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Gross Output

Despite a First Decline in More Than a Decade for Q1, Gross Output (GO) Might Still Offer Hope for a Robust Recovery in Late 2020

Washington, DC (Tuesday, July 7, 2020):  On July 6, 2020, the federal Bureau of Economic Analysis (BEA) announced that gross output (GO) – the most comprehensive measure of total spending in the economy, including the supply chain – slowed dramatically in the 1st quarter 2020.

Gross Output declined in the aftermath of current political unrests, as well as negative effects of the COVID-19 pandemic and government shutdown of the economy in response to the pandemic. However, GO might offer still some promise for a strong recovery, even over the short term. Business spending, which is a better indicator of economic recovery, declined significantly less than consumer spending. This might be an indication that the economy is more fundamentally sound than currently anticipated.

While some of the business spending was to fight the current epidemic, businesses also used a significant portion of that spending to transform and set up their operations for opening after government closing mandates are lifted. If that is correct, the economy might recover quicker than expected. The most recent jobs report also offered an indication that a relatively fast recovery is certainly a strong possibility.

After delivering steady increases over the past 42 consecutive quarters, first quarter 2020 Gross Output declined 4% in real-terms. Last time real GO declined — in the second quarter 2009 — was in the aftermath of the 2008 economic pullback. While still growing, GO had already slowed its growth rate to 1.1% in the fourth quarter 2019 from nearly 2.5% in the previous period.

This growth slowdown in the last period last year, and a decline in the first period 2020 offered a leading indication that the overall economy was already cooling. GO appears to have anticipated the pullback already in the first quarter even before the economy experienced the full effects of the COVID-19 pandemic and government-mandated shutdowns.

However, while gross output generally declines more than GDP during economic pullbacks, this period’s data presents an anomaly. Despite declining 4% on annualized basis, GO fell less than real GDP, which pulled back 5.1% in the same period.

One reason for this anomaly – and potential s positive sign pointing to a faster-than-expected recovery – is that business spending decreased at a slower rate than consumer spending. Businesses generally anticipate economic contractions and begin spending cuts earlier than consumers. Therefore, Gross Output, which includes business-to business transactions, generally offers earlier signs of pending economic contractions than GDP, which measures only final output.

While consumer spending fell 5.9% in the first quarter 2020, business spending contracted only 5.4%. Despite a relatively small magnitude, this is a significant margin as back-tested date indicates that business spending tends to decline at significantly higher rates than consumer spending during periods of “normal” economic contractions. The margin is even more significant in nominal terms where business spending fell just 4% compared to the 5.7% consumer spending decline. It appears that businesses anticipated the full impact of the COVID-19 epidemic based on just one month of information and adjusted their economic activity by reducing buying activities.

The disruptions in the domestic and global supply chain caused by the COVID-19 pandemic, as well as civic unrest in the U.S., have been in the news lately.  GO is the only macro statistic that includes the value of B2B spending and supply chain. “It deserves to be watched closely and updated frequently,” said Dr. Mark Skousen, presidential fellow at Chapman University and a leading advocate of GO as a better, more comprehensive indicator of economic performance.

Business — Not Consumers — Drives the Economy

Note:  Contrary to what the media says, consumer spending does not drive the economy, and does not represent two-thirds of the economy. Using GO as a better, more accurate measure of total spending in the economy, the business sector (B2B spending) is almost twice the size as consumer spending. Consumer spending is the effect, not the cause, of prosperity (Say’s law).

The continued business spending decline suggests that the economy began slowing down as a response to early signs that the COVID-19 epidemic’s impact could be significantly more serious than initially anticipated in December 2019. The U.S.–China Phase One trade agreement — signed on January 15, 2020, in Washington D.C. by China’s Vice Premier Liu He and U.S. President Donald Trump – went into effect on July 1, 2002.  However, there are accusations from both sides regarding the origin of the COVID-19 virus and new information that suggests Chinese government officials might have been aware that the epidemic began in China much earlier than they disclosed it in December 2019. Therefore this agreement might not have the intended economic impact as originally anticipated. Furthermore, protests and civil unrests in the U.S. create additional headwinds that the economy will have to overcome even after the COVID-19 pandemic is under control.

GO is a leading indicator of what GDP will do in the next quarter and beyond. As David Ranson, chief economist for the private forecasting firm HCWE & Co., states, “Movements in gross output serve as a leading indicator of movements in GDP.”

Whenever GO is growing faster than GDP, as it did in most of 2018, it’s a positive sign that the economy is still robust and growing.  However, GO has grown at a slower pace than the GDP in the last three quarters, a sign that the economy was slowing down as it entered 2020.

The federal government will release the advance estimate for second-quarter GDP on July 30, 2020 and a full release of second-quarter GO on September 30, 2020.

Report on Various Sectors of the Economy

In the first quarter 2020, 17 of 22 industry sectors groups contracted to drive the overall GO contraction. The second largest sector – Manufacturing – contracted 7.1% on an annualized basis. This pullback marked a third consecutive contraction after the sector declined 1.2% and 1.5% in the previous two periods of 2019. However, a bigger concern is that manufacturing of Durable goods declined nearly 10%. Durable goods, which include capital expense items by businesses and have bigger impact on long-term economic activity, declined considerably more than Nondurable goods, which contracted just 4.5%, less than half the rate for Durable goods.

Finance, insurance, real estate, rental, and leasing – the largest segment that accounts for nearly one-fifth of total Gross Output – was one of just few bright spots in the first quarter. After expanding 1.3% in Q4 2019, this sector more than doubled its growth to 3.2% in the first quarter 2020. The Finance and insurance sub-segment advanced 3.5% and Real estate rental and leasing still grew at a respectable 3.0%.

After briefly breaking a streak of declining for three consecutive periods in Q4 2019, the Mining sector posted a 42% drop in the first quarter 2020. While an important sector among the leading indicators in the early stages of production, the Mining sector only accounts for approximately 1.3% of the overall GO, which minimizes the impact of the decline on the economy overall.

Similarly to the Mining sector, the Utilities sector delivered a single-period increase in Q4 after two negative periods. However, in Q1 2020, the Utilities sector pulled back more than 21%. The Transportation and warehousing sector also suffered a large decline of nearly 16% after expanding 4.7% in the previous period.

Another positive contributor was the Construction sector. After increasing its expansion rate from 2.5% in Q3 to 4.4% Q4 2020, this sector expanded nearly 14% in the first period 2020.

Several other sectors, such as professional, business, educational, health care and social assistance, contracted between 1% and 5%. Under the lockdown directives, the    Arts, entertainment, recreation, accommodation, and food services sector declined more than 40%.

Another sector that continued its steady expansion was Government spending, albeit at a slightly slower pace. After expanding more than 4% in the last period of 2019, overall government spending rose 1.8% in the first quarter 2020. The main driver was a 3.7% growth of Federal government spending. State and local government spending increased at relatively small 1%.

Gross Output

Gross output (GO) and GDP are complementary statistics in national income accounting. GO is an attempt to measure the “make” economy; i.e., total economic activity at all stages of production, similar to the “top line” (revenues/sales) of a financial accounting statement. In April 2014, the BEA began to measure GO on a quarterly basis along with GDP.

Gross domestic product (GDP) is an attempt to measure the “use” economy, i.e., the value of finished goods and services ready to be used by consumers, business and government. GDP is similar to the “bottom line” (gross profits) of an accounting statement, which determined the “value added” or the value of final use.

GO tends to be more sensitive to the business cycle, and more volatile, than GDP. During the financial crisis of 2008-09, GO fell much faster than GDP, and afterwards, recovered more quickly than GDP. Still, it wasn’t until late 2013 that GO fully recovered from its peak in 2007. Until mid-2018, GO outpaced GDP, suggesting a growing economy.  However, since then GO has slowed dramatically, threatening the economic boom.

Consumer Spending Declined Significantly More Than Business Spending in Q1 2020, Which Could Indicate That the Economy Has Solid Fundamentals and is Ready to Bounce Back as Soon as the COVID-19 Pandemic is Under Control and Government Restrictions Mandates Are Lifted

Our business-to-business (B2B) index is also useful. It measures all the business spending in the supply chain and new private capital investment. Nominal B2B activity contracted 4% in the fourth quarter to $26.3 trillion. Meanwhile, consumer spending contracted 5.7% on an annualized basis to $14.6 trillion. In real terms, B2B activity decreased at an annualized rate of 5.4% and consumer spending declined 5.9%.

Gross Output

“B2B spending is in fact a pretty good indicator of where the economy is headed, since it measures spending in the entire supply chain,” stated Skousen. “After slowing its growth in the fourth quarter at the end of 2019, business activity declined 5.4% in real terms during the first-quarter 2020.

After the initial decline in early-2020, the stock market continues to experience volatility. However, since the mid-March lows, the markets have rebounded strongly and recovered most of those losses. The S&P 500 has risen 40% and has already recovered nearly 90% of its losses between the beginning of 2020 and its year-to-date low on March 23.

While lower than in the previous period, total business spending indicates that the overall economy might surge back in the second half of the year. One stumbling block for the economic recovery might be renewed and continued interference by government officials, such as Governor Sisolak’s (D-NV) decision to extend the current shutdown phase through the end of July in Las Vegas, which forced a cancellation of our FreedomFest conference for the first time since it began in 2007. Similar decisions might put additional pressure on businesses across the country and suppress economic recovery deeper into the year.”

About GO and B2B Index

Skousen champions Gross Output as a more comprehensive measure of economic activity. “GDP leaves out the supply chain and business to business transactions in the production of intermediate inputs,” he notes. “That’s a big part of the economy, bigger than GDP itself. GO includes B2B activity that is vital to the production process. No one should ignore what is going on in the supply chain of the economy.”

Skousen first introduced Gross Output as a macroeconomic tool in his work The Structure of Production (New York University Press, 1990). A new third edition was published in late 2015, and is now available on Amazon.

Click here: Structure of Production on Amazon

The BEA’s decision in 2014 to publish GO on a quarterly basis in its “GDP by Industry” data is a major achievement in national income accounting. GO is the first output statistic to be published on a quarterly basis since GDP was invented in the 1940s.

The BEA now defines GDP in terms of GO. GDP is defined as “the value of the goods and services produced by the nation’s economy [GO] less the value of the goods and services used up in production (Intermediate Inputs or II].” See definitions at https://www.bea.gov/newsreleases/industry/gdpindustry/gdpindnewsrelease.htm

With GO and GDP being produced on a timely basis, the federal government now offers a complete system of accounts. As Dale Jorgenson, Steve Landefeld, and William Nordhaus conclude in their book, A New Architecture for the U. S. National Accounts, “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”

Skousen adds, “Gross Output and GDP are complementary aspects of the economy, but GO does a better job of measuring total economic activity and the business cycle, and demonstrates that business spending is more significant than consumer spending,” he says. “By using GO data, we see that consumer spending is actually only about a third of economic activity, not two-thirds that is often reported by the media. As the chart above demonstrates, business spending is in fact almost twice the size of consumer spending in the US economy.”

For More Information

Steve Forbes: What’s Ahead podcast. In this podcast, Steve Forbes discusses Gross Output with Mark Skousen on September 9, 2019:  https://www.forbes.com/sites/steveforbes/2019/09/09/were-using-the-wrong-measure-gdp-to-gauge-the-economys-real-health-mark-skousen/#35ff3d9a52fa

The GO data released by the BEA can be found at www.bea.gov under “Quarterly GDP by Industry.” Click on interactive tables “GDP by Industry” and go to “Gross Output by Industry.” Or go to this link directly: http://www.bea.gov/iTable/iTable.cfm?ReqID=51&step=1#reqid=51&step=3&isuri=1&5102=15

For more information on Gross Output (GO), the Skousen B2B Index, and their relationship to GDP, see the following:

Mark Skousen, “If GDP Lags, Watch the Economy Grow,” Wall Street Journal, April 24, 2018:  https://www.grossoutput.com/2018/04/26/away-go-economy-growing-faster-expected/

Mark Skousen, “At Last, a Better Way to Economic Measure” lead editorial, Wall Street Journal, April 23, 2014: http://on.wsj.com/PsdoLM

Steve Forbes, Forbes Magazine (April 14, 2014): “New, Revolutionary Way To Measure The Economy Is Coming — Believe Me, This Is A Big Deal”: http://www.forbes.com/sites/steveforbes/2014/03/26/this-may-save-the-economoy-from-keynesians-and-spend-happy-pols/

Mark Skousen, Forbes Magazine (December 16, 2013): “Beyond GDP: Get Ready For A New Way To Measure The Economy”: http://www.forbes.com/sites/realspin/2013/11/29/beyond-gdp-get-ready-for-a-new-way-to-measure-the-economy/

Steve Hanke, Globe Asia (July 2014): “GO: J. M. Keynes Versus J.-B. Say,” http://www.cato.org/publications/commentary/go-jm-keynes-versus-j-b-say

David Ranson, “Output growth data that the economy generates months earlier than GDP,” Economy Watch, July 24, 2017. HCWE & Co. http://www.hcwe.com/guest/EW-0717.pdf

Mark Skousen, “Linking Austrian Economics to Keynesian Economics,” Journal of Private Enterprise, Winter, 2015: http://journal.apee.org/index.php?title=Parte7_Journal_of_Private_Enterprise_vol_30_no_4.pdf

To interview Dr. Mark Skousen on this press release, contact him at mskousen@chapman.edu, or Ned Piplovic, Media Relations at skousenpub@gmail.com.

