by Spencer England
A couple of weeks ago President Obama said that the private sector was doing fine.
Needless to say this was subject to much criticism from some sources. But is that criticism justified ?
Let’s see what the data says. This chart of real business output compares output in the five long cycles since WW II — it omits the 1950s and 1970s because of the multiple recessions in those decades. What the chart shows is that compared to the two long cycles before the Great Moderation that growth is much weaker but compared to the 1990s and 2000s cycles, growth this cycle is essentially identical.
In other words there is no difference between private sector growth now and in the 2000s that Larry Kudlow called the Goldilocks economy.
Let’s see what happened to private sector profits in these cycles.
Profits this cycle appear to be about the same as in earlier long cycles.
What about business investments?
Investments are much stronger than the were in the early 2000s and roughly the same as they were in the 1990s. It should be no surprise that investment are weaker than in the 1960s or 1980s
Private payrolls look much like investments — weaker than in the old style recoveries in the 1960s and 1980s but about the same as in the 1990s and stronger than in the early 2000s.
To finish, I would like to point out that many of the comments about the private sector economy are based on an erroneous calculation of private sector real GDP. They seem to think that one can estimate private sector GDP by subtracting government consumption from total GDP. But that is not correct.
Remember, we do not directly estimate output. Rather the GDP data measures consumption and adjust that for changes in trade and inventories to indirectly estimate output. For example if Boeing builds a 747 or Ford builds a truck it does not show up in GDP as output. It shows up in the GDP accounts in one of five ways.
1. If they sell it to an individual it is recorded in personal consumption expenditures.
2. If they sell it to a business it shows up as business fixed investment.
3. If they export it is recorded in the trade account.
4. If they do not sell it , the jet or truck is counted as an increase in inventories.
5. If they sell it to the government it is recorded as government consumption.
But if the jet or truck or some other good or service is sold to the government it still counts as private sector output just the same as if they had exported it or sold it to an individual or a business. In the GDP accounts, government consumption includes two types of transactions. One is government employment like a policeman or a soldier. The other is government purchases of goods or services from private business. So to correctly estimate private sector GDP you need to subtract only government employment but not government purchases from total GDP. This makes a big difference in the size and growth of the private economy. Every quarter that government purchases grow faster than private sector output it causes the estimate of private GDP derived by subtracting government consumption from total GDP to understate private GDP. This method of estimating private GDP generates a highly biased estimate. For example,using the correct methodology shows that over the past decade private sector real GPD expanded almost 20% while the estimate derived from subtracting all government consumption from total real GDP concludes that private sector real GDP contracted some -16%.
Don’t worry, you do not have to find data that breaks government consumption into the two categories to correctly estimate private output. The BEA does it for you and estimates private output. But you will not find it in the GDP accounts. Rather, it is in the productivity data provided by the Bureau of Labor Statistics under the heading called business output.