Business – Not Consumers – Drives the EconomyContrary to views of many academic economists and wide-spread media reports, consumer spending does not drive the economy, and does not represent two-thirds of the economy. Using GO as a better and a more accurate measure of total spending in the economy, the business sector (B2B spending) is almost twice the size of consumer spending. Consumer spending is the effect, not the cause, of prosperity (Say’s law). Therefore, our business-to-business (B2B) index is very useful for gauging the economy’s underlying health and the readiness to rebound after economic downturns. The B2B Index measures all the business spending in the supply chain and new private capital investment. In the fourth quarter, nominal B2B activity expanded more than 14% to $26.6 trillion. At the same time, consumer spending grew less than 4% on an annualized basis to $14.5 trillion. In real terms, B2B activity expanded at an annualized rate of 12% to $23.25 trillion and consumer spending remained flat at the same level as in the previous period of $13 trillion.
GO Continues to Grow Faster than GDP in Fourth Quarter to Suggest Strong Economic Recovery at least in the First Half of 2021Despite significant declines in the first two quarters of 2020, Gross Output indicates robust long-term growth. Prior to what appears to be merely a short-term pullback, GO delivered steady quarterly growth over the previous 42 consecutive periods. Gross Output growth slowed in late 2019, which could have been an early sign of economic slowdown even before the pandemic and government shutdowns in early 2020. However, GO’s renewed growth in the third and fourth quarter 2020 could set the tone for the overall direction of the economy for the entire 2021 and beyond. Gross Output 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.” The federal government will release the advance estimate for first-quarter 2021 GDP on April 29, 2021 and the full release of Gross Output, as well as the third estimate of GDP on June 24, 2021. Important Note: We are hopeful that in the near future, the BEA will release GO at the same time as the first estimate of GDP for the quarter, not the third estimate.
Report on Various Sectors of the EconomyAfter two periods of contraction and a robust rebound in the third quarter, all but a few of the individual economic sectors continue to expand. After declining in the previous three quarters, the mining sector expanