Washington, DC (Monday, April 6, 2020): On April 6, 2020, the federal Bureau of Economic Analysis (BEA) announced that gross output (GO) – the most comprehensive measure of total spending in the economy, including the supply chain – slowed dramatically in the 4th quarter 2019.
The 1.1% real-term growth in the fourth-quarter 2019 was substantially lower than the 2.5% expansion in the previous period, and much slower than 4th quarter real GDP (2.1%). This growth slowdown at the end of last year indicated that the overall economy was cooling already coming into 2020.
Furthermore, after surging more than 4% in the second quarter and rising 2% in the third-quarter 2019, business-to-business (B2B) in the supply chain declined 1.7% in the last quarter of the year.
It appears that the businesses anticipated the full impact of the COVID-19 epidemic based on just one month of information and adjusted their economic activity by reducing buying activities.
The disruptions in the global supply chain have been in the news lately. GO is the only macro statistic that includes the value of B2B spending and supply chain. “It deserves to be watched closely and updated for frequently,” said Dr. Mark Skousen, presidential fellow at Chapman University and a leading advocate of GO as a better, more comprehensive indicator of economic performance.
After growing faster than the GDP in the first three periods of the year, GO growth of 1.1% in real terms underperformed substantially the 2.1% GDP growth rate for the fourth quarter. Total spending on new goods and services (adjusted GO)  increased to above $46.45 trillion. While GO still managed to expand, albeit at a slower pace than in the previous period, B2B spending declined 0.8% (-1.7% in real terms). Additionally, consumer spending growth slowed for the second consecutive period 3.2% (1.9% in real terms) for the current 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).
The business spending decline suggests that the economy began slowing down amid early signs that the COVID-19 epidemic might have a bigger impact than initially anticipated in December 2019. China’s Vice Premier Liu He and U.S. President Donald Trump signed the U.S.–China Phase One trade agreement on January 15, 2020, in Washington D.C. However, this agreement might not have the intended economic impact in the midst of accusations from both sides regarding the origin of the COVID-19 virus.
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 did in most of 2018, it’s a positive sign that the economy is still robust and growing. However, GO has grown at a slower pace than the GDP in the last three quarters, a sign that the economy was slowing down as it entered 2020.
The federal government will release the advance estimate for first-quarter GDP on April 29, 2020 and second-quarter GDP on July 30, 2020. Both are expected to show a sharp drop in GDP growth and another recession.
Report on Various Sectors of the Economy
The second largest sector – Manufacturing – contracted 1.2% on annualized basis. However, this fourth-quarter contraction was actually lower than the 1.5% pullback in the previous period. However, a concern is that manufacturing of Durable goods declined 3%. Durable goods, which include capital expense items by businesses and have bigger impact on long-term economic activity, declined considerably while Nondurable goods still expanded at 0.8%.
Finance, insurance, real estate, rental, and leasing – the largest segment that accounts for nearly one-fifth of the total gross output – expanded at just 1.3%. The tempered growth rate was driven by a 2.2% contraction in the Finance and insurance subsegment.
After declining for three consecutive periods, the Mining sector reversed trend and delivered a 1.4% expansion in the fourth quarter. While an important sector among the leading indicators in the early stages of production, the Mining sector only accounts for approximately 1.5% of the overall GO, which minimizes the impact of the decline on the economy overall.
Reversing direction after two negative periods with a 2.7% expansion in the third quarter, Utilities expanded again 1.4% in the fourth-quarter 2019. Transportation and warehousing expanded 4.7%. Construction improved its growth rate from 2.5% in Q3 to 4.4% for the last period of the year. Alternatively, Professional and business services, which accounts for more than one tenth of GO, grew only 2.9% in the fourth quarter after surging 6.9% in the preceding period.
Another troublesome indicator is that Government spending increased again after declining briefly in the third quarter. Overall government spending increased 4.1%. Federal spending led with a 4.6% growth over the previous period. State and local government spending increased 3.9%
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 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. Until mid-2018, GO outpaced GDP, suggesting a growing economy. However, since then GO has slowed dramatically, threatening the economic boom.
While Consumer Spending Continued to Advance in Q4, Business Spending (B2B) Began Contracting at The End of 2019 in Anticipation of the Current Economic Downturn.
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 contracted 0.8% in the fourth quarter to $26.6 trillion. Meanwhile, consumer spending rose to $14.8 trillion, equivalent to a 3.2% annualized growth rate. In real terms, B2B activity decreased at an annualized rate of -1.7% and consumer spending rose at 1.9%.
“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 first-quarter 2019, business activity picked up the pace and expanded 1.1% in real terms during each of the two subsequent periods. However, business spending reversed direction and contracted 1.7% in real terms for the last period of 2019. The stock market continued to advance and the overall economy appeared to maintain its upward trajectory in October and November 2019. However, private businesses gleaned enough information from the early stage of the COVID-19 outbreak in December to reduce their overall buying on concerns that the mild outbreak could turn into a full pandemic. Overall business spending trend continues to be an early indicator that anticipates the direction that the overall economy will take over the subsequent few quarters.”
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:
- Steve Forbes: What’s Ahead podcast. In this podcast, Steve Forbes discusses Gross Output with Mark Skousen on September 9, 2019: https://www.forbes.com/sites/steveforbes/2019/09/09/were-using-the-wrong-measure-gdp-to-gauge-the-economys-real-health-mark-skousen/#35ff3d9a52fa
- 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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