Missouri economy is 5th most diversified in nation

By Joe Driskill

Director of state Department of Economic Development

A recent analysis by the Department of Economic Development's Missouri Economic Research and Information Center has determined that we have the fifth most diversified economy in the United States. That means Missouri is the fifth closest state to matching the national economic mix.

Generally this is a favorable measure because it shows Missouri's economy is not heavily dependent on any single sector. A downturn in one sector does not send the state's overall economy into a downturn.

That is good news for us. It is also good news for Missouri that in the past year we have moved from the sixth most diversified economy to the fifth most diversified. Minnesota is the most diversified state, followed by Illinois, Pennsylvania, California and Missouri. The least diversified economies are the District of Columbia, Alaska, Wyoming, Nevada and Delaware.

By closely reflecting the diversity of the national economy, Missouri is able to withstand a drop in any single economic sector. For example, the recent decline in the air transportation sector has impacted Missouri a great deal and has impacted some tourism and convention locations. But because we are also reliant on other sectors, the overall impact balances out.

The one downside to having a diversified economy is when a general recession hits the nation, states like Missouri are hit the hardest. By the end of 2002, 15 of the 20 states most closely mirroring the U.S. economy were among the states with the biggest drops in total employment.

Since general recessions tend to occur every eight to 10 years, in most years our diversity is good. And, our diversity also means that Missouri is poised for a quick recovery as the national recession eases.

This study was done by analyzing data from the U.S. Bureau of Economic Analysis used to determine Gross State Product, which is a state's economic base and considered the state counterpart of the national Gross Domestic Product. A careful review of this data provides a clear picture of economic diversity and specialization among the states.

GSP was broken out among the 14 major industry divisions based on the standard classifications: Agriculture, Forestry and Fishing; Amusement, Personal Recreational and Repair Services; Business and Professional Services; Communications; Construction; Durable Manufacturing; Finance, Insurance and Real Estate; Non-Durable Manufacturing; Federal Government; Mining, Oil and Gas; Retail Trade; State and Local Government; Transportation and Utilities; and Wholesale Trade.

A standardized diversification index is used to describe the degree of deviation between GSP and GDP for a given state and a specialization ratio is determined to measure a state's GSP concentration in a given industry relative to the national average. The current research is based on data for the year 2000.

The study also shows that Missouri's economy was specialized in the following areas: ranked 6th nationally in Communications, 11th in Wholesale Trade, 15th in Manufacturing of Non-Durable Goods and Transportation and Utilities, 16th in Construction, 20th in Business and Professional Services, and 22nd in Durable Goods Manufacturing.

This kind of data is extremely important for us to know, particularly with the dynamic nature of today's fast changing, global economy. Decision-makers need to understand the weaknesses and strengths of their state's economic base. They must not only be able to identify and take advantage of areas of comparable economic advantage, but also recognize areas of vulnerability and take steps to address adverse effects of changes in the global economy. One way to achieve this is to ensure there is a well diversified economy in terms of industry mix.