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[1] The BEA currently uses a limited measure of total sales of goods and services in the production process. Once products are fabricated and packaged at the manufacturing stage, the BEA’s GO only adds “net” sales at the wholesale and retail level. Its official GO for the 2020 1st quarter is $37.8 trillion. By including gross sales at the wholesale and retail level, the adjusted GO increases to nearly $46.1 trillion in Q1 2020. Thus, the BEA omits more than $8.2 trillion in business-to-business (B2B) transactions in its GO statistics. We include them as a legitimate economic activity that should be accounted for in GO, which we call Adjusted GO. See the new introduction to Mark Skousen, The Structure of Production, 3rd ed. (New York University Press, 2015), pp. xv-xvi.
Gross Output

GO Beyond GDP: A Breakthrough in Macroeconomics

A Paper Presented to the Mont Pelerin Society Meetings

on May 8, 2017, Seoul, Korea

(anniversary of Friedrich Hayek’s birthday)

by Mark Skousen

Presidential Professor,

Chapman University

“Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare.  Both are required in a complete system of accounts.” — Dale W. Jorgenson, J. Stephen Landefeld, and William D. Nordhaus (2006) 

“This is a great leap forward in national accounting. Gross output, long advocated by Mark Skousen, will have a profound and manifestly positive impact on economic policy.”                                               —  Steve Forbes (2014)

The purpose of this paper is to introduce the benefits of gross output (GO), a broader measure of the economy that the federal government began publishing on a quarterly basis along with gross domestic product (GDP) starting in April 2014.  I am honored to discuss this new statistic on May 8, 2017, here at the Mont Pelerin Society meeting, which happens to be Friedrich Hayek’s birthday.  Hayek is the founder of the Mont Pelerin Society, and GO is a measure of Hayek’s triangle.  I believe GO deserves recognition as a major triumph in Austrian economics since Friedrich Hayek won the Nobel Prize in 1974.

In this paper, I argue that GO is more consistent with economic growth theory, and more helpful in measuring and anticipating the ups and downs of the business cycle.  GO also demonstrates that, contrary to what is commonly reported in the financial media, business spending is far bigger and more important than consumer spending in the economy.  Thus, GO is also a supply-side statistic, and its adoption by the government’s Bureau of Economic Analysis (BEA) is a significant advance in supply-side economics. 

It is my contention that GO is a major breakthrough in national income accounting.  Just as publicly-traded companies release a quarterly financial statement that highlights revenues/sales as the “top line” and net income or profits as the “bottom line,” so now the economics profession has finally caught up with the accountants and Wall Street finance by identifying GO as the top line in national income accounting to go along with GDP, the bottom line.  In fact, it is the intention of the BEA to publish both GO and GDP simultaneously within the next year or two, as publicly-traded companies do. 

In sum, GO is one of the most significant innovation in national income accounting since GDP was invented in the 1940s, and a major advance in the development of macroeconomics.  It is fertile ground for new research in economic growth in theory and practice. 

Why is GO Important?

First, some background: 

In the 1980s, I began doing research on an alternative model of macroeconomics that culminated in my book, The Structure of Production, published by New York University Press in 1990.  I came to the conclusion that gross domestic product (GDP) was an incomplete and sometimes misleading measure of the economy, and that it told only part of the story of the business cycle. 

Over the years, it has become apparent that the introduction of GDP in the 1940s helped support the Keynesian notion that business decision-making to expand or contract is dependent on current aggregate demand and the relatively level of spending by consumers, business and government (C + I + G).  Indeed, since consumption expenditures represent by far the largest sector of the economy, as measured by GDP, and business investment as the smallest, the focus by the media and government officials led to the false impression that consumer spending, not business investment, is the main driver of economic growth.    

The quarterly release of GDP statistics to the media and the general public perpetuates this Keynesian mindset.  The latest GDP statistics (2016) are broken down into these major categories of spending: 

GO

Figure 1. Breakdown in GDP, 2016.

Source:  Bureau of Economic Analysis, www.bea.gov.  2016

Thus, consumer spending represents 68.9% of GDP in the United States in 2016, followed by government spending, 17.5%; and last, private investment, 16.4%.  Net exports is negative at -0.3%.[1]

Based on a superficial reading of GDP data, the financial media is quick to focus on, first, consumer spending, and second, government spending as the key driver of economic growth. 

It is not uncommon to see the following statements in the media following the release of GDP data: 

“With personal consumption accounting for nearly 70 percent of all economic activity, however, the administration will be hard pressed to lift growth substantially if consumers remain cautious about opening their wallets.” – Nelson D. Schwartz, “Economy Grows at Slowest Rate in 3 Years,” New York Times, April 28, 2017, page 1.

“Consumer spending is the lifeblood of the U. S. economy…”  Barron’s, August 15, 2016, p. M1. 

“Household spending generates more than two-thirds of total economic output, so sturdy [consumer] spending gains should translate into economic growth.” – “Spending Rises, Inflation Stays Low,” Wall Street Journal, September 30, 2014, p. A2. 

“Consumer spending makes up more than 70% of the economy, and it usually drives growth during economic recoveries.” — “Consumers Give Boost to Economy,” New York Times, May 1, 2010, p. B1. 

Or as the Wall Street Journal stated a few years ago,

“Consumers are the engine of the U. S. economy, accounting for about 70% of economic demand…” — “Consumers Stepped Up Spending in March,” Wall Street Journal, April 17, 2012, p. A7.

And in a broader context, here’s a report from the New York Times discussing the role of government, investment, and consumer spending in the economy: 

     “Friday’s estimates of second-quarter gross domestic product [1.3%, well below consensus forecasts] provided a sobering look at how a decline in public spending and investment can restrain growth…The astonishingly slow growth rate from April through June was due in large part to sluggish consumer spending and an increase in imports, which subtract from growth numbers.  But dwindling government spending also held back growth.”  — “The Role of Government Spending,” New York Times, July 29, 2011

These examples from the national media demonstrate how its conventional interpretation of GDP as the representative of the economy favors a Keynesian perspective that puts consumer spending first, government stimulus second, and business investment a poor third when it comes to economic performance.  Trade doesn’t even rate.

The Keynesian Diversion:  Pro-Consumption, Anti-Saving

The GDP data is consistently with the Keynesian aggregate demand model, introduce in 1936 with the publication of John Maynard Keynes’s General Theory.  The British economist promoted the idea that consumption is more vital, dependable and productive than saving in a mature economy.  As noted in the Keynesian cross model developed by Paul Samuelson, an increase in the “propensity to consume” leads to full employment.  In his magnum opus, Keynes applauded “all sorts of policies for increasing the propensity to consume,” including confiscatory inheritance taxes and the redistribution of wealth in favor of lower-income groups, who consumed a higher percentage of their income than the wealthy (Keynes 1973 [1936]: 325). 

Canadian economist Lorie Tarshis, the first to write a Keynesian textbook in the post-war, warned that a high rate of saving is “one of the main sources of our difficulty,” and one of the goals of the federal government should be to encourage consumption and “reducing incentives to thrift” (Tarshis 1947: 521-22).

MIT professor Paul Samuelson introduced the “paradox of thrift” is his 1948 edition of Economics, the thesis that saving more could result in less income.  “Franklin’s old virtues [of thrift] may be modern sins” (Samuelson 1948: 270).  As another Keynesian textbook put it more bluntly, “While savings may pave the road to riches for an individual, if the nation as a whole decides to save more, the result could be a recession and poverty for all” (Baumol and Blinder 1988: 192).  Even today Keynesian economists content that Asian nations suffer from a “saving glut” and should adopt policies that encourage consumer spending (Bernanke 2015). 

The Keynesian anti-saving mentality applied especially during an economic downturn.  But even during a recovery, the Keynesians argued that consumption was more significant than saving in promoting growth when resources were “unemployed.”  Keynesian economist Hyman Minsky confirmed this unorthodox approach when he wrote, “The policy emphasis should shift from the encouragement of growth through investment to the achievement of full employment through consumption production” (Minksy 1982: 113). 

This pro-consumption policy was officially approved during the Kennedy administration when the 1963 Annual Economic Report of the President focused on the demand side to stimulate economic activity via the tax cuts: “The most important single thing we can do to stimulate investment in today’s economy is to raise consumption by major reduction of individual tax rates” (Kennedy 1963: xvii).  Thus, according to the Keynesian model, it is through increased personal consumption expenditures that business investment is stimulated. 

A Keynesian anti-saving mentality even crept into George W. Bush administration in the 2000s, when Bush pushed through Congress several tax cuts to stimulate spending.  As President Bush said in December 2006 at a news conference, “I encourage you all to go shopping more” (new conference transcript, December 20, 2006).   Oh, if only the Christmas shopping season could last year around!  CNN expressed a similar sentiment a few years later:  “The rebates will put about $120 billion in the hands of individuals in the hope that they will spend it and boost a faltering U.S. economy.  Economists generally agree that the economy should see a boost from the rebate checks.  But most also agree that the full impact will be less than the total value of the stimulus package.  That’s because some recipients are expected to save their rebates or use them to pay down credit cards or other debt instead of spending it.”  (CNN Report, “Bush signs stimulus bill; rebate checks expected in May,” Feb 13, 2008.) http://www.cnn.com/2008/POLITICS/02/13/bush.stimulus/

Leading Economic Indicators

Contradict Keynesian GDP Model

And yet we continue to see plenty of evidence to support the traditional classical model of economic growth, that growth is dependent on the supply side of the economy:  increases in productive savings and capital formation, improved technology and entrepreneurship, and advances in education, training and human capital, have led to higher standards of living over time.  According to Robert Solow (1957) and Robert Barro (2011), growth is more a function of technological advances, productive investment, and entrepreneurship than consumer spending.  Consumer spending is largely the effect, not the cause, of prosperity (Hanke 2014). 

Among the US leading economic indicators published monthly by the Conference Board, most are linked to the earlier stages of production and business activity:  Average weekly hours, manufacturing; Average weekly initial claims for unemployment insurance; Manufacturers’ new orders, consumer goods and materials; ISM® Index of New Orders; Manufacturers’ new orders, nondefense capital goods excluding aircraft orders; Building permits, new private housing units; Stock prices, 500 common stocks; Leading Credit Index™; Interest rate spread, 10-year Treasury bonds less federal funds; and Average consumer expectations for business conditions.  Note that the highly touted “consumer confidence index” that is highlighted in the media has been changed to the “average consumer expectations for business conditions” (Conference Board 2017). 

Similar conclusions can be found looking at the leading economic indicators in other nations.  For example, the Conference Board has six indicators to predict economic growth in Korea:  Stock Prices, Value of Machinery Orders, Index of Inventories to Shipments, Export FOB, Yield of Government Public Bonds, and Private Construction Orders. 

In fact, of the 13 economies in the world covered by the Conference Board, none identify consumer spending and retail sales as leading indicators.  As a Forbes economist John Papola recently concluded, “Economic growth (booms) and declines (bust) have always been led by changes in business and durable goods investment, while final consumer goods spending has been relatively stable through the business cycle.” (Papola 2013).

Does increased savings hurt economic growth?  A recent econometric study by the St. Louis Fed contradicts this conventional wisdom.  Even in the short run, the author concludes, “a higher saving rate in the current quarter is associated with faster (not slower) economic growth in the current and next few quarters” (Thornton 2009)

How do we reconcile the GDP statistics that seem to support the Keynesian model with the historical evidence that reinforces the neo-classical model of economic growth?  What’s missing in the macroeconomic model?

 

Sin of Omission:  The Supply Chain.

The paradox is resolved once it is recognized that GDP is an incomplete measure of economic activity.  It leaves out a big chunk of the business sector, i.e., the supply chain.  By definition, GDP accounts for the value of final products and services only, and omits intermediate inputs, a key ingredient in the macroeconomic landscape. 

While GDP is a reasonable estimate of national welfare and economic growth, it is highly misleading in underreporting the role that business plays in economic performance.  It vastly underestimates the full contributions of business in the “make” economy, that is, the full value of business-to-business (B2B) transactions that move the supply chain along the intermediate stages of production toward the production of finished goods and services (the “use” economy). 

GDP includes only a small portion of the B2B transactions – it only accounts for “gross private fixed investment,” the value of final capital goods, the tools, equipment and machinery used to advance the production process.  The value of goods in process – valued at more than GDP itself – is left out, often erroneously dismissed as “double counting.” 

A Short History of National Income Accounting

The fateful decision to leave out any calculation of the supply chain in GDP was made decades ago in a debate between two Russian American economists at Harvard: Simon Kuznets and Wassily Leontief.  Kuznets did the original work in the 1930s on national income accounting, and determined that national income (“net output”) should be the key indicator (Kuznets 1934: 1).  To properly measure national income, he subtracted intermediate production from gross output to come up with a “net output” figure, which he later called Gross National Product (now Gross Domestic Product or GDP). 

Leontief, on the other hand, contended that the interrelations between goods was critical to understanding how the economy works, and developed a more complex system of input-output tables under the umbrella of gross output (Leontiff 1966).  Both won the Nobel Prize for their work, but ultimately textbook economics and popular economics ended up with the “net” figure, GDP, as the key measure of the economy. 

We continue to suffer the consequences.  The GDP model has led to much mischief in theory and policy, as we noted above. 

