Washington, DC (Thursday, November 1, 2018): Gross output (GO), the top line of national accounting that measures spending at all stages of production, continued to build on the growth from the first quarter and advanced at an even faster pace than GDP in the second quarter.
Based on data released on Thursday, November 1, 2018 by the BEA, adjusted GO (GO*) increased in real terms at an annualized rate of 4.6% in the second quarter of 2018. This increase is over 50% higher than the last period’s 2.7% growth rate and substantially higher than the real GDP’s 4.1% growth rate in the second quarter of 2018.
Mark Skousen, editor of Forecasts & Strategies and a Presidential Fellow at Chapman University, states, “When GO grows faster than GDP, this is a good sign of an expanding economy. Additionally, the data indicates that business investment and spending continued to expand rapidly, probably because of positive corporate earnings reports, the slightly lower concerns regarding tariffs, the new full depreciation rules and the usual weather-related uptick business activity during the spring.”
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 second quarter Skousen B2B Index, a measure of business spending throughout the supply chain, increased at 7.8% in nominal terms, which is significantly higher than the 4.5% growth rate from the previous quarter. After a slowdown in the previous quarter, the growth in the second quarter is the highest strongest growth rate since the first quarter of 2017. In the second quarter of 2018, B2B transactions rose at an annual rate of 4.4% in real terms, which is three times higher than the growth rate from the previous quarter, and faster than GDP. Furthermore, B2B spending increase was 36% higher than the growth of consumer spending in the second quarter.
The nominal adj. GO increased at an outstanding 7.9% in the second quarter of 2018 to reach $44.4 trillion. This current adjusted GO is more than double the size of the current $20.4 trillion GDP figure, which measures final output only. After a lackluster growth in the first quarter, the broader GO* growth rate of 4.6% in real terms indicates a heating up in economic activity expansion again, most likely because of the HUGE wholesale and retail trade increase in the fourth quarter dampened the first quarter results and second quarter performance moved closer to normal levels. “I view the slower growth in GO in the 1st quarter as temporary and the economy is likely to recover in the 2nd quarter,” commented Skousen about the results in the previous quarter. The current quarter’s results indicate that Skousen’s assessment was accurate.
While growth in some industrial sectors was minor, every single sector advanced versus the previous quarter, which drove the growth of GO in the second quarter of 2018. While spending increased at mild rates the previous quarter, the current quarter’s numbers indicate a continuation of robust growth across the economy, and especially in the early stages of production, such as mining and construction. Growth in the early stages is usually a reliable leading economic indicator that overall economic growth should continue to expand.
Report on Various Sectors of the Economy
After a brief slowdown in the previous period, the mining sector’s growth advanced at the highest rate of any sector – 38%.
While the growth of the mining sector is quite robust and a leading indicator, it has a relatively small impact on the growth of the overall GO due to the mining sector’s low share of just 1.7% of total GO. Conversely, the manufacturing sector, which accounts for 17% of the total GO, advanced 7.2%, which was close to last period’s 7.6% growth rate. At 9.2%, the growth rate for Nondurable Goods was significantly higher than the 5.2% growth rate for Durable Goods.
The largest sector – Finance, insurance, real estate, rental and leasing – advanced at 3.8%, which was substantially lower than previous period’s growth rate of nearly 10%.
Additionally, two more segments posted double-digit percentage growth rates for the second quarter. While the Wholesale trade sector increased 10.8%, the Arts, entertainment, recreation, accommodation, and food services sector advanced 12.7%. The growth in this sector was most likely driven by the low unemployment, wage growth and overall economic growth, which provided consumer with additional funds for discretionary spending. These two segments account for a 9% combined share of total GO.
Total government spending (11% share of total GO) increased at 4%, which was higher than the 3.8% from the previous period but still considerably lower than the 6.7% average growth rate over the past two years. Additionally, this two-year average growth rate of total government spending declined for the second consecutive period after rising for five consecutive quarters. State and local government spending increased at 4.3% which was higher than the 3.2% growth of government spending at the federal level.
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) Continues to 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 7.8% in the second quarter to $25.85 trillion. Meanwhile, consumer spending rose to $13.8 trillion, which is equivalent to a 5.7% annualized growth rate. In real terms, B2B activity rose at an annualized rate of 4.4% and consumer spending rose at a significantly slower rate of 2.7%.
“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 resumed a strong growth trend after bucking some of the tariff, interest rates, and market correction concerns from the first quarter. Without the reduction in some of those concerns and a strong earnings season, the business community refocused on taking advantage of the tax reform bill in December 2017, and an improved business environment and a reduction in obstructive business regulations.”
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 2018 2nd quarter is slightly above $36.2 trillion. By including gross sales at the wholesale and retail level, the adjusted GO increases to more than $44.4 trillion in Q2 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.