Washington, DC (Thursday, April 19, 2018)
Gross output (GO), the top line of national accounting that measures spending at all stages of production, accelerated economic growth to record levels in the 4th quarter 2017.
Based on data released on Thursday, April 19, 2018 by the BEA and adjusted to include all sales throughout the production process, real adjusted GO (GO*) increased at an annualized rate of 5.6% in the fourth quarter of 2017, which is a significant improvement over the previous quarter’s increase of 2.7%. Additionally, real adjusted GO for the fourth quarter of 2017 rose at nearly double the 2.9% GDP growth rate.
Mark Skousen, editor of Forecasts & Strategies and a Presidential Fellow at Chapman University, states, “The latest GO data indicates that business investment and spending took off in the 4th quarter, probably as a result of the business tax reductions passed by Congress in late December 2017. The new tax breaks and deregulatory environment are likely to stimulate further economic growth in 2018, barring international tensions and trade wars.”
Real GDP, the bottom line of national income accounting, rose at an annualized rate of 2.9% in the fourth quarter 2017. During an economic expansion, real GO* generally grows at a higher rate than real GDP. In Q4 2017, real GO* grew at 5.6% ‒ 95% higher than the real GDP growth rate for the quarter ‒, which is a good indication that intermediate business activity is picking up pace and should translate into higher GDP growth in the near future.
Skousen states, “The GDP growth rate of 2.9% failed to take into account what happened behind the scenes in the booming supply chain in the 4th quarter. 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. After two quarters of lagging behind the GDP, the GO is again growing at a dramatically faster rate and shows a strong positive outlook for the economy in 2018.”
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 reliable leading indicator: http://www.hcwe.com/guest/EW-0118.pdf
The fourth quarter Skousen B2B Index, a measure of business spending throughout the supply chain, increased at 12.2% in nominal terms, which is significantly higher than the 4.2% growth rate from the previous quarter. The substantial growth in the fourth quarter puts the business spending increase at levels we have not seen since the second quarter of 2014. In the fourth quarter of 2017, B2B transactions rose at an annual rate of 8.5% in real terms, which is more than triple the 2.7% rate form the previous quarter.
After a growth slowdown in the second quarter and a slight uptick in the third quarter, the adjusted GO grew at more than 9% in nominal terms and increased to reach $42.7 trillion. The current adjusted GO reached $42.7 trillion, more than double the size of GDP ($19.75 trillion), which measures final output only.
The overall growth of GO in the fourth quarter resulted from the growth in all but two industrial sectors. The spending increase in the early stages of production, such as manufacturing, is usually a reliable leading economic indicator that overall economic growth should continue to expand.
Supply Chain Activity Skyrockets
The mining sector growth exploded from its 4.7% growth rate last period and expanded at nearly 46% in the fourth quarter of 2017. While it is important to monitor the growth rate in the mining sector as an early indicator of economic expansion, the mining sector accounts for just 1.5% share of total GO, which minimizes the impact on the overall GO. However, the manufacturing sector accounts for nearly a fifth of total GO (18% share). Therefore, the 13% annualized growth of the manufacturing sector has a much greater positive impact on the total GO and should be an even better indicator of an accelerated economic expansion to come. Just as a reference, the manufacturing sector rose 5.6% in the previous quarter. The 10.2% growth rate for durable goods was slightly lower than the growth rate for non-durable goods, which rose 16% in the fourth quarter.
Another sector with an 18% share of GO is the finance, insurance, real estate, rental and leasing sector. This sector expanded 6% in the fourth quarter, which was more than double the expansion rate in the previous quarter when this sector grew at a 2.8% annualized rate in nominal terms. Additionally, the real estate, rental and leasing sub-segment drove this expansion by growing at 6.4% versus the Finance and insurance sub-segment, which grew at a respectable but slightly lower 5.4%.
Compared to the previous quarter, spending fell significantly only in the Arts, entertainment, recreation, accommodation, and food services sector which accounts for just 4% of the total GO and declined 3% from the previous quarter. Within this sector the Arts, entertainment and recreation sub-segment fell more than 11% from the prior quarter and the Accommodation and food services sub-segment was flat to Q3.
In addition to Mining and Manufacturing industries, two more segments posted double-digit percentage increases from the previous quarter. The Utilities segment rose 12.5% and Construction increased 12.4%. Both segments combined account for 5.5% of total GO.
Total government spending (11% share of total GO) increased its spending at a rate higher than the 3.1% two-year average for the second consecutive quarter. After a 3.6% hike in the third quarter, total government spending inched up another 4.8% in the fourth quarter. State and local governments lead the growth with a 5% increase and the federal government expanded at a slightly lower 4.4% annualized rate in nominal terms.
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. Recently quarterly GO and GDP have both been growing at a similar pace.
Business Spending (B2B) Grows Faster Than Consumer Spending
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 12.2% in the 4th quarter to $24.6 trillion. Meanwhile, consumer spending rose to $13.7 trillion, which is equivalent to a 6.7% annualized growth rate. In real terms, B2B activity rose at an annualized rate of 8.5% and consumer spending rose 4.4%.
“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. “The business activity is heating up again in the fourth quarter of 2017, potentially because the business community saw early indications that President Trump and Congress were serious about trying to pass a tax reform bill before the end of 2017.”
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. 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: BEA – Gross Output by Industry
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
- 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
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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 2017 3rd quarter is $33.8 trillion. By including gross sales at the wholesale and retail level, the adjusted GO is $41.7 trillion in Q3 2017. Thus, the BEA omits nearly $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.