In the 1970s and 1980s, economists became disenchanted with the state of macroeconomic theory and practice.  I was among them.  In my research to find a new macro model, I was particularly impressed with the work of Austrian economist Friedrich Hayek and his small volume of lectures at the London School of Economics, Prices and Production (1931).  It introduced Hayek’s triangles, a theoretical measure of spending at all stages of production. 

His work was resurrected by the later “neo-Austrian” work of Sir John Hicks.  According to Hicks, a nation’s complete measure of capital and the economy must include durable goods as well as “goods that are in the pipeline, goods in process of production” (Hicks 1973a: 191).[2]

In the spirit of Leontief, Hayek, and Hicks, I suggested that we needed a new macro statistic that measured spending at all stages of production, a figure that includes the value of the supply chain.   See pp. 178-184 in chapter 6 of The Structure of Production.   In this work, I developed a universal 4-stage model of the economy, a modified form of Hayek’s triangle.  See figure 2 below. 

Gross Output

Figure 2.  Universal 4-Stage Model of the Economy

Source:  Mark Skoqusen, The Structure of Production (New York University Press, 3rd ed., 2015), p. xviii, and Economic Logic (Capital Press, 2014), p. 58.

I defined spending at all four stages of production gross output (GO), and stage 4 as GDP, and made some initial estimates.  (Both Hayek and Hicks’s works were entirely theoretical.)  In Structure, I contend that GO is a more comprehensive measure of the economy, serves as a valuable tool in analyzing the business cycle, restores the business sector as the major driver of the economy, and deserves to be updated on a quarterly basis along with GDP.  More recently, I contend that GO should be reported as the “top line” in national income accounting, and GDP as the “bottom line.” 

Surprise Announcement by the BEA

A giant step forward occurred in national income accounting when in early 2014, the Bureau of Economic Analysis (BEA) of the

  1. S. Department of Commerce (under the creative leadership of the director Steve Landefeld) announced it would begin publishing Gross Output, along with Gross Output by Industry, on a quarterly basis. It is the first new measure of the economy to be published quarterly since GDP was invented in the 1940s.[3]

This new macro statistic includes intermediate inputs for the first time, defined by the BEA as “the value of both foreign and domestically produced goods and services which are used as energy, materials, and purchased services as part of an industry’s production process.”  As a result, we now have a more complete picture of the economic structure.  The BEA now tracks 402 industries and 69 commodities in its Gross Output by Industry. 

To see the latest data on GO, go to https://www.bea.gov/iTable/iTable.cfm?ReqID=51&step=1#reqid=51&step=51&isuri=1&5114=q&5102=15

GO does not replace GDP by any means.  Both need to be reported.  As Dale W. Jorgenson, J. Stephen Landefeld, and William D. Nordhaus state, “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare.  Both are required in a complete system of accounts” (Jorgenson et al 2006: 6).

GDP estimates the value of final use in the economy.  It does a consistent job of measuring spending by consumers and government, but does not tell the whole story of commercial activity.  GDP includes fixed capital expenditures but omits a critical component–spending by business to move the production process along the supply chain, what economists call goods-in-process or what businesses call B2B spending.  This omission of business’s contribution to the supply chain amounted to $21.3 trillion in 2016, substantially larger than GDP itself ($18.7 trillion). 

GO Offers a Better Perspective of Total Economic Activity

What can we learn from GO? 

First, GO is a much better measure of total economic activity and a better indicator of the business cycle.  Figure 3 demonstrates the size and volatility of GO in relationship with GDP. 

Figure 3.  Adjusted Gross Output (GO*) versus GDP, 2007-2016.

Source:  BEA data, plus US Census Bureau data on monthly wholesale and retail trade added to create Adjusted GO.

In the third quarter of 2016, Adjusted GO (GO*) amounted to almost $40 trillion, more than double GDP of $18.7 trillion.[4] 

Recently the BEA has published GO data going back to 1947 on an annual basis: http://bea.gov/industry/gdpbyind_data.htm

Figure 4 below shows changes in GO and GDP, demonstrating how GO does a better job of measuring the depth of the recession and recovery.  During the 2008-09 financial crisis, nominal GDP decreased only 5%, but Adj. GO fell over 25%.  Moreover, during the recovery and expansion phrase, GO tends to rise faster than GDP.  See figure 5 below.

Figure 4.  Quarterly changes in Adj. Gross Output (GO*) and GDP, 2007-2016. 

Source:  BEA data, plus US Census Bureau data on monthly wholesale and retail trade added to create Adjusted GO.

Second, GO may also be a good forecaster of the economy’s condition.  When GO is falling faster than GDP, a recession is imminent.  When GO is moving back up faster than GDP, it suggests a recovery.  David Colander (Middlebury) states:  “For forecasting, the new measure [gross output] may be more helpful than the GDP measure, because it provides information of goods in process.” (2014: 451)  Economic analyst David Ranson adds:  “GO is better correlated with financial-price movements than most of the other indicators.  It tends to portray the economy as more cyclical than real GDP does, the recession of 2008-09 as deeper, and the recovery as slower.  The universal use of real GDP as a measure of the economy’s vitality is subject to misunderstandings, pitfalls, and criticism — especially in the short run. GDP includes only ‘final’ goods and services, leaving out the huge economy that consists of businesses buying and selling intermediate goods to one another.” (2015: 4).[5]

Third, GO by Industry disaggregates the economy into 402 industries and 69 commodities, allowing economists to see more clearly how the structure of the economy is shifting over time.   Austrian economists who are critical of aggregate statistics will find this approach appealing and fertile ground for research on potential imbalances and asset bubbles in the economy. 

The Importance of Business in the Economy

Fourth, GO shows that business spending is far more important than consumer spending.  The overarching view of economic activity changes dramatically when you switch from the narrow GDP model to the broader GO model.  See figure 5 below comparing the GO* and GDP models. 

Figure 5.  GDP Model vs GO Model in 2016 (calculations by author).  II stands for Intermediate Inputs. 

Source:  Bureau of Economic Analysis, www.bea.gov.  2016

The GDP model gives the impression that spending by consumers is the main driver of the economy, representing two thirds of GDP.  (See figure 1.) But by using the broader GO model, we can refigure the breakdown in total economic activity and see very different results. 

Thus, we can refigure the breakdown of total economic activity as follows:

Figure 6.  Breakdown of GO 2016. 

Source:  www.bea.gov, additions from author. 

Using the GO model above, it turns out that consumer spending is only about a third of total economic activity, and business spending (B2B transactions, or I+II in figure 6) is close to 60% and thus far more significant than the retail or consumer market. 

From the GO data, I have created the Skousen B2B Index, which measures all business spending throughout the production process.  As you can see from figure 7 below, it is almost double the level of consumer spending in the United States and more volatile.  B2B is also much more volatile than consumer spending. 

Figure 7.  US Business Spending and Consumer Spending, 2007-2016. 

Source:  BEA data, plus US Census Bureau data on monthly wholesale and retail trade to create the Skousen B2B Index. 

By incorporating the supply chain, national income accounting gives a full business perspective of the production process.  John Hicks recognized this years ago.  “It is the typical business man’s viewpoint, nowadays the accountant’s viewpoint, in the old days the merchant’s viewpoint.” (Hicks 1973:12)  As former BEA director Steve Landefeld noted when GO was introduced in 2014, “Gross Output provides an important new perspective on the economy and a powerful new set of tools of analysis, one that is closer to the way many businesses see themselves.” (BEA News Conference, 25 April 2014). 

CNBC’s Larry Kudlow best reflects the implications of the GO model: “Though not one in a thousand recognizes it, it is business, not consumers, that is the heart of the economy.  When businesses produce profitably, they create income-paying jobs and then consumers spend.  Profitable firms also purchase new equipment because they need to modernize and update all their tools, structures and software” (Kudlow 2006). 

GO Provides a Powerful Link between Micro and Macro

In a very real sense, GO fills in the missing piece of the macroeconomic puzzle.  GO is truly a snapshot of the total economy, because it includes both the full production process and the final product (GDP). 

In economics, the development of GO provides a vital link between microeconomics, the theory of the firm, to macroeconomics, the theory of the economy as a whole.  Here below in figure 8, I reproduce John Taylor’s 4-stage micro model in the production of a cup of espresso.

 

Figure 8.  Four Stages of Production of Espresso Coffee. 

Source:  John B. Taylor, Economics, 5th ed. (Boston: Houghton Mifflin, 2006)

This is similar to the 4-stage macro model in figure 1.  Thus, we see a link between micro and macro. 

In microeconomics, profits and losses are derived from a firm’s revenues minus expenses at each stage of production.  The final price of the retail good or service is equivalent to the combined profit margins or value added of all the previous stages of production.  In macro, we witness a similar phenomenon:  GO adds up all the revenues of all firms throughout the stages of production, while GDP determines the value of the final/finished goods and services, or value added (gross profit).[6]

GO as a Unifying Force in Economics

The introduction of GO can be viewed as a unifying force in accounting, finance and economics.  Even the varying schools of economics see value in this new macro statistic. 

GO appeals to supply-side economists.  As Prof. Steve Hanke (Johns Hopkins) states, “With GO, GDP’s monopoly will be broken as the U.S. government will provide official data on the supply side of the economy and its structure” (Hanke 2014).  According to Hanke, GO confirms Say’s law, that the business sector of the most important force in the economy.  Thus, entrepreneurship, technology, saving and investment, and capital formation form the foundation of economic growth.  Accordingly, business activity drives the economy much more so than consumer spending or government stimulus.

Monetarists may find GO a move in the right direction.  GO can be viewed as a way to measure Irving Fisher’s famous Equation of Exchange, where MV=PT, in The Purchasing Power of Money (1911).[7]  Fisher is the father of monetarism and the Quantity Theory of Money, which argues that price inflation (P) is determined largely by increasing in the money supply (M).  As Jeremy Siegel (Wharton) wrote me, “Gross output is truly a measure of the aggregate demand for money (MV).”  GO can also be viewed as an attempt to quantify PT, the “volume of trade,” although it omits financial transactions of assets (stocks, bonds, real estate, collectibles, etc.). 

Even Keynesians have embraced GO.  GO expands J. M. Keynes’s Aggregate Demand function (The General Theory, 1936) to include the demand for all goods and services along the supply chain, not just final effective demand (final use, or GDP).  As William D. Nordhaus (Yale) wrote me, “This will open up the potential for new insights into the behavior of the economy.”

Finally, GO can be viewed as a major advance in Austrian economics, since it is a measure of Hayek’s triangle.  I consider the BEA’s decision to publish GO every quarter along with GDP as the biggest advance in Austrian economics since Hayek won the Nobel Prize in 1974.  Think of it as the Hayek-Keynes Part II debate.  This time Hayek wins (or at least ties). 

 

Conclusion:  GO Creates a New Paradigm Shift in Macroeconomics

In sum, gross output goes a long way toward completing the macroeconomic puzzle.  It links macro with microeconomics.  And it is a powerful unifying force – bringing together the disciplines of accounting, finance, business, and economics; and finding common ground in all the major schools of economics. 

GO is now being integrated into most of the top economics textbooks.  The following textbooks have added or plan to add sections on GO:  McConnell Brue Flynn; Roger LeRoy Miller; David Colander; John Taylor; and Glenn Hubbard.  Since GO complements GDP, it’s not difficult to integrate GO in the chapter on national income accounting.  (To see how this is done, see chapters 14 and 15 of my Economic Logic.) 

Other countries are moving ahead with measuring the supply chain in the economy.  It has been adopted in the UK on an annual basis (called “Total Output”).  The US is in the forefront of this system of national accounts, and I expect the G20 countries to follow within the next ten years.

Double Counting and Other Issues

Although much progress has been made in the acceptance of GO, there is still considerable debate about this new measure.  Only a handful of academic journals have discussed it, and the textbooks are just starting to incorporate it.  The adoption and approval of GO is far from complete. 

Some economists have raised concerns about GO:  that it is nothing more than “double counting,” and that mergers, vertical integration, and outsourcing distorts GO.  Even the BEA raises doubts about the accuracy of GO, and downplays its significance when it reports every quarter. In frequently asked questions, the BEA states:

“Gross output by industry is an essential statistical tool needed to study and understand the interrelationships of the industries that underlie the overall economy.  However, because of its duplicative nature, it may not be a good stand-alone indicator of the overall health of an industry or sector.  What can one infer about the economic health of an industry solely from the fact that gross output increases?  Nothing, without understanding what happened to the change in intermediate inputs and to value added.  Did the increase in gross output simply reflect a change in the extent of outsourcing or could it reflect a more substantive, fundamental change in the economy?  Gross output alone does not provide enough information to answer that question.  Moreover, focusing solely on gross output is likely to exaggerate the cyclical-nature of the economy, particularly for sectors that are more sensitive to this cyclicality, like manufacturing.” (BEA, “What is gross output by industry and how does it differ from gross domestic product by industry?”, Frequently Asked Questions:  https://www.bea.gov/faq/index.cfm?faq_id=1034)

My response:  GO does indeed involve the repeatedly sale of a commodity as it goes through the production, while GDP measures value added only and thus avoids double counting.  I agree that double counting should be avoided in measuring final output, but that does not mean it is without value and should be ignored.  For two reasons, multiple transactions in the supply chain play a vital and necessary role in the capitalist system.

First, products are often transformed as they move along the production process, e.g., iron ore becomes steel; coffee beans are roasted and grounded; cowhide becomes leather and then shoes; wholesalers distribute goods from one location to another – all serving useful, productive purposes that should be measured. 

