Washington, DC (Friday, April 19, 2019): Today the federal government released gross output (GO) for the 4th quarter 2018, and the increase (2.3% in real terms) confirmed a slow-growth economy as we enter a new year. For the entire year of 2018, real GO grew at 2.91%, slightly faster than 2.86% for real GDP.
That’s an improvement over 2016 (only 1.6% increase in real GDP) and 2017 (2.3% increase in real GDP), but not the 3-4% the Trump supply-side economists had hoped for.
No doubt the corporate tax cuts had a positive effect, but the largest factor inhibiting growth is probably the Trump trade war. Trade plays a much bigger role in the US and world economy; representing over 25% of spending in the US economy. And at the end of last year, world trade slumped, and Chinese exports plummeted.
Last month, the federal government reported that real GDP growth, the “bottom line” of national income accounting, slowed for the second consecutive quarter. After dropping from 4.2% in the second quarter to 3.4% in the third quarter, real GDP only grew 2.2% in the fourth quarter.
Today the federal government (Bureau of Economic Analysis in the US Commerce Department) released 4th quarter estimates of gross output (GO), the “top line” in national income accounting. It measures spending at all stages of production, including the supply chain.
The results were tepid in comparison to the previous four periods. Total spending on new goods and services (adjusted GO)  was slightly more than $45.2 trillion in nominal terms.
Real GO advanced at an annualized rate of 2.3% in the 4th quarter – only slightly above the 2.2% real GDP growth. Business-to-business (B2B) spending rose only slightly (0.3%) above third quarter and substantially slower than the 2.2% growth rate of consumer spending in the same period.
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, the business sector (B2B spending) is almost twice the size as consumer spending. Consumer spending is the effect, not the cause, of prosperity (Say’s law).
While the reduced growth of business spending in the fourth quarter suggests economic slowdown, that slowdown was affected by multiple factors. Fears of U.S.-China trade war escalation, as well as uncertainty about the actions of the Federal Reserve regarding interest rates, drove down the overall markets in late 2018.
These fears and uncertainties undoubtedly influenced the reduction in fourth quarter business spending as well. However, the December announcement that the Fed is not planning additional rate hikes in 2019 and only one hikes in 2020, as well as positive developments in trade negotiations with China, have lessened some of the concerns and the markets have been recovering since the beginning of the year.
While lower than last period, Gross Output growth was broad based across industries. All sectors of the economy – except Mining, and Arts, entertainment, recreation, accommodation, and food services – advanced in the fourth quarter. Government spending rose 3.5% in nominal terms, which was the lowest growth rate in the past six quarters.
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 most of 2018, it’s a positive sign that the economy is still robust and growing. However, it is clearly growing at a slower pace as we enter 2019. And GO* is clearly growing far less than GDP in the 4th quarter 2018.
The advance estimate of first-quarter GDP will be released next week, April 26, and is expected to be 2% or less.
Report on Various Sectors of the Economy
After growing at double-digit percentages and nearly doubling over the previous four quarters, the mining sector pulled back 7.2% in the fourth quarter on an annualized basis. However, the sector comprises less than 2% of the entire Gross Output and the fourth quarter decline has only a small impact.
Similarly, the Arts, entertainment, recreation, accommodation, and food services– the other declining segment – contributed only 4% to the total GO. Therefore, this segment’s 1.6% annualized decline also had minimal impact on the growth of the overall GO.
However, as the second largest segment that accounts for more than 17% of GO, the 1% growth of the manufacturing sector had a much bigger impact on the modest GO growth in the fourth quarter. More importantly, while nondurable goods declined 1.9%, the durable goods subsegment – which is a much better indicators of long-term economic expansion – advanced 3.9%.
The finance, insurance, real estate, rental and leasing sector is the largest GO sector with a 19% share of GO. This sector advanced at the same 4.8% rate as it did in the previous period and 26% faster than the 3.8% growth rate from two periods ago.
The fastest growing sectors were utilities, transportation and warehousing. Utilities, which account for just 1.4% of GO, advanced at 12.9% which advanced at 11%. Transportation and warehousing grew at 11%. While growing at a slightly lower rate than utilities, transportation and warehousing – with a 3.4% share — had a bigger positive impact on the growth of the overall GO.
Total government spending accounts for 10.6% of the total GO spending and increased 3.5% in the fourth quarter. However, this growth rate was the lowest since the second quarter of 2017. While federal government increased 3.3%, state and local government expanded a slightly higher rate of 3.5%.
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) attempts to measure the “use” economy, i.e., the value of finished goods and services ready for use 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) Grew Slower Than Consumer Spending First Time Since Second Quarter 2017
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 1.7% in the third quarter to $26.37 trillion. Meanwhile, consumer spending rose to $14.2 trillion, which is equivalent to a 3.9% annualized growth rate. In real terms, B2B activity rose at an annualized rate of 0.3% and consumer spending rose at a significantly slower rate of 2.2%.
“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 slowed considerably in the 4th quarter, although it’s probably a temporary situation.”
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, bigger than GDP itself. 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 new output statistic 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 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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