Washington, DC (Friday, April 21, 2017): Gross output (GO), the top line of national income accounting, increased sharply and much faster than GDP in the fourth quarter 2016, indicating a robust economy for 2017. “Whenever GO grows faster than GDP, it’s a good sign of economic recovery,” stated Mark Skousen, editor of Forecasts & Strategies and a Presidential Fellow at Chapman University who has long championed GO as a vital macro statistic.
Moreover, the Skousen B2B Index, a measure of business spending throughout the supply chain, skyrocketed in the fourth quarter, indicating a sharp recovery in business activity following the November presidential election of Donald Trump. B2B transactions rose at an annual rate of 8.4% in the fourth quarter, 5.8% in real terms, the faster rate in years.
Based on data released today by the BEA and adjusted to include all sales throughout the production process, nominal adjusted GO (GO*) increased at an annualized rate of 6.2% in the fourth quarter of 2016, which is 30% higher than the growth rate in the previous quarter [1]. Nominal adj. GO for the entire year (2016) advanced 4.1%, or 2.4% in real terms, substantially faster than GDP.
Nominal GDP, the bottom line of national income accounting, rose at an annualized rate of 4.16% in the fourth quarter, slightly lower than the growth rate from the third quarter. For the entire year (2016), nominal GDP advanced 3.9% or 2.1% in real terms.
Adjusted GO reached $40.6 trillion and exceeded the $40 trillion mark for the first time ever. In the fourth quarter, the Adjusted GO was more than double the size of GDP ($18.87 trillion), which measures final output only.
It is not just that the total economy is showing signs of growth. Industries in the early stages of production, which tend to be leading economic indicators, expanded at a higher rate than the overall economy. While the early stages of production – agriculture, forestry, fishing, hunting, mining, construction and manufacturing – accounted for a 26% share of GO, those combined sectors contributed 35% of the growth in the fourth quarter.
Supply Chain Activity on the Increase
Supply chain activity among various sectors was mostly positive, with only a few declining sectors. After reversing two quarters of double-digit declines in the third quarter, the mining sector enjoyed a 30.2% annualized increase in the fourth quarter. Utilities were down 5.5% for the quarter. The construction sector grew at a much faster pace of 7.7% in the fourth quarter when compared to a 2.57% third quarter boost.
The manufacturing sector accounts for an 18% share of total Gross output. Therefore, the sector has a significant impact on the overall performance of GO. The fourth quarter manufacturing increase of 7.6% is more than double of previous quarter’s growth rate. Another sector with an 18% share of GO is the Finance, insurance, real estate, rental and leasing sector, which rose 3.9% in the fourth quarter.
Professional and business services sector made another positive contribution and increased 4.3% for the quarter. Health care and social sciences sector reversed its decline from the third quarter and returned to the positive side in the fourth quarter with a 9.3% increase. The Retail sector and the Wholesale sector extended their growth records from the previous period with 6.6% and 8.2% increases, respectively.
Total government spending (11% share of total GO) increased slightly (+2%). This increase was driven by the growth in Local government spending, which rose by 3.3% in the fourth quarter while federal spending declined 1%.
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. The fact that the adjusted GO continued to grow faster than GDP is a positive sign.
Business Spending (B2B) Grows Faster 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 8.4% to $23.3 trillion. Meanwhile, consumer spending rose 5.5% to $13 trillion in the fourth quarter. In real terms, B2B activity was up 5.8% and consumer spending increased 3.4%.
“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. “There is no doubt that business activity has picked up in expectation of pro-business legislation in 2017.”
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 “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 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 2016 4th quarter is $32.8 trillion. By including gross sales at the wholesale and retail level, the adjusted GO is $40.6 trillion in Q4 2016. 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.
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