Second, businesses are engaging in real economic activity throughout the “double counting” process.  Checks are being written and investment funds are being advanced to pay for gross expenses of a business, including goods-in-process.  B2B transactions are the critical steps in moving the production process along the supply chain toward final use.  Firms cannot run a business on value added alone.  In sum, double counting counts.   No analyst on Wall Street can afford to ignore sales, the top line in financial statements, and focus on profits only.  Equally the smart economist will look at the direction of GO as well as GDP in determining economic performance. 

Outlook for GO

Despite concerns about its efficacy, the BEA continues to publish GO and GO by Industry every quarter, and plans to publish this data simultaneously with GDP in the near future. 

GO is a work in progress, and researchers are likely to find fertile ground with this new macro data.  The introduction of GO is a paradigm shift in economics, and as such, debates and in-fighting in the profession are common place and will continue in our goal to find a complete and accurate model of the economy.  Despite its imperfections, GO is a giant step in the right direction. 

Cited Works

Barro, Robert J. 2011.  “How to Really Save the Economy.”  New York Times (September 10). 

Baumol, William J. and Alan S. Blinder. 1988.  Economics: Principles and Policies. 4th ed.  San Diego:  Harcourt Brace Jovanovich.

Bernanke, Ben. 2015. “The Global Savings Glut.”  Brookings Institute.  https://www.brookings.edu/blog/ben-bernanke/2015/04/01/why-are-interest-rates-so-low-part-3-the-global-savings-glut/

Colander, David. 2014. “Gross Output.” Eastern Economic Journal 40:451-455. 

Conference Board. 2017.  “The Conference Board Leading Economic Index.” http://www.conference-board.org/data/bcicountry.cfm?cid=1

Forbes, Steve.  2014. “New, Revolutionary Way To Measure The Economy Is Coming — Believe Me, This Is A Big Deal.” Forbes Magazine (April 14): http://www.forbes.com/sites/steveforbes/2014/03/26/this-may-save-the-economoy-from-keynesians-and-spend-happy-pols/

Hanke, Steve. 2014. “GO: J. M. Keynes Versus J.-B. Say,” Globe Asia (July) http://www.cato.org/publications/commentary/go-jm-keynes-versus-j-b-say

Hicks, John R. 1973a.  “The Austrian Theory of Capital and Its Rebirth in Modern Economics.” In Carl Menger and the Austrian School of Economics, ed. By J. R. Hicks and W. Weber. Oxford: Oxford University Press.

Hicks, John R. 1973b.  Capital and Time. Oxford:  Oxford University Press. 

Jorgenson, Dale W, J. Stephen Landefeld, and William D. Nordhaus.  2006.  A New Architecture for the US National Accounts.  Chicago:  NBER and University of Chicago Press.  

Kennedy, John F. 1963.  Economic Report of the President.  Washington, DC:  US Printing Office. 

Keynes, John Maynard. 1973 [1936].  The General Theory of Employment, Interest and Money. New York: Macmillan.

Kudlow, Larry. 2006.  “On Jobs, Tax Cuts, and the Democrats.” National Review Online (September 5). 

Kuhn, Thomas. 1962.  The Structure of Economic Revolution. Chicago: University of Chicago Press. 

Kuznets, Simon. 1934. “National Income, 1929-1932.” National Bureau of Economic Research, Bulletin 49 (June 7).

Leontief, Wassily. 1966.  Input-Output Economics.  New York: Oxford University Press. 

Minsky, Hyman. 1982.  Can “It” Happen Again? Essays in Instability and Finance.  New York:  M. E. Sharpe Publishers. 

Papola, John. 2013. “Think Consumption is the ‘Engine’ of our Economy?  Think Again,” Forbes, January 2, 2013.  https://www.forbes.com/sites/beltway/2013/01/30/think-consumption-is-the-engine-of-our-economy-think-again/#54b6956f6497

Ranson, R. David. 2015.  “Alternative data to track the economy and better explain capital-market prices,” Economy Watch, HCWE & Co., November 3.   http://www.hcwe.com/trials/EW-1015.pdf.

Tarshis, Lorie. 1947.  The Elements of Economics.  Boston:  Houghton Mifflin. 

Thornton, Daniel L. 2009.  “Personal Saving and Economic Growth,” Economic Synopses, St. Louis Fed, December 17. 

Samuelson, Paul A. 1948.  Economics:  An Introductory Analysis.  New York:  McGraw Hill. 

Mark Skousen, “At Last, a Better Way to Economic Measure” lead op ed, Wall Street Journal, April 23, 2014: http://www.wsj.com/articles/SB10001424052702303532704579483870616640230

Skousen, Mark. 2015 [1990].  The Structure of Production.  New York:  New York University Press. 

Skousen, Mark. 2017 [2008].  Economic Logic.  5th ed. (Washington, DC: Capital Press)

Solow, Robert. 1957. “Technical Change and the Aggregate Production Function.”Review of Economics and Statistics 39 (August): 312–320.

For More Information on Gross Output

“Gross Output” Wikipedia entry:  https://en.wikipedia.org/wiki/Gross_output

The GO data released by the BEA can be found at www.bea.gov under “Quarterly GDP by Industry.” Click on interactive tables “GDP by Industry” and go to “Gross Output by Industry.” Or go to this link directly: https://www.bea.gov/iTable/iTable.cfm?ReqID=51&step=1#reqid=51&step=51&isuri=1&5114=q&5102=15

For the latest analysis of quarterly gross output statistics, see my press releases at www.mskousen.com

Mark Skousen, The Structure of Production (New York University Press, 1990), with new introductions in 2007 and 2015.

Mark Skousen, “At Last, a Better Way to Economic Measure” lead op ed, Wall Street Journal, April 23, 2014: http://www.wsj.com/articles/SB10001424052702303532704579483870616640230

Steve Forbes, Forbes Magazine (April 14, 2014): “New, Revolutionary Way To Measure The Economy Is Coming — Believe Me, This Is A Big Deal”: http://www.forbes.com/sites/steveforbes/2014/03/26/this-may-save-the-economoy-from-keynesians-and-spend-happy-pols/

Mark Skousen, Forbes Magazine (December 16, 2013): “Beyond GDP: Get Ready For A New Way To Measure The Economy”: http://www.forbes.com/sites/realspin/2013/11/29/beyond-gdp-get-ready-for-a-new-way-to-measure-the-economy/

Gene Epstein, “A New Way to Gauge the Economy,” Barron’s, April 26, 2014: http://www.barrons.com/articles/SB50001424053111903409104579515671290511580

Steve Hanke, Globe Asia (July 2014): “GO: J. M. Keynes Versus J.-B. Say,”: http://www.cato.org/publications/commentary/go-jm-keynes-versus-j-b-say

David Colander, “Gross Output,” Eastern Economic Journal 40:451-455 (2014):  http://www.palgrave-journals.com/eej/journal/v40/n4/full/eej201439a.html

Mark Skousen, rejoinder, “On the GO:  De-Mystifying Gross Output,” Eastern Economic Journal 41:284-288 (2015):  http://www.palgrave-journals.com/eej/journal/v41/n2/full/eej201465a.html

Mark Skousen, “Linking Austrian Economics to Keynesian Economics,” Journal of Private Enterprise, Winter, 2015: http://journal.apee.org/index.php?title=Parte7_Journal_of_Private_Enterprise_vol_30_no_4.pdf

Footnotes

[1] In addition to overplaying the influence of consumer spending, GDP underplays the role of trade.  Trade, measured by the value of exports plus imports, amounted to 26.9% of GDP in the United States in 2016.  It’s substantially higher in most other countries, over 58% of world GDP in 2015.  It’s 85% in the Republic of Korea.  See  http://data.worldbank.org/indicator/NE.TRD.GNFS.ZS

[2] Intrigued by their efforts, I traveled to Europe to meet Hayek and Hicks.  In 1985, I met with Friedrich Hayek at his summer home in the Austrian Alps, and we discussed his macroeconomic theories of capital and the business cycle, and he expressed hope that someday economists would carry on his Austrian macro model. 

Three years later, in the summer of 1988, I met 84-year-old Sir John Hicks, the famed Nobel laureate who transformed Keynesian economics into the grand neoclassical synthesis with his 1937 article in Econometrica, “Mr. Keynes and the ‘Classics’.”  Despite his age and physical ailments, his mind was alert and, during our meeting, he recounted how he had gradually become disenchanted with modern economic theory he helped to develop.  In particularly, he seemed displeased by the failure of orthodox economists to teach the importance of time and the stages-of-production concept in macroeconomics, a subject he emphasized in his own textbook, The Social Framework (1971), and later in his treatise, Capital and Time (1973b). 

[3] Leontief originally estimated gross output (GO) in his input-output tables that came out every five years, and in the early 1990s, the BEA began publishing GO every year, but the data was always several years behind. 

[4] Unfortunately, the BEA measure of GO does not include all wholesale and retail trade figures.  As a BEA explains, “The output for industries that buy and sell merchandise but do not provide any additional fabrication is measured as margin.  By I-O convention, this margin is measured as sales receipts less the cost of goods” (Bureau of Economic Analysis, Concepts and Methods of the U. S. Input-Output Accounts:  Measuring the Nation’s Economy.  2nd ed. U. S. Department of Commerce, 2009, pp. 4-5).  By the BEA’s measure, GO reached $32.4 trillion in 2016.  When you include total wholesale and retail trade, it adds an additional $7.6 trillion to what I now term “adjusted GO” — $40 trillion, more than double GDP ($18.7 trillion). 

[5] I send out a press release every quarter analyzing the latest quarter GO data.  See www.mskousen.com

[6] Because GDP includes returns of the factors of production (incomes, rents, interest, and profits), GDP is actually equivalent to the accounting term gross profit, not net income or profits, in a financial statement.  I thank David Colander (Middlebury College) for pointing this out. 

[7] I thank Vernon Smith (Chapman University) and Jay Carlson (Utah Valley University) for pointing out how GO is an updated version of Fisher’s equation of exchange. 

Gross Output (GO) Anticipated Slowdown in 2020 – Before the Deluge

Washington, DC (Monday, April 6, 2020): On April 6, 2020, the federal Bureau of Economic Analysis (BEA) announced that gross output (GO) – the most comprehensive measure of total spending in the economy, including the supply chain – slowed dramatically in the 4th quarter 2019.

The 1.1% real-term growth in the fourth-quarter 2019 was substantially lower than the 2.5% expansion in the previous period, and much slower than 4th quarter real GDP (2.1%).  This growth slowdown at the end of last year indicated that the overall economy was cooling already coming into 2020.

Furthermore, after surging more than 4% in the second quarter and rising 2% in the third-quarter 2019, business-to-business (B2B) in the supply chain declined 1.7% in the last quarter of the year.

It appears that the businesses anticipated the full impact of the COVID-19 epidemic based on just one month of information and adjusted their economic activity by reducing buying activities.

The disruptions in the global supply chain have been in the news lately.  GO is the only macro statistic that includes the value of B2B spending and supply chain.  “It deserves to be watched closely and updated for frequently,” said Dr. Mark Skousen, presidential fellow at Chapman University and a leading advocate of GO as a better, more comprehensive indicator of economic performance.

After growing faster than the GDP in the first three periods of the year, GO growth of 1.1% in real terms underperformed substantially the 2.1% GDP growth rate for the fourth quarter. Total spending on new goods and services (adjusted GO) [1] increased to above $46.45 trillion. While GO still managed to expand, albeit at a slower pace than in the previous period, B2B spending declined 0.8% (-1.7% in real terms). Additionally, consumer spending growth slowed for the second consecutive period 3.2% (1.9% in real terms) for the current period.

 

Business — Not Consumers — Drives the Economy

Note:  Contrary to what the media says, consumer spending does not drive the economy, and does not represent two-thirds of the economy. Using GO as a better, more accurate measure of total spending in the economy, the business sector (B2B spending) is almost twice the size as consumer spending. Consumer spending is the effect, not the cause, of prosperity (Say’s law).

The business spending decline suggests that the economy began slowing down amid early signs that the COVID-19 epidemic might have a bigger impact than initially anticipated in December 2019. China’s Vice Premier Liu He and U.S. President Donald Trump signed the U.S.–China Phase One trade agreement on January 15, 2020, in Washington D.C. However, this agreement might not have the intended economic  impact in the midst of accusations from both sides regarding the origin of the COVID-19 virus.

GO is a leading indicator of what GDP will do in the next quarter and beyond. As David Ranson, chief economist for the private forecasting firm HCWE & Co., states, “Movements in gross output serve as a leading indicator of movements in GDP.”

Whenever GO is growing faster than GDP, as it did in most of 2018, it’s a positive sign that the economy is still robust and growing.  However, GO has grown at a slower pace than the GDP in the last three quarters, a sign that the economy was slowing down as it entered 2020.

The federal government will release the advance estimate for first-quarter GDP on April 29, 2020 and second-quarter GDP on July 30, 2020.  Both are expected to show a sharp drop in GDP growth and another recession.

 

Report on Various Sectors of the Economy

The second largest sector – Manufacturing – contracted 1.2% on annualized basis. However, this fourth-quarter contraction was actually lower than the 1.5% pullback in the previous period. However, a concern is that manufacturing of Durable goods declined 3%. Durable goods, which include capital expense items by businesses and have bigger impact on long-term economic activity, declined considerably while Nondurable goods still expanded at 0.8%.

