Washington, DC (Thursday, January 9, 2020): On January 9, 2020, the Bureau of Economic Analysis (BEA) released the “top line” measure of total spending at all stages of the economy, known as gross output (GO), for the 3rd quarter 2019.
Real GO rose 2.5%, 25% than the 2.0% growth in the previous period, and faster than real GDP (2.1%).
The latest GO data suggests that the overall economy continues its growth at a slightly faster pace than it did in the first half of 2019. However, after surging more than 4% in the previous period, business-to-business (B2B) in the supply chain advanced just 2% in the third quarter.
After trailing GDP growth for two consecutive periods to begin 2019, GO growth has accelerated toward the end of 2019, and implies continued growth into 2020. Total spending on new goods and services (adjusted GO)  increased to above $46 trillion for the first time. While GO expanded at a faster pace than in the previous period, B2B spending advanced just 2% (1.3% in real terms), which was only half the growth rate from the previous period. Additionally, consumer spending growth slowed as well from 6.9% (4.4% real) in the second quarter to 4.6% (2.8% real) for the current period. (4.4% in real terms).
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. Consumption represents only about one-third of total economic demand. Consumer spending is the effect, not the cause, of prosperity (Say’s law).
The renewed increase in business spending suggests that the economy is likely to continue expanding at a moderate pace. Strong corporate earnings, prediction that the Federal Reserve is likely to maintain current interest rate levels for 2020 and reliable indications that government representatives of China and the United States will sign phase-one trade deal as early as next week might be drivers of the continued business spending.
In addition to an overall GO growth of 2.5%, most of the individual sectors expanded as well. Just like in the previous period, only two sectors contracted in the third quarter. Furthermore, after a 5.4% expansion in the previous period, government spending growth cooled slightly to “only“ 3.5%.
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 is now doing, it’s a positive sign that the economy is still robust and growing.
The federal government will release the advance estimate for fourth-quarter GDP on January 30, 2020. If 3rd quarter GO serves as a good forecaster, GDP is likely to grow faster than 2.1%.
Report on Various Sectors of the Economy
The mining sector declined now for the third consecutive period. Additionally, the pullback of nearly 26% is significantly higher than the 7% contraction in the previous period. Fortunately, while Mining is a very important sector in the early stages of production, the segment only accounts for approximately 1.5% of the overall GO, which minimizes the impact of the decline on the economy overall.
The second sector that contracted in the third quarter was manufacturing. While manufacturing is the second largest sector with a 16% share, the sector contracted just 1.5%. Despite the segments size, the 1.5% contraction had a smaller effect on the overall economy than the Mining sector’s pullback. Some positive news would be that the 1.9% Non-Durable goods contraction represents nearly 60% of manufacturing’s overall decline. Durable goods, which include capital expense items by businesses and have bigger impact on long-term economic activity, declined just 1.2%, which is lower than the 4.2% decline in the previous period and the 11.7% pullback in the first-quarter 2019.
Similarly, utilities continued to move in the positive direction. After contracting 13.6% in the first quarter and 4.2% in the second quarter of the year, utilities expanded 2.7% in the third-quarter 2019. Transportation remained virtually flat compared to previous period.
After pausing growth and remaining flat in the previous period, construction expanded 2.5%. Professional and business services, which accounts for more than one tenth of GO, delivered annualized growth of 6.9%, which was the highest growth rate of any sector this period. However, while slightly lower at 6.6%, the growth of the finance, insurance, real estate, rental, and leasing sector was a bigger driver of economic expansion on the account of the largest share of the economy at 16%.
Government spending at all levels increased at an annualized rate of 3.45%. The growth was well balanced between the federal level which expanded at 3.41% and the state and local level growth of 3.49%. However, a positive sign is that government expansion overall and at each individual level was lower than in the previous period. In the second quarter overall government grew 5.4%, 4.6% on the federal level and 6.7% locally.
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. Lately, GO has outpaced GDP, suggesting a growing economy.
Business Spending (B2B) Continues to Advance at a Slower Pace Than Consumer Spending in both Nominal and Real Terms.
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 expanded just 2% in the third second quarter to $26.4 trillion. Meanwhile, consumer spending rose to $14.7 trillion, which is equivalent to a 4.6% annualized growth rate. In real terms, B2B activity rose at an annualized rate of 1.3% and consumer spending rose at 2.8%.
“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. “After slowing considerably in the fourth-quarter 2018 and first-quarter 2019, business activity picked up the pace in the second quarter and third quarters. While lower than in the previous period, business spending still expanded 2% in the third-quarter 2019, which indicates that the economy might still have enough momentum to maintain a moderate expansion trend, unless prevented by negative developments in trade or monetary policy.”
About GO and B2B Index
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.”
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 Forbes, Forbes Magazine (October 8, 2019): “GDP is the Wrong Measure to Truly Gauge an Economy’s Health”:https://www.forbes.com/sites/steveforbes/2019/10/08/gdp-is-the-wrong-measure-to-truly-gauge-an-economys-health/
- 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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