FOURTH QUARTER GROSS OUTPUT AND B2B INDEX POINT TO BUSINESS RECESSION

By Mark Skousen

April 21, 2016

Washington, DC (Thursday, April 21, 2016):  U. S. economic activity continued to slow dramatically in the 4^th quarter 2015, threatening recession.  As a whole, the growth rate of the economy was anemic, almost flat, for 2015.

Gross output (GO), the new measure of total U. S. economic activity published by the Bureau of Economic Analysis, showed that spending throughout the economy declined slightly in the 4^th quarter of 2015.  And the Skousen B2B Index — a measure of business spending throughout the supply chain — has now fallen two quarters in a row.  Both data suggest a mild business recession as we entered 2016.

Based on data released today by the BEA and adjusted to include all sales throughout the production process, nominal GO fell 0.6% in the 4^th quarter of 2015, compared to an increase in the 3^rd quarter (+2.3%)^[1].   Adjusted GO was $39.0 trillion in the 4^th quarter, more than double the size of GDP ($18.2 trillion), which measures final output only.  Nominal GDP actually rose 2.3% in the 4^th quarter.  When GO declines relatively to GDP, it’s usually a sign of recession.

Deflationary pressure on prices continued in the 4^th quarter, so that in real terms, the adjusted GO growth rate rose slightly.  But the rise in real GO (+0.8%) was less than the growth in real GDP (+1.4%).

Supply chain activity varied significantly in the 4^th quarter, with continued declines in early-stage production: Mining activity fell by 11.4% and manufacturing declined by 2%.  Gainers were led by information, finance, real estate, rental, and leasing, but they were not enough to compensate for the losses in the early stages.  Wholesale and retail sectors also fell by 1.6%.

GO and GDP are complementary statistics in national income accounting.  Gross output (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. The fact that the adjusted GO is now falling faster than GDP growth suggests that the economic recovery is losing steam as we enter 2016.

Real Business Spending (B2B) Suffers Decline

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 fell 0.8% from the previous 3^rd quarter to $22.7 trillion.  In real terms, B2B fell 1.0%.  Meanwhile, consumer spending rose 0.6% to $12.4 trillion in Q4 (+0.3% in real terms).

“The GO data and my own B2B Index demonstrate that total US economic activity has slowed dramatically.  While the ‘use’ economy (GDP) is still barely growing, the ‘make’ economy (GO) is in recession,” stated Mark Skousen, editor of Forecasts & Strategies and a Presidential Fellow at Chapman University. “B2B spending is in fact a pretty good indicator of where the economy is headed, since it measures spending in the entire supply chain, and it indicates tepid growth and maybe even a downturn.”

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.  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 by providing technical data for this release.

Special Announcement

Cato Institute Luncheon and Policy Forum on Gross Output,

Friday, May 13, Washington, DC, 11:00 am – 1 pm ET.

Mark Skousen, Steve Forbes and George Gilder will be speaking at the Hayek Auditorium at the Cato Institute, 1000 Massachusetts Ave. NW, Washington, DC 20001, on the topic, “GO Beyond GDP: What Really Drives the Economy?”  The discussion will focus on gross output (GO) and how to encourage long-term economic growth, and what it means to investors, businesses and government policy.  The panel will be moderated by Peter Goettler, president of the Cato Institute.  Afterwards, we will have a luncheon and autograph session for the various author’s books:  Mark Skousen, “The Structure of Production”; Steve Forbes, “Reviving America”; and George Gilder, “The Scandal of Money.”

Lunch is complimentary.

To register, go to http://www.cato.org/events/go-beyond-gdp-what-really-drives-economy.

Or email [email protected] or call (202) 789-5229.

If you can’t make it, you can see this event live by going to www.cato.org/live.

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: 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, “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

New:  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 [email protected], or Ned Piplovic, Media Relations,  at [email protected].

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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 2015 3rd quarter is $31.6 trillion. But by including gross sales at the wholesale and retail level, the adjusted GO is $39.0 trillion at the end of 2015.  Thus, the BEA omits $7.5 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.