts.
Questions
People also ask.
What is an MSA used for?
It is used to collect and compare economic, population and housing data for urban regions in the United States.
Who defines MSAs?
A US federal statistical agency defines them and reviews the definitions from time to time, so boundaries can shift after each review.
Why do lenders care about MSAs?
Because local housing and job markets differ, and MSA data helps lenders judge risk in each region and set limits on how much to lend there.
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