Macroeconomics on the GO: How Wall Street Economic Analysts Use Gross Output (GO)

Here are two examples of how private economic research firms are using gross output (GO) to analyze and predict the future of the economy, growth and the markets.

  1. David Ranson, chief economist, HCWE, Inc. (formerly H. C. Wainwright Economics). www.hcwe.com

Gross output (GO) is a potent but widely-neglected source of information about the national economy whose potential value has been championed and pioneered over many years by economist Mark Skousen in many professional contributions, including his book, The Structure of Production. Thanks to his efforts to bring it to the attention of the economics profession, GO is finally beginning to receive the attention it deserves. GO is a much more comprehensive measure of the size of the economy than GDP. Since GDP includes only ‘final’ goods and services, it leaves out a huge segment of the economy that consists of transactions among businesses that buy and sell intermediate goods to one another in the course of the supply chain of which GDP is the ultimate outcome.

This left-out segment, which might be called the ‘intermediate economy,’ is larger than GDP itself, and dwarfs personal consumption. Its most important feature is that it reflects economic vitality at an earlier stage in the supply chain. As a result it leads GDP by at least three months. It has more credibility than the many leading indicators of GDP for several reasons. Its quarterly growth is very highly correlated with GDP growth, and it’s a direct measure of economic activity rather than a mere indicator that tends to rise and fall in advance of GDP. Historically, GO is better correlated than GDP with financial prices in the capital markets, such as stocks.

GO portrays an economy that is substantially more cyclical than GDP portrays it. According to GO data, the recession of 2008-09 was much deeper than generally thought, and the recovery was slower.

The chief obstacle to using GO as a forecasting tool remains the delay in publishing it. Although the Bureau of Economic Analysis now gives GO more priority than it had in the past, the earliest estimate for any particular quarter is published three months after the quarter has ended – at the time that the third monthly estimate of GDP is released.

I was an early adopter of the idea of Gross Output after interviewing Mark Skousen over past two decades about economic theory. I’ve had a chance to watch and see how the idea developed and eventually became an official government aggregate.

I believe economists who use GO can enjoy a competitive edge over those who rely solely on GDP, which is only a slice of aggregate spending. My friend, Steve Forbes likes to call GDP the X-ray of the economy and GO as the CAT Scan. I would use a different analogy. GDP is like

Flatland in the eponymous Victorian novel, a place with only two dimensions. The Flatlanders only see a circle, not a sphere.  They see a square, not a cube.  GDP is of Flatland whereas GO is of Sphereland.  It shows an extra dimension ignored by virtually the entire economic commentariat.

I found GO particularly helpful in seeing how the pandemic and subsequent lockdown would affect the economy, by looking at various industries in terms of order of magnitude of their respective slice of GO as opposed to GDP.

The lockdown was focused on sectors which were skewed towards final stage consumption, such as retail, entertainment and travel.  Large swaths of consumption were temporarily suppressed, which cause GDP to collapse.

What is surprising is what happened to GO. In past recessions, GO and the supply chain fell far more than GDP, but in the latest GO/GDP data, we discovered that GO fell slightly less that GDP.  Thus, the supply chain was more resilient than the demand step.

In sum, GO showed how the economy is more resilient in bouncing back then many anticipated.

The supply chain in GO is a high volatility, high signal metric which tells us much more than the flatline of consumer spending.

As a citizen, I hope GO is widely adopted. But as an entrepreneur, I hope my competitors never hear of it.

For more information on GO, go to www.grossoutput.com.

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