Rik W. Hafer

According to the most recently released data from the Bureau of Economic Analysis’s (BEA), (https://www.bea.gov/newsreleases/regional/gdp_state/qgsp_newsrelease.htm) Missouri’s output of goods and services (real GDP) grew at a 3.8 percent rate in the third quarter of 2016. Between the third quarter of 2015 and the same period in 2016, the economy expanded at a 2.0 percent rate.   

When the BEA announces its real GDP growth rates for states, it uses an “all-industry” value.  This includes both private industries (all economic enterprises owned by individuals or groups) and also the government (which encompasses the purchases of goods and services at all levels/branches of government).  Because the private and public sectors both contribute to total (all-industry) output, this total measure can provide misleading signals on how well the private sector of the economy is doing.  After all, the private sector of the economy is the growth engine for future economic well-being. 

The table below illustrates how total measures don’t always paint the full picture. The table shows the growth rates for three categories: All Industry; Private Industry, and Government.  The data cover the most recent four quarters for which information is available. All growth rates are based on year-over-year comparisons to smooth short-term wiggles in the data. In other words, the growth rate for 2016Q3 is the growth rate from 2015Q3 to 2016Q3, etc.

The data show that government “output” grew in the third quarter but declined in the previous three. This resulted in an all-industry output growth that was lower than that of the private sector, which actually expanded in every quarter shown.  While the all-industry growth rate averaged 1.6 percent over these four quarters, private industry output—excluding government—increased at a faster average rate of 1.9 percent. 

You might be thinking, “But such small differences in growth rates are trivial.”  They are small, but they are not trivial:  Using the average all-industry growth rate, it would take 45 years for the state’s output to double.  The private industry values, in contrast, indicate that income would double in 38 years, a 16 percent reduction.  Surely most of us would prefer our income to grow faster. 

After separating out the effects of government, it appears that the private sector’s output of goods and services expanded at a faster pace than is suggested by the commonly used all-industry measure.  This example shows that including government’s activity can affect our perception of how well the economy is actually doing.

Compound Annual Growth Rate of Real GDP (%)
Period*All IndustryPrivate IndustryGovernment
2016 Q32.02.20.6
2016 Q22.12.4-0.2
2016 Q12.12.4-0.4
2015 Q40.81.0-0.4

 

About the Author

Rik Hafer
Rik Hafer is a Show-Me Institute research fellow and a professor of economics and the Director of the Center for Economics and the Environment at Lindenwood University in Saint Charles, Missouri.