Washington, DC (Thursday, July 21, 2016): U. S. economic activity is still sluggish and without indication of significant growth. Economic data released today indicates that industries in the early stages of production are struggling, which could spell trouble for consumer spending in the upcoming months.
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 held steady in the 1st quarter of 2016, only marginally increasing versus the 4th quarter of 2015 — 0.8% on an annualized basis. The Skousen B2B Index — a measure of business spending throughout the supply chain — has now fallen three quarters in a row. The B2B Index change versus prior quarter in nominal term is currently at -1.6% — its lowest level since the 2008 recession. Both data suggest continued lethargic growth of the economy and a potential mild business recession as we enter the second half of 2016.
Based on data released today by the BEA and adjusted to include all sales throughout the production process, nominal GO increased only 0.8% in the 1st quarter of 2016, slightly better than the small decline in the 4th quarter of 2015 (-0.6%). Adjusted GO was almost $39.0 trillion in the 1st quarter, more than double the size of GDP ($18.2 trillion), which measures final output only. Nominal GDP actually rose 1.4% in the 1st quarter.
While the GDP Price index continued to increase, the GO Price Index fell to a level not seen since Q2 2013. Therefore, in real terms, the adjusted GO growth rate (+0.8%) was slightly higher than the GDP real growth rate (+0.5%)
Supply chain activity varied among various sectors significantly in the 1st quarter, with significant declines in early-stage production. Compared in nominal terms to the previous quarter, mining activity continued to fall by 19.6%. The only exception among early stages was construction, which grew by 3.42%. However, since construction accounts for mere 4% share of total GO, it was not enough to offset other losses in the early stages of production. While manufacturing declined only 1.84%, it accounts for 18% share of total GO. Therefore, manufacturing had more than twice the impact of construction but in the opposite direction. Some gains were achieved in Professional and business services (+2.05%) and Health care and social assistance (2.2%), with remaining sectors without major change versus the previous quarter. While the wholesale sector was down (-1.75%), the retail sector was slightly higher (1.6%) in Q1 2016 versus the previous quarter. Government spending (11% share of total GO) was flat (+0.12%) with federal spending declining slightly (-0.12%), while state and local government spending increased 0.24%.
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 still declining faster than GDP growth suggests that the economic recovery is remaining sluggish as we enter the second half of 2016.
Real Business Spending (B2B) Suffers Slight 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 1.6% from the previous quarter to $22.3 trillion. Meanwhile, consumer spending rose 0.4% to $12.5 trillion in Q1.
“The GO data and my own B2B Index demonstrate that total US economic activity has slowed dramatically. While the ‘use’ economy (GDP) is growing slightly, 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 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: 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”:
Mark Skousen, Forbes Magazine (December 16, 2013): “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
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 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 2016 1st 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 beginning of 2016. 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.