Finance, insurance, real estate, rental, and leasing – the largest segment that accounts for nearly one-fifth of the total gross output – expanded at just 1.3%. The tempered growth rate was driven by a 2.2% contraction in the Finance and insurance subsegment.

After declining for three consecutive periods, the Mining sector reversed trend and delivered a 1.4% expansion in the fourth quarter. While an important sector among the leading indicators in the early stages of production, the Mining sector only accounts for approximately 1.5% of the overall GO, which minimizes the impact of the decline on the economy overall.

Reversing direction after two negative periods with a 2.7% expansion in the third quarter, Utilities expanded again 1.4% in the fourth-quarter 2019. Transportation and warehousing expanded 4.7%. Construction improved its growth rate from 2.5% in Q3 to 4.4% for the last period of the year. Alternatively, Professional and business services, which accounts for more than one tenth of GO, grew only 2.9% in the fourth quarter after surging 6.9% in the preceding period.

Another troublesome indicator is that Government spending increased again after declining briefly in the third quarter. Overall government spending increased 4.1%. Federal spending led with a 4.6% growth over the previous period. State and local government spending increased 3.9%

 

Gross Output

 

Gross output (GO) and GDP are complementary statistics in national income accounting. GO is an attempt to measure the “make” economy; i.e., total economic activity at all stages of production, similar to the “top line” (revenues/sales) of a financial accounting statement. In April 2014, the BEA began to measure GO on a quarterly basis along with GDP.

Gross domestic product (GDP attempts to measure the “use” economy, i.e., the value of finished goods and services ready to be used by consumers, business and government. GDP is similar to the “bottom line” (gross profits) of an accounting statement, which determined the “value added” or the value of final use.

GO tends to be more sensitive to the business cycle, and more volatile, than GDP. During the financial crisis of 2008-09, GO fell much faster than GDP, and afterwards, recovered more quickly than GDP. Still, it wasn’t until late 2013 that GO fully recovered from its peak in 2007. Until mid-2018, GO outpaced GDP, suggesting a growing economy.  However, since then GO has slowed dramatically, threatening the economic boom.

 

While Consumer Spending Continued to Advance in Q4, Business Spending (B2B) Began Contracting at The End of 2019 in Anticipation of the Current Economic Downturn.

Our business-to-business (B2B) index is also useful. It measures all the business spending in the supply chain and new private capital investment. Nominal B2B activity contracted 0.8% in the fourth quarter to $26.6 trillion. Meanwhile, consumer spending rose to $14.8 trillion, equivalent to a 3.2% annualized growth rate. In real terms, B2B activity decreased at an annualized rate of -1.7% and consumer spending rose at 1.9%.

 

Gross Output

 

“B2B spending is in fact a pretty good indicator of where the economy is headed, since it measures spending in the entire supply chain,” stated Skousen. “After slowing considerably in the first-quarter 2019, business activity picked up the pace and expanded 1.1% in real terms during each of the two subsequent periods. However, business spending reversed direction and contracted 1.7% in real terms for the last period of 2019. The stock market continued to advance and the overall economy appeared to maintain its upward trajectory in October and November 2019. However, private businesses gleaned enough information from the early stage of the COVID-19 outbreak in December to reduce their overall buying on concerns that the mild outbreak could turn into a full pandemic. Overall business spending trend continues to be an early indicator that anticipates the direction that the overall economy will take over the subsequent few quarters.”

About GO and B2B Index

The BEA’s decision in 2014 to publish GO on a quarterly basis in its “GDP by Industry” data is a major achievement in national income accounting. GO is the first output statistic to be published on a quarterly basis since GDP was invented in the 1940s.

The BEA now defines GDP in terms of GO. GDP is defined as “the value of the goods and services produced by the nation’s economy [GO] less the value of the goods and services used up in production (Intermediate Inputs or II].” See definitions at https://www.bea.gov/newsreleases/industry/gdpindustry/gdpindnewsrelease.htm.

With GO and GDP being produced on a timely basis, the federal government now offers a complete system of accounts. As Dale Jorgenson, Steve Landefeld, and William Nordhaus conclude in their book, A New Architecture for the U. S. National Accounts, “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”

Skousen adds, “Gross Output and GDP are complementary aspects of the economy, but GO does a better job of measuring total economic activity and the business cycle, and demonstrates that business spending is more significant than consumer spending,” he says. “By using GO data, we see that consumer spending is actually only about a third of economic activity, not two-thirds that is often reported by the media. As the chart above demonstrates, business spending is in fact almost twice the size of consumer spending in the US economy.”

 

For More Information

The GO data released by the BEA can be found at www.bea.gov under “Quarterly GDP by Industry.” Click on interactive tables “GDP by Industry” and go to “Gross Output by Industry.” Or go to this link directly: BEA – Gross Output by Industry

For more information on Gross Output (GO), the Skousen B2B Index, and their relationship to GDP, see the following:

 

To interview Dr. Mark Skousen on this press release, contact him at mskousen@chapman.edu, or Ned Piplovic, Media Relations at skousenpub@gmail.com.

# # #

________________________________________
[1] The BEA currently uses a limited measure of total sales of goods and services in the production process. Once products are fabricated and packaged at the manufacturing stage, the BEA’s GO only adds “net” sales at the wholesale and retail level. Its official GO for the 2019 4th quarter is $38.2 trillion. By including gross sales at the wholesale and retail level, the adjusted GO increases to nearly $46.5 trillion in Q4 2019. Thus, the BEA omits more than $8.2 trillion in business-to-business (B2B) transactions in its GO statistics. We include them as a legitimate economic activity that should be accounted for in GO, which we call Adjusted GO. See the new introduction to Mark Skousen, The Structure of Production, 3rd ed. (New York University Press, 2015), pp. xv-xvi.
GO

U.S. Economy on the GO: Total Spending Accelerates

Washington, DC (Thursday, January 9, 2020):  On January 9, 2020, the Bureau of Economic Analysis (BEA) released the “top line” measure of total spending at all stages of the economy, known as gross output (GO), for the 3rd quarter 2019.

Real GO rose 2.5%, 25% than the 2.0% growth in the previous period, and faster than real GDP (2.1%).

The latest GO data suggests that the overall economy continues its growth at a slightly faster pace than it did in the first half of 2019. However, after surging more than 4% in the previous period, business-to-business (B2B) in the supply chain advanced just 2% in the third quarter.

After trailing GDP growth for two consecutive periods to begin 2019, GO growth has accelerated toward the end of 2019, and implies continued growth into 2020.  Total spending on new goods and services (adjusted GO) [1] increased to above $46 trillion for the first time.  While GO expanded at a faster pace than in the previous period, B2B spending advanced just 2% (1.3% in real terms), which was only half the growth rate from the previous period. Additionally, consumer spending growth slowed as well from 6.9% (4.4% real) in the second quarter to 4.6% (2.8% real) for the current period. (4.4% in real terms).

 

Business — Not Consumers — Drives the Economy

Note:  Contrary to what the media says, consumer spending does not drive the economy, and does not represent two-thirds of the economy. Using GO as a better, more accurate measure of total spending in the economy, the business sector (B2B spending) is almost twice the size as consumer spending. Consumption represents only about one-third of total economic demand.  Consumer spending is the effect, not the cause, of prosperity (Say’s law).

The renewed increase in business spending suggests that the economy is likely to continue expanding at a moderate pace. Strong corporate earnings, prediction that the Federal Reserve is likely to maintain current interest rate levels for 2020 and reliable indications that government representatives of China and the United States will sign phase-one trade deal as early as next week might be drivers of the continued business spending.

In addition to an overall GO growth of 2.5%, most of the individual sectors expanded as well. Just like in the previous period, only two sectors contracted in the third quarter. Furthermore, after a 5.4% expansion in the previous period, government spending growth cooled slightly to “only“ 3.5%.

GO is a leading indicator of what GDP will do in the next quarter and beyond. As David Ranson, chief economist for the private forecasting firm HCWE & Co., states, “Movements in gross output serve as a leading indicator of movements in GDP.”

Whenever GO is growing faster than GDP, as it is now doing, it’s a positive sign that the economy is still robust and growing.

The federal government will release the advance estimate for fourth-quarter GDP on January 30, 2020. If 3rd quarter GO serves as a good forecaster, GDP is likely to grow faster than 2.1%.

 

Report on Various Sectors of the Economy

The mining sector declined now for the third consecutive period. Additionally, the pullback of nearly 26% is significantly higher than the 7% contraction in the previous period. Fortunately, while Mining is a very important sector in the early stages of production, the segment only accounts for approximately 1.5% of the overall GO, which minimizes the impact of the decline on the economy overall.

The second sector that contracted in the third quarter was manufacturing. While manufacturing is the second largest sector with a 16% share, the sector contracted just 1.5%. Despite the segments size, the 1.5% contraction had a smaller effect on the overall economy than the Mining sector’s pullback. Some positive news would be that the 1.9% Non-Durable goods contraction represents nearly 60% of manufacturing’s overall decline. Durable goods, which include capital expense items by businesses and have bigger impact on long-term economic activity, declined just 1.2%, which is lower than the 4.2% decline in the previous period and the 11.7% pullback in the first-quarter 2019.

Similarly, utilities continued to move in the positive direction. After contracting 13.6% in the first quarter and 4.2% in the second quarter of the year, utilities expanded 2.7% in the third-quarter 2019. Transportation remained virtually flat compared to previous period.

After pausing growth and remaining flat in the previous period, construction expanded 2.5%.  Professional and business services, which accounts for more than one tenth of GO, delivered annualized growth of 6.9%, which was the highest growth rate of any sector this period. However, while slightly lower at 6.6%, the growth of the finance, insurance, real estate, rental, and leasing sector was a bigger driver of economic expansion on the account of the largest share of the economy at 16%.

Government spending at all levels increased at an annualized rate of 3.45%. The growth was well balanced between the federal level which expanded at 3.41% and the state and local level growth of 3.49%. However, a positive sign is that government expansion overall and at each individual level was lower than in the previous period. In the second quarter overall government grew 5.4%, 4.6% on the federal level and 6.7% locally.

GO

 

Gross output (GO) and GDP are complementary statistics in national income accounting. GO is an attempt to measure the “make” economy; i.e., total economic activity at all stages of production, similar to the “top line” (revenues/sales) of a financial accounting statement. In April 2014, the BEA began to measure GO on a quarterly basis along with GDP.

Gross domestic product (GDP) is an attempt to measure the “use” economy, i.e., the value of finished goods and services ready to be used by consumers, business and government. GDP is similar to the “bottom line” (gross profits) of an accounting statement, which determined the “value added” or the value of final use.

GO tends to be more sensitive to the business cycle, and more volatile, than GDP. During the financial crisis of 2008-09, GO fell much faster than GDP, and afterwards, recovered more quickly than GDP. Still, it wasn’t until late 2013 that GO fully recovered from its peak in 2007. Lately, GO has outpaced GDP, suggesting a growing economy.

 

 

Business Spending (B2B) Continues to Advance at a Slower Pace Than Consumer Spending in both Nominal and Real Terms.

Our business-to-business (B2B) index is also useful. It measures all the business spending in the supply chain and new private capital investment. Nominal B2B activity expanded just 2% in the third second quarter to $26.4 trillion. Meanwhile, consumer spending rose to $14.7 trillion, which is equivalent to a 4.6% annualized growth rate. In real terms, B2B activity rose at an annualized rate of 1.3% and consumer spending rose at 2.8%.

GO

“B2B spending is in fact a pretty good indicator of where the economy is headed, since it measures spending in the entire supply chain,” stated Skousen. “After slowing considerably in the fourth-quarter 2018 and first-quarter 2019, business activity picked up the pace in the second quarter and third quarters. While lower than in the previous period, business spending still expanded 2% in the third-quarter 2019, which indicates that the economy might still have enough momentum to maintain a moderate expansion trend, unless prevented by negative developments in trade or monetary policy.”

 

About GO and B2B Index

The BEA’s decision in 2014 to publish GO on a quarterly basis in its “GDP by Industry” data is a major achievement in national income accounting. GO is the first output statistic to be published on a quarterly basis since GDP was invented in the 1940s.

The BEA now defines GDP in terms of GO. GDP is defined as “the value of the goods and services produced by the nation’s economy [GO] less the value of the goods and services used up in production (Intermediate Inputs or II].” See definitions at https://www.bea.gov/newsreleases/industry/gdpindustry/gdpindnewsrelease.htm.

With GO and GDP being produced on a timely basis, the federal government now offers a complete system of accounts. As Dale Jorgenson, Steve Landefeld, and William Nordhaus conclude in their book, A New Architecture for the U. S. National Accounts, “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”

Skousen adds, “Gross Output and GDP are complementary aspects of the economy, but GO does a better job of measuring total economic activity and the business cycle, and demonstrates that business spending is more significant than consumer spending,” he says. “By using GO data, we see that consumer spending is actually only about a third of economic activity, not two-thirds that is often reported by the media. As the chart above demonstrates, business spending is in fact almost twice the size of consumer spending in the US economy.”

 

For More Information

The GO data released by the BEA can be found at www.bea.gov under “Quarterly GDP by Industry.” Click on interactive tables “GDP by Industry” and go to “Gross Output by Industry.” Or go to this link directly: BEA – Gross Output by Industry

For more information on Gross Output (GO), the Skousen B2B Index, and their relationship to GDP, see the following:

To interview Dr. Mark Skousen on this press release, contact him at mskousen@chapman.edu, or Ned Piplovic, Media Relations at skousenpub@gmail.com.

# # #

________________________________________
[1] The BEA currently uses a limited measure of total sales of goods and services in the production process. Once products are fabricated and packaged at the manufacturing stage, the BEA’s GO only adds “net” sales at the wholesale and retail level. Its official GO for the 2019 3rd quarter is $38 trillion. By including gross sales at the wholesale and retail level, the adjusted GO increases to more than $46 trillion in Q3 2019. Thus, the BEA omits more than $8 trillion in business-to-business (B2B) transactions in its GO statistics. We include them as a legitimate economic activity that should be accounted for in GO, which we call Adjusted GO. See the new introduction to Mark Skousen, The Structure of Production, 3rd ed. (New York University Press, 2015), pp. xv-xvi.
Gross output

U.S. Enjoys a Modest Recovery – No Recession in Sight!

Washington, DC (Tuesday, October 29, 2019):

 

On October 29, 2019, the Bureau of Economic Analysis released gross output (GO) data for the 2nd quarter 2019. The 2.0% real-term growth in the second-quarter 2019 was 25% higher than the 1.6% growth in the previous period. Adjusted GO[1] grew even faster, 2.9% in real terms for the 2nd quarter.

After experiencing a lower growth rate in the first-quarter 2019, adj. GO growth resumed its trend from the prior three periods and advanced 4% in nominal terms and 2.9% in real terms in the second quarter. Interestingly, nominal GDP grew 4.6% in nominal terms in the 2nd quarter.

Total spending on new goods and services (adjusted GO) rose to nearly $45.7 trillion. In line with the GO indications, B2B spending advanced 5.9% (3.8% in real terms) and consumer spending expanded 6.9% (4.4% in real terms).  All second quarter growth rates were substantially higher than growth rates from the previous period, which ranged from 0.5% to 1.5%.

Mark Skousen, a presidential fellow at Chapman University and editor of Forecasts & Strategies, states, “This expansion implies that the economy is currently still recovering modestly without any major recession indicators in sight.  After a flat performance in the first quarter, business-to-business (B2B) in the supply chain advanced nearly 6% in the second quarter. That’s good news.”

Skousen champions Gross Output as a more comprehensive measure of economic activity. “GDP leaves out the supply chain and business to business transactions in the production of intermediate inputs,” he notes. “That’s a big part of the economy, bigger than GDP itself. GO includes B2B activity that is vital to the production process. No one should ignore what is going on in the supply chain of the economy.”

Recently, Steve Forbes compared GDP to an x-ray of the economy, and GO to a CAT-scan.  See his commentary in the October 31, 2019, issue of Forbes magazine:  https://www.forbes.com/sites/steveforbes/2019/10/08/gdp-is-the-wrong-measure-to-truly-gauge-an-economys-health/#4be5ff3c13ce

Skousen first introduced Gross Output as a macroeconomic tool in his work The Structure of Production (New York University Press, 1990). A new third edition was published in late 2015, and is now available on Amazon.

Click here: Structure of Production on Amazon

 

Business — Not Consumers — Drives the Economy

According to Skousen, the introduction of GO has important implications for the economy and economic policy.  Contrary to what the media says, consumer spending does not represent two-thirds of the economy. GO is a better, more accurate measure of total spending in the economy.  It turns out that the business sector (B2B spending) is almost twice the size as consumer spending. Consumer spending is the effect, not the cause, of prosperity (Say’s law).

The renewed increase in business spending suggests that the economy might be able to avert a major slowdown and continue expanding at a moderate pace. Strong corporate earnings, interest rate cuts by the Fed, and optimism about resolving the trade conflicts with China might be drivers behind renewed business spending.

In addition to an overall GO expansion of 4.9% (2.9% in real terms), most of the individual industrial sectors grew as well. Unlike the first quarter when five sectors contracted, only two sectors (Mining and Utilities) declined in the second quarter.  Interestingly, government spending growth expanded more than two-fold.

GO is a leading indicator of what GDP will do in the next quarter and beyond. As David Ranson, chief economist for the private forecasting firm HCWE & Co., states, “Movements in gross output serve as a leading indicator of movements in GDP.”

Whenever GO is growing faster than GDP, as it did in most of 2018, it’s a positive sign that the economy is still robust and growing.  However, GO has grown at a slower pace than the GDP in 2019.

The federal government will release the advance estimate for third-quarter GDP on January 9, 2020.  Brian Moyer, the director of the BEA, expects top-line GO and bottom-line GDP to be released simultaneously in September 2020.

 

Report on Various Sectors of the Economy

While the Mining sector declined for the third consecutive period, the 6.8% pullback was significantly lower than the 26% contraction in the previous period. The Utilities sector also delivered a second consecutive pullback. Just like the Mining sector, the 8.9% contraction was lower than the previous period’s pullback of 13.6%. However, these two sectors combine for less than 3% share of total GO. Therefore, while important indicators as early stages of production, the impact on the overall GO is minor.

More importantly, Manufacturing – the second-largest segment with 17% share of Gross Output – remained relatively flat and expanded only 0.5%. While experiencing only minimal growth, the Manufacturing sector still performed significantly better than it did in the previous period when the sector contracted 3.7%.

While lower than the 11.7% pullback in the previous period, Durable goods’ 4.2% decline in the second quarter limited growth of the overall Manufacturing sector despite a 1.5% expansion of non-durable gods. After a 12% growth in the previous period, Construction remined flat in the second quarter.

The Information sector was the fastest growing sector with 8.1%. While growing at a slightly lower rate of 6.8%, the Finance, insurance, real estate, rental, and leasing sector contributed the most to GO growth as it is the largest sector with nearly 20% share to total GO. Driven by a 6% expansion of the health care segment, the Educational services, health care, and social assistance sector, which accounts for 8% share of GO, expanded 5.6%.

Unfortunately, the overall expansion of GO brought along an increase in government spending as well. With an 11% share of Gross Output, total government spending increased 5.4%, which is an order of magnitude higher than the growth rate of only 1.5% in the previous period. Generally, state and local government spending tends to grow faster than federal spending. However, in the second-quarter 2019, State and local government spending grew ”only” 4.8% and the Federal government increased its spending by 6.7%. Since early 2016, this has been the second period in a row where federal government grew faster than state and local government spending.

 

Gross output

Gross output (GO) and GDP are complementary statistics in national income accounting. GO is an attempt to measure the “make” economy; i.e., total economic activity at all stages of production, similar to the “top line” (revenues/sales) of a financial accounting statement. In April 2014, the BEA began to measure GO on a quarterly basis along with GDP.

Gross domestic product (GDP) is an attempt to measure the “use” economy, i.e., the value of finished goods and services ready to be used by consumers, business and government. GDP is similar to the “bottom line” (gross profits) of an accounting statement, which determined the “value added” or the value of final use.

GO tends to be more sensitive to the business cycle, and more volatile, than GDP. During the financial crisis of 2008-09, GO fell much faster than GDP, and afterwards, recovered more quickly than GDP. Still, it wasn’t until late 2013 that GO fully recovered from its peak in 2007. Until mid-2018, GO outpaced GDP, suggesting a growing economy.

 

Currently Business Spending (B2B) has Advanced at a Slower Pace Than Consumer Spending in both Nominal and Real Terms.

Our business-to-business (B2B) index is also useful. It measures all the business spending in the supply chain and new private capital investment. Nominal B2B activity expanded 5.9% in the second quarter to $26.4 trillion. Meanwhile, consumer spending rose to $14.5 trillion, which is equivalent to a 6.9% annualized growth rate. In real terms, B2B activity rose at an annualized rate of 3.8% and consumer spending rose at 4.4%.

 

Gross output

“B2B spending is in fact a pretty good indicator of where the economy is headed, since it measures spending in the entire supply chain,” stated Skousen. “After slowing considerably in the fourth-quarter 2018 and first-quarter 2019, business activity picked up the pace in the second quarter, which indicates that the economy might still have enough momentum to maintain a moderate expansion trend, unless prevented by negative developments in trade or monetary policy.”

 

About GO and B2B Index

The BEA’s decision in 2014 to publish GO on a quarterly basis in its “GDP by Industry” data is a major achievement in national income accounting. GO is the first output statistic to be published on a quarterly basis since GDP was invented in the 1940s.

The BEA now defines GDP in terms of GO. GDP is defined as “the value of the goods and services produced by the nation’s economy [GO] less the value of the goods and services used up in production (Intermediate Inputs or II].” See definitions at https://www.bea.gov/newsreleases/industry/gdpindustry/gdpindnewsrelease.htm.

With GO and GDP being produced on a timely basis, the federal government now offers a complete system of accounts. As Dale Jorgenson, Steve Landefeld, and William Nordhaus conclude in their book, A New Architecture for the U. S. National Accounts, “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”

Skousen adds, “Gross Output and GDP are complementary aspects of the economy, but GO does a better job of measuring total economic activity and the business cycle, and demonstrates that business spending is more significant than consumer spending,” he says. “By using GO data, we see that consumer spending is actually only about a third of economic activity, not two-thirds that is often reported by the media. As the chart above demonstrates, business spending is in fact almost twice the size of consumer spending in the US economy.”

 

For More Information

The GO data released by the BEA can be found at www.bea.gov under “Quarterly GDP by Industry.” Click on interactive tables “GDP by Industry” and go to “Gross Output by Industry.” Or go to this link directly: BEA – Gross Output by Industry

For more information on Gross Output (GO), the Skousen B2B Index, and their relationship to GDP, see the following:

To interview Dr. Mark Skousen on this press release, contact him at mskousen@chapman.edu, or Ned Piplovic, Media Relations at skousenpub@gmail.com.

# # #

________________________________________
[1] The BEA currently uses a limited measure of total sales of goods and services in the production process. Once products are fabricated and packaged at the manufacturing stage, the BEA’s GO only adds “net” sales at the wholesale and retail level. Its official GO for the 2019 2nd quarter is $37.7 trillion. By including gross sales at the wholesale and retail level, the adjusted GO increases to $45.6 trillion in Q2 2019. Thus, the BEA omits $8 trillion in business-to-business (B2B) transactions in its GO statistics. We include them as a legitimate economic activity that should be accounted for in GO, which we call Adjusted GO. See the new introduction to Mark Skousen, The Structure of Production, 3rd ed. (New York University Press, 2015), pp. xv-xvi.
Trade

Trade War Threatens Recession

Washington, DC (Monday, July 29, 2019):

On July 19, 2019, the federal government released gross output (GO) for the 1st quarter 2019, and the 1.6% real-term growth — which was 30% lower than the 2.3% advancement from the previous period – strengthened the implication that the economic growth might be slowing.  Business-to-business (B2B) in the supply chain actually declined in the first quarter.

While corporate tax cuts and the elimination of some of the burdensome business regulations undoubtedly had positive effects on economic growth, the effects of tariffs and trade restrictions are significantly higher, as trade plays a much bigger role in the US and world economy. Trade accounts for more than 25% of spending in the US economy and nearly 60% of the global economy.

Whereas GO growth decreased in the first quarter after rising in the tree previous periods, GDP reversed direction after falling for three consecutive quarters and advanced at 3.1%, which was nearly 30% higher than the 2.2% growth rate from the fourth-quarter 2018.  But the decline in the value of the supply chain suggests that the rise in real GDP is temporary.

Total spending on new goods and services (adjusted GO) [1] exceeded $45 trillion by a small margin. In line with the GO indications, B2B spending declined 0.3% (0.4% in real terms) and consumer spending expanded 1.4% (0.5% in real terms), which was lower than the 2.2% consumer spending growth rate from the previous period.

 

Business — Not Consumers — Drives the Economy

Note:  Contrary to what the media says, consumer spending does not drive the economy, and does not represent two-thirds of the economy. Using GO as a better, more accurate measure of total spending in the economy, the business sector (B2B spending) is almost twice the size as consumer spending. Consumer spending is the effect, not the cause, of prosperity (Say’s law).

The continued slowdown in business spending suggests a potential economic slowdown and the end of the longest bull market since the Great Depression, if business spending growth stalls. However, the trend might still reverse on a potential resolution of the trade conflict as Trump Administration’s delegation is heading to China for the next round of trade negotiations.

Furthermore, the overall economy and markets are waiting in anticipation for the results of the Federal Open Market Committee meetings next Tuesday and Wednesday. The primary interest is whether the Fed will decide to counter its quarter-point hike from December 2018 and revert its target rate back to 2% to 2.25%, or go even further and announce a half-point interest rate reduction to June-2018 levels.

The fears of continued trade war with China has certainly influenced business spending slowdown. However, positive impressions from the upcoming trade negotiations with China and a potential Fed funds rate cut of up to half percent might alleviate some of the reservations, which could result in a renewed push to increase business spending in the second half of the year.

In addition to a lower growth of the overall GO, more sectors experienced a decline – five in the first-quarter 2019 versus only two in the fourth-quarter 2018. However, on the positive side, government spending rose only 1.5% in nominal terms at annual rates, which was the lowest growth rate in the past seven quarters.

GO is a leading indicator of what GDP will do in the next quarter and beyond. As David Ranson, chief economist for the private forecasting firm HCWE & Co., states, “Movements in gross output serve as a leading indicator of movements in GDP.”

Whenever GO is growing faster than GDP, as it did in most of 2018, it’s a positive sign that the economy is still robust and growing.  However, GO has grown at a slower pace than the GDP in the last two quarters.

The advance estimate of second-quarter GDP was released on July 26, 2019. As implied by the slower GO growth in the first quarter, the second-quarter GDP rose at 2.1% in real terms, which is 32% lower than the 3.1% advancement from the first quarter 2019.

 

Report on Various Sectors of the Economy

After growing at double-digit percentages and nearly doubling over four quarters, the Mining sector pulled back 7.2% in the fourth quarter 2018. Unfortunately, the Mining sector extended its decline and contracted more than 26% on an annualized basis for the first-quarter 2019. The Mining sector comprises only 1.6% of the entire Gross Output and the first-quarter decline has only a small impact on the overall economic output in the current period. However, the Mining sector is one of the early stages of production and often an early indicator of potential economic downturns in the near future.

Similarly, the Agriculture, forestry, fishing, and hunting sector – another early stage of production sector – also contracted 1.5%. Furthermore, Manufacturing – the second-largest segment with 17% share of Gross Output – declined 3.7%. One promising development within the Manufacturing sector was that production of Durable Goods increased 4%. Non-durable Goods declined 11.7%. Additionally, Transportation & Warehousing — another indicator of economic activity strength — also contracted 5.6%.

Among the expanding sectors, Construction – 4.6% share of GO – advanced at an annualized rate of nearly 12%, Educational services, health care, and social assistance, which accounts for 8.2% share of GO expanded 7.6%. Also, the largest sector that accounts for 19% of GO – Finance, insurance, real estate, rental, and leasing – expanded 2.2%.

Total government spending accounted for 10.6% of the total GO spending and increased 1.5% in the first-quarter 2019, which is significantly lower than the 3.5% growth in the previous quarter. This growth rate is the lowest since the second quarter 2017. While federal government increased 2.4%, state and local government expanded only 1.1%, which is less than one-third the 3.5% growth from the previous period. Additionally, the federal government grew more than state and local governments for the first time since the second quarter 2016.

Trade

 

Gross output (GO) and GDP are complementary statistics in national income accounting. GO is an attempt to measure the “make” economy; i.e., total economic activity at all stages of production, similar to the “top line” (revenues/sales) of a financial accounting statement. In April 2014, the BEA began to measure GO on a quarterly basis along with GDP.

Gross domestic product (GDP) is an attempt to measure the “use” economy, i.e., the value of finished goods and services ready to be used by consumers, business and government. GDP is similar to the “bottom line” (gross profits) of an accounting statement, which determined the “value added” or the value of final use.

GO tends to be more sensitive to the business cycle, and more volatile, than GDP. During the financial crisis of 2008-09, GO fell much faster than GDP, and afterwards, recovered more quickly than GDP. Still, it wasn’t until late 2013 that GO fully recovered from its peak in 2007. Until mid-2018, GO outpaced GDP, suggesting a growing economy.  However, since then GO has slowed dramatically, threatening the economic boom.

 

Currently Business Spending (B2B) Is Advanced at a Slower Pace Than Consumer Spending in both Nominal and Real Terms.

Our business-to-business (B2B) index is also useful. It measures all the business spending in the supply chain and new private capital investment. Nominal B2B activity pulled back 0.3% in the first quarter to slightly below $26 trillion. Meanwhile, consumer spending rose to $14.24 trillion, which is equivalent to a 1.4% annualized growth rate. In real terms, B2B activity declined at an annualized rate of 0.4% and consumer spending rose at 0.5%.

Trade

“B2B spending is in fact a pretty good indicator of where the economy is headed, since it measures spending in the entire supply chain,” stated Skousen. “The business activity slowed considerably in the 4th and 1st quarters, although it could be a temporary situation, depending on trade policy.”

 

About GO and B2B Index

Skousen champions Gross Output as a more comprehensive measure of economic activity. “GDP leaves out the supply chain and business to business transactions in the production of intermediate inputs,” he notes. “That’s a big part of the economy, bigger than GDP itself. GO includes B2B activity that is vital to the production process. No one should ignore what is going on in the supply chain of the economy.”

Skousen first introduced Gross Output as a macroeconomic tool in his work The Structure of Production (New York University Press, 1990). A new third edition was published in late 2015, and is now available on Amazon.

Click here: Structure of Production on Amazon

The BEA’s decision in 2014 to publish GO on a quarterly basis in its “GDP by Industry” data is a major achievement in national income accounting. GO is the first new output statistic published on a quarterly basis since GDP was invented in the 1940s.

The BEA now defines GDP in terms of GO. GDP is defined as “the value of the goods and services produced by the nation’s economy [GO] less the value of the goods and services used up in production (Intermediate Inputs or II].” See definitions at https://www.bea.gov/newsreleases/industry/gdpindustry/gdpindnewsrelease.htm

With GO and GDP produced on a timely basis, the federal government now offers a complete system of accounts. As Dale Jorgenson, Steve Landefeld, and William Nordhaus conclude in their book, A New Architecture for the U. S. National Accounts, “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”

Skousen adds, “Gross Output and GDP are complementary aspects of the economy, but GO does a better job of measuring total economic activity and the business cycle, and demonstrates that business spending is more significant than consumer spending,” he says. “By using GO data, we see that consumer spending is actually only about a third of economic activity, not two-thirds that is often reported by the media. As the chart above demonstrates, business spending is in fact almost twice the size of consumer spending in the US economy.”

Note: Ned Piplovic provided technical data for this release.

 

For More Information

The GO data released by the BEA can be found at www.bea.gov under “Quarterly GDP by Industry.” Click on interactive tables “GDP by Industry” and go to “Gross Output by Industry.” Or go to this link directly: BEA – Gross Output by Industry

For more information on Gross Output (GO), the Skousen B2B Index, and their relationship to GDP, see the following:

To interview Dr. Mark Skousen on this press release, contact him at mskousen@chapman.edu, or Ned Piplovic, Media Relations at skousenpub@gmail.com.

# # #

________________________________________
[1] The BEA currently uses a limited measure of total sales of goods and services in the production process. Once products are fabricated and packaged at the manufacturing stage, the BEA’s GO only adds “net” sales at the wholesale and retail level. Its official GO for the 2019 1st quarter is slightly above $37.25 trillion. By including gross sales at the wholesale and retail level, the adjusted GO increases to nearly $45 trillion in Q1 2019. Thus, the BEA omits almost $8 trillion in business-to-business (B2B) transactions in its GO statistics. We include them as a legitimate economic activity that should be accounted for in GO, which we call Adjusted GO. See the new introduction to Mark Skousen, The Structure of Production, 3rd ed. (New York University Press, 2015), pp. xv-xvi.
Gross output

Gross Output Confirms a Slow-Growth Economy as We Enter 2019

Washington, DC (Friday, April 19, 2019): Today the federal government released gross output (GO) for the 4th quarter 2018, and the increase (2.3% in real terms) confirmed a slow-growth economy as we enter a new year. For the entire year of 2018, real GO grew at 2.91%, slightly faster than 2.86% for real GDP.

That’s an improvement over 2016 (only 1.6% increase in real GDP) and 2017 (2.3% increase in real GDP), but not the 3-4% the Trump supply-side economists had hoped for.

No doubt the corporate tax cuts had a positive effect, but the largest factor inhibiting growth is probably the Trump trade war. Trade plays a much bigger role in the US and world economy; representing over 25% of spending in the US economy. And at the end of last year, world trade slumped, and Chinese exports plummeted.

Last month, the federal government reported that real GDP growth, the “bottom line” of national income accounting, slowed for the second consecutive quarter. After dropping from 4.2% in the second quarter to 3.4% in the third quarter, real GDP only grew 2.2% in the fourth quarter.

Today the federal government (Bureau of Economic Analysis in the US Commerce Department) released 4th quarter estimates of gross output (GO), the “top line” in national income accounting. It measures spending at all stages of production, including the supply chain.

The results were tepid in comparison to the previous four periods. Total spending on new goods and services (adjusted GO) [1] was slightly more than $45.2 trillion in nominal terms.

Real GO advanced at an annualized rate of 2.3% in the 4th quarter – only slightly above the 2.2% real GDP growth. Business-to-business (B2B) spending rose only slightly (0.3%) above third quarter and substantially slower than the 2.2% growth rate of consumer spending in the same period.

 

Business — Not Consumers — Drives the Economy

Note:  Contrary to what the media says, consumer spending does not drive the economy, and does not represent two-thirds of the economy. Using GO as a better, more accurate measure of total spending in the economy, the business sector (B2B spending) is almost twice the size as consumer spending. Consumer spending is the effect, not the cause, of prosperity (Say’s law).

While the reduced growth of business spending in the fourth quarter suggests economic slowdown, that slowdown was affected by multiple factors. Fears of U.S.-China trade war escalation, as well as uncertainty about the actions of the Federal Reserve regarding interest rates, drove down the overall markets in late 2018.

These fears and uncertainties undoubtedly influenced the reduction in fourth quarter business spending as well. However, the December announcement that the Fed is not planning additional rate hikes in 2019 and only one hikes in 2020, as well as positive developments in trade negotiations with China, have lessened some of the concerns and the markets have been recovering since the beginning of the year.

While lower than last period, Gross Output growth was broad based across industries. All sectors of the economy – except Mining, and Arts, entertainment, recreation, accommodation, and food services – advanced in the fourth quarter. Government spending rose 3.5% in nominal terms, which was the lowest growth rate in the past six quarters.

GO is a leading indicator of what GDP will do in the next quarter and beyond. As David Ranson, chief economist for the private forecasting firm HCWE & Co., states, “Movements in gross output serve as a leading indicator of movements in GDP.”

Whenever GO is growing faster than GDP, as it has been doing in most of 2018, it’s a positive sign that the economy is still robust and growing.  However, it is clearly growing at a slower pace as we enter 2019.  And GO* is clearly growing far less than GDP in the 4th quarter 2018.

The advance estimate of first-quarter GDP will be released next week, April 26, and is expected to be 2% or less.

 

Report on Various Sectors of the Economy

After growing at double-digit percentages and nearly doubling over the previous four quarters, the mining sector pulled back 7.2% in the fourth quarter on an annualized basis. However, the sector comprises less than 2% of the entire Gross Output and the fourth quarter decline has only a small impact.

Similarly, the Arts, entertainment, recreation, accommodation, and food services– the other declining segment – contributed only 4% to the total GO. Therefore, this segment’s 1.6% annualized decline also had minimal impact on the growth of the overall GO.

However, as the second largest segment that accounts for more than 17% of GO, the 1% growth of the manufacturing sector had a much bigger impact on the modest GO growth in the fourth quarter. More importantly, while nondurable goods declined 1.9%, the durable goods subsegment – which is a much better indicators of long-term economic expansion – advanced 3.9%.

The finance, insurance, real estate, rental and leasing sector is the largest GO sector with a 19% share of GO. This sector advanced at the same 4.8% rate as it did in the previous period and 26% faster than the 3.8% growth rate from two periods ago.

The fastest growing sectors were utilities, transportation and warehousing. Utilities, which account for just 1.4% of GO, advanced at 12.9% which advanced at 11%. Transportation and warehousing grew at 11%. While growing at a slightly lower rate than utilities, transportation and warehousing – with a 3.4% share — had a bigger positive impact on the growth of the overall GO.

Total government spending accounts for 10.6% of the total GO spending and increased 3.5% in the fourth quarter. However, this growth rate was the lowest since the second quarter of 2017. While federal government increased 3.3%, state and local government expanded a slightly higher rate of 3.5%.

Gross output

Gross output (GO) and GDP are complementary statistics in national income accounting. GO is an attempt to measure the “make” economy; i.e., total economic activity at all stages of production, similar to the “top line” (revenues/sales) of a financial accounting statement. In April 2014, the BEA began to measure GO on a quarterly basis along with GDP.

Gross domestic product (GDP) attempts to measure the “use” economy, i.e., the value of finished goods and services ready for use by consumers, business and government. GDP is similar to the “bottom line” (gross profits) of an accounting statement, which determined the “value added” or the value of final use.

GO tends to be more sensitive to the business cycle, and more volatile, than GDP. During the financial crisis of 2008-09, GO fell much faster than GDP, and afterwards, recovered more quickly than GDP. Still, it wasn’t until late 2013 that GO fully recovered from its peak in 2007. Recently quarterly GO has been outpacing GDP, suggesting a growing economy.

 

Business Spending (B2B) Grew Slower Than Consumer Spending First Time Since Second Quarter 2017

Our business-to-business (B2B) index is also useful. It measures all the business spending in the supply chain and new private capital investment. Nominal B2B activity increased 1.7% in the third quarter to $26.37 trillion. Meanwhile, consumer spending rose to $14.2 trillion, which is equivalent to a 3.9% annualized growth rate. In real terms, B2B activity rose at an annualized rate of 0.3% and consumer spending rose at a significantly slower rate of 2.2%.

Gross output

“B2B spending is in fact a pretty good indicator of where the economy is headed, since it measures spending in the entire supply chain,” stated Skousen. “The business activity slowed considerably in the 4th quarter, although it’s probably a temporary situation.”

 

About GO and B2B Index

Skousen champions Gross Output as a more comprehensive measure of economic activity. “GDP leaves out the supply chain and business to business transactions in the production of intermediate inputs,” he notes. “That’s a big part of the economy, bigger than GDP itself. GO includes B2B activity that is vital to the production process. No one should ignore what is going on in the supply chain of the economy.”

Skousen first introduced Gross Output as a macroeconomic tool in his work The Structure of Production (New York University Press, 1990). A new third edition was published in late 2015, and is now available on Amazon.

Click here: Structure of Production on Amazon

The BEA’s decision in 2014 to publish GO on a quarterly basis in its “GDP by Industry” data is a major achievement in national income accounting. GO is the first new output statistic published on a quarterly basis since GDP was invented in the 1940s.

The BEA now defines GDP in terms of GO. GDP is defined as “the value of the goods and services produced by the nation’s economy [GO] less the value of the goods and services used up in production (Intermediate Inputs or II].” See definitions at https://www.bea.gov/newsreleases/industry/gdpindustry/gdpindnewsrelease.htm

With GO and GDP produced on a timely basis, the federal government now offers a complete system of accounts. As Dale Jorgenson, Steve Landefeld, and William Nordhaus conclude in their book, A New Architecture for the U. S. National Accounts, “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”

Skousen adds, “Gross Output and GDP are complementary aspects of the economy, but GO does a better job of measuring total economic activity and the business cycle, and demonstrates that business spending is more significant than consumer spending,” he says. “By using GO data, we see that consumer spending is actually only about a third of economic activity, not two-thirds that is often reported by the media. As the chart above demonstrates, business spending is in fact almost twice the size of consumer spending in the US economy.”

Note: Ned Piplovic assisted in providing technical data for this release.

 

For More Information

The GO data released by the BEA can be found at www.bea.gov under “Quarterly GDP by Industry.” Click on interactive tables “GDP by Industry” and go to “Gross Output by Industry.” Or go to this link directly: BEA – Gross Output by Industry

For more information on Gross Output (GO), the Skousen B2B Index, and their relationship to GDP, see the following:

To interview Dr. Mark Skousen on this press release, contact him at mskousen@chapman.edu, or Ned Piplovic, Media Relations at skousenpub@gmail.com.

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[1] The BEA currently uses a limited measure of total sales of goods and services in the production process. Once products are fabricated and packaged at the manufacturing stage, the BEA’s GO only adds “net” sales at the wholesale and retail level. Its official GO for the 2018 4th quarter is slightly above $37.15 trillion. By including gross sales at the wholesale and retail level, the adjusted GO increases to more than $45.2 trillion in Q4 2018. Thus, the BEA omits more than $8 trillion in business-to-business (B2B) transactions in its GO statistics. We include them as a legitimate economic activity that should be accounted for in GO, which we call Adjusted GO. See the new introduction to Mark Skousen, The Structure of Production, 3rd ed. (New York University Press, 2015), pp. xv-xvi.
Gross output (GO), the top line of national accounting and a leading economic indicator, grew at a slower pace than GDP in the second quarter

2ND QUARTER GROSS OUTPUT SHOWS SURPRISE SLOWDOWN IN ECONOMY

By: MARK SKOUSEN

Washington, DC (Thursday, November 2, 2017): Gross output (GO), the top line of national accounting and a leading economic indicator, grew at a slower pace than GDP in the second quarter 2017, indicating a sudden slowdown in economic activity.  Mark Skousen, editor of Forecasts & Strategies and a Presidential Fellow at Chapman University, states, “My research shows that whenever GO grows slower than GDP, it suggests a potential decline in economic growth and if this trend persists, a recession could follow.  While the Gross Output grew at a slower pace, there is no still no evidence of a recession.”

Based on data released on Thursday, November 2, 2017 by the BEA and adjusted to include all sales throughout the production process, nominal adjusted Gross Output (GO*) increased at an annualized rate of 2.9% in the second quarter of 2017, which is significantly lower than the previous quarter’s increase of 6.0%[1]. Nominal adjusted GO for the second quarter of 2017 grew at slower pace than the 4.0% nominal GDP growth and the 3.6% growth of the unadjusted GO reported by the BEA.

Real GDP, the bottom line of national income accounting, rose at an annualized rate of 3.1% in the second quarter 2017.  Real GO* generally grows at a higher rate than real GDP during an economic expansion.  However, in Q2 2017, real GO* grew at only 1.7%.

Skousen states, “By focusing solely on final spending and the end of the economic chain, GDP can sometimes be a misleading indicator of economic performance.  GO is a much better, more comprehensive view of total economic activity along the entire supply chain, and indicates a less positive outlook right now.”

In fact, according to a recent study by David Ranson, chief economist at HCWE & Co., GO anticipates changes in GDP by as much as 12 weeks in advance and thus serves as a new leading indicator: http://www.hcwe.com/guest/EW-0717.pdf

Skousen B2B Index Also Slows Dramatically

The Skousen B2B Index, a measure of business spending throughout the supply chain, increased at 2.6% in Q2, which is significantly less than the 8.1% growth rate from the previous quarter. This is the first slowdown after four consecutive quarters of strong B2B growth of 5% or more. In the second quarter, B2B transactions rose at an annual rate of 1.4% in real terms.

After four quarters of strong growth, the adjusted GO rose at slower pace, but still increased to reach $41.27 trillion. The current adjusted GO is more than double the size of GDP ($19.25 trillion), which measures final output only.

Supply Chain Activity Continues Increasing, But at a Slower Pace

Out of the 29 Industries and sectors defined within GO, 26 sectors rose compared to the previous quarter. The mining sector grew 8.3% in the second quarter 2017, the most of any sector, but this was relatively small compared to the 62.7% annualized growth in the first quarter 2017. Moreover, the mining sector accounts for just 1% share of total GO, which diminishes the impact of this small increase on the overall GO.  In contrast, the manufacturing sector is almost a fifth of total GO (18% share). Therefore, the 1.2% annualized growth of the manufacturing sector has a much greater impact on the total GO. With a 2.6% annualized growth rate, durable goods outpaced non-durable goods, which fell 0.2% compared to the previous quarter.

Another sector with an 18% share of GO is the finance, insurance, real estate, rental and leasing sector. In the second quarter, this sector grew at a 7.0% annualized rate in nominal terms, which is higher than the 6.7% increase in the first quarter 2017. The finance and insurance subsector, which accounts for 8% of total GO by itself, rose 11.1%.

Compared to the previous quarter, spending fell significantly in only two sectors. The largest drop of 4.8% is in the agriculture, forestry, fishing and hunting sector. The Construction sector was down 5.7%. The aforementioned non-durables sector and the accommodation and food services sector were virtually flat with no change to the previous quarter. These four sectors combined account for a 17% share of the total GO. Therefore, the negative performance of these few sectors had a noticeable impact on the overall GO growth.

The other surprise in 2nd quarter GO was the dramatic slowdown in wholesale and retail trade. Compared to Q1, total retail trade rose only 0.3% and the Wholesale trade actually fell a marginal 0.1%.

Total government spending (11% share of total GO) increased 2.9% in the second quarter. This growth rate is marginally lower than last quarter’s 3% growth rate. The federal government grew at an annualized rate of 2.2% in nominal terms and state and local government grew at a slightly higher rate of 3.2%.

Gross Output

 

Gross Output and GDP are “Top Line” and “Bottom Line” of National Accounting

Gross output (GO) and GDP are complementary statistics in national income accounting.  GO is an attempt to measure the “make” economy; i.e., total economic activity at all stages of production, similar to the “top line” (revenues/sales) of a financial accounting statement.  In April 2014, the BEA began to measure GO on a quarterly basis along with GDP.

Gross domestic product (GDP) is an attempt to measure the “use” economy, i.e., the value of finished goods and services ready to be used by consumers, business and government.  GDP is similar to the “bottom line” (gross profits) of an accounting statement, which determined the “value added” or the value of final use.

Gross Output tends to be more sensitive to the business cycle, and more volatile, than GDP. During the financial crisis of 2008-09, GO fell much faster than GDP, and afterwards, recovered more quickly than GDP. Still, it wasn’t until late 2013 that GO fully recovered from its peak in 2007. The fact that the adjusted GO has continued to grow faster than GDP (most of the time) is a positive sign.

Business Spending (B2B) Grows Slower Than Consumer Spending

We have also created a new business-to-business (B2B) index based on GO data.  It measures all the business spending in the supply chain and new private capital investment.  Nominal B2B activity increased 2.6% to $23.67 trillion.  Meanwhile, consumer spending rose to $13.3 trillion in the second quarter, which is equivalent to a 3.5% annualized growth rate. In real terms, B2B activity rose at an annualized rate of 1.4% and consumer spending rose 2.5%.

Gross Output

“B2B spending is a pretty good indicator of where the economy is headed, since it measures business spending along the entire supply chain,” stated Skousen.  “The fact that business activity has slowed down in the 2nd quarter is a bit surprising, given the pro-business legislation is that expected to become law soon.”

About Gross Output and B2B Index

Skousen champions Gross Output as a more comprehensive measure of economic activity. “GDP leaves out the supply chain and business to business transactions in the production of intermediate inputs,” he notes. “That’s a big part of the economy.  GO includes B2B activity that is vital to the production process. No one should ignore what is going on in the supply chain of the economy.”

Skousen first introduced Gross Output as a macroeconomic tool in his work The Structure of Production (New York University Press, 1990). A new third edition was published in late 2015, and is now available on Amazon.

Click here: Structure of Production on Amazon

The BEA’s decision in 2014 to publish GO on a quarterly basis in its “GDP by Industry” data is a major achievement in national income accounting. GO is the first output statistic to be published on a quarterly basis since GDP was invented in the 1940s.

The BEA now defines GDP in terms of GO. GDP is defined as “valued added,” that is, “the value of the goods and services produced by the nation’s economy [GO] less the value of the goods and services used up in production (Intermediate Inputs or II].”  See definitions at https://www.bea.gov/newsreleases/industry/gdpindustry/gdpindnewsrelease.htm

With GO and GDP being produced on a timely basis, the federal government now offers a complete system of accounts. As Dale Jorgenson, Steve Landefeld, and William Nordhaus conclude in their book, A New Architecture for the U. S. National Accounts, “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”

Skousen adds, “Gross Output and GDP are complementary aspects of the economy, but GO does a better job of measuring total economic activity and the business cycle, and demonstrates that business spending is more significant than consumer spending,” he says. “By using GO data, we see that consumer spending is actually only about a third of economic activity, not two-thirds that is often reported by the media. As the chart above demonstrates, business spending is in fact almost twice the size of consumer spending in the US economy.”

Note: Ned Piplovic assisted in providing technical data for this release.

For More Information

The Gross Output data released by the BEA can be found at www.bea.gov under “Quarterly GDP by Industry.” Click on interactive tables “GDP by Industry” and go to “Gross Output by Industry.” Or go to this link directly: http://www.bea.gov/iTable/iTable.cfm?ReqID=51&step=1#reqid=51&step=3&isuri=1&5102=15

For more information on Gross Output (GO), the Skousen B2B Index, and their relationship to GDP, see the new website, www.grossoutput.com (still in development), as well as the following:

Mark Skousen, “GO Beyond GDP:  Introducing Gross Output as the Top Line in National Income Accounting,” presented as the 2017 Schumpeter Lecture in Stockholm, Sweden, sponsored by the Swedish Entrepreneurship Forum:  http://entreprenorskapsforum.se/wp-content/uploads/2017/10/PS_Skousen_web.pdf

Mark Skousen, “At Last, a Better Economic Measure” lead editorial, Wall Street Journal, April 23, 2014: http://on.wsj.com/PsdoLM

Steve Forbes, Forbes Magazine (April 14, 2014): “New, Revolutionary Way To Measure The Economy Is Coming — Believe Me, This Is A Big Deal”:

http://www.forbes.com/sites/steveforbes/2014/03/26/this-may-save-the-economoy-from-keynesians-and-spend-happy-pols/

Mark Skousen, Forbes Magazine (December 16, 2013): “Beyond GDP: Get Ready For A New Way To Measure The Economy”:

http://www.forbes.com/sites/realspin/2013/11/29/beyond-gdp-get-ready-for-a-new-way-to-measure-the-economy/

Steve Hanke, Globe Asia (July 2014): “GO: J. M. Keynes Versus J.-B. Say,” http://www.cato.org/publications/commentary/go-jm-keynes-versus-j-b-say

David Ranson, “Output growth data that the economy generates months earlier than GDP,” Economic Watch, July 24, 2017.  HCWE, Inc. http://www.hcwe.com/guest/EW-0717.pdf

Mark Skousen, “Linking Austrian Economics to Keynesian Economics,” Journal of Private Enterprise, Winter, 2015:  http://journal.apee.org/index.php?title=Parte7_Journal_of_Private_Enterprise_vol_30_no_4.pdf

To interview Dr. Mark Skousen on this press release, contact him at mskousen@chapman.edu, or Ned Piplovic, Media Relations at skousenpub@gmail.com.

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[1] The BEA currently uses a limited measure of total sales of goods and services in the production process. Once products are fabricated and packaged at the manufacturing stage, the BEA’s GO only adds “net” sales at the wholesale and retail level. Its official GO for the 2017 2nd quarter is $33.2 trillion.  By including gross sales at the wholesale and retail level, the adjusted GO is $41.27 trillion in Q2 2017.  Thus, the BEA omits $7.8 trillion in business-to-business (B2B) transactions in its GO statistics.  We include them as a legitimate economic activity that should be accounted for in GO, which we call Adjusted GO.  See the new introduction to Mark Skousen, The Structure of Production, 3rd ed. (New York University Press, 2015), pp. xv-xvi.