By Mark Skousen
Editor, Forecasts & Strategies
Washington, DC (Thursday, February 21, 2018): “Gross Output provides an important new perspective on the economy and a powerful new set of tools of analysis, one that is closer to the way many businesses see themselves.” –Former BEA director Steve Landefeld
Is the US economic boom coming to an end?
Last month the federal government reported that real GDP growth, the “bottom line” of national income accounting, slowed from 4.2% in the second quarter to 3.4% in the third quarter. Many pundits said that the slowdown will continue and that a recession is inevitable by 2020.
But today’s economic numbers suggest otherwise. Business spending, in particular, is rising at a faster pace.
Today the federal government (Bureau of Economic Analysis in the US Commerce Department) released 3rd quarter estimates of gross output (GO), the “top line” in national income accounting. It measures spending at all stages of production.
The results were eye-popping. Total spending on new goods and services (adj. GO) topped $45 trillion for the first time.
Real GO climbed at an annualized rate of 4.6% in the 3rd quarter, much faster than GDP. Business-to-business (B2B) spending rose even faster, 5.8% in real terms, much more than consumer spending (up 3.2%).
Business — Not Consumers — Drives the Economy
Note: Contrary to what the media says, consumer spending does not drive the economy, and does not represent two-thirds of the economy. Using GO as a better, more accurate measure of total spending in the economy, business spending (B2B) is almost twice the size as consumer spending. Consumer spending is the effect, not the cause, of prosperity (Say’s law).
There is no slowdown at all in the supply chain and business spending – in fact, they are growing faster.
The growth was broad based. Every sector of the economy in the 3rd quarter grew except utilities and agriculture. Government spending rose 4.4% in real terms. (Does it ever go down?)
Faster GO Means No Recession in Sight for 2019
GO is a leading indicator of what GDP will do in the next quarter and beyond. As David Ranson, chief economist for the private forecasting firm HCWE & Co., states, “Movements in gross output serve as a leading indicator of movements in GDP.”
Whenever GO is growing faster than GDP, as it has been doing in 2018, it’s a positive sign that the economy is still robust and growing. That’s what we are seeing.
Fourth quarter GDP will be released next week, February 28. I expect real GDP to growth faster than 3.4%.
Report on Various Sectors of the Economy
The mining sector slowed its growth compared to the previous quarter but was still the fastest growing sector in the third quarter with an annualized growth rate of 22.8%. While business growth in this sector provides a solid foundation for various industries later in the supply chain, the mining castor makes up just 1.8% of the total GO and has a lesser impact on the GO growth compared to some of the larger sectors.
Because the manufacturing sector comprises more than 17% of the total GO, the 9.1% growth rate of this sector has a much greater impact on the growth of the overall GO. Furthermore, within this sector, Durable goods production advanced at nearly 13%, which more than twice the 5.3% growth rate for Nondurable goods.
The Finance, insurance, real estate, rental and leasing sector is the largest GO sector with a 19% share, this sector advanced at 4.8%, which was more than 26% better than the 3.8% growth rate from the previous period.
Additionally, the Construction sector advanced 7%, Arts, entertainment, recreation, accommodation, and food services sector grew 6.4% and Educational services, health care, and social assistance sector expanded 8.1%. Another indication that businesses and individuals are spending with a long-term horizon outlook is that Wholesale trade spending growth of 5.2% is substantially higher than the 3.2% expansion of Retail spending.
The only two sectors that retracted in the third quarter were Agriculture, forestry, fishing, and hunting, which declined 8.2%, and Utilities with a 6.5% contraction.
Total government spending – 10.6% of the total GO – increase of 4.4% is 10% larger than the 4% growth from the previous quarter. However, the growth was distributed more evenly between the federal government (+4.2%) and State and local government growth (4.5%). While state government expanded just slightly faster than the 4.3% in previous period, the federal government’s spending grew at a pace that its more than 31% faster than its growth the second quarter of 2018.
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 has been outpacing GDP, suggesting a growing economy.
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 8.1% in the third quarter to $26.37 trillion. Meanwhile, consumer spending rose to $14 trillion, which is equivalent to a 5% annualized growth rate. In real terms, B2B activity rose at an annualized rate of 5.8% and consumer spending rose at a significantly slower rate of 3.2%.
“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 3rd quarter is slightly above $36.8 trillion. By including gross sales at the wholesale and retail level, the adjusted GO increases to more than $45 trillion in Q3 2018. Thus, the BEA omits more than $8.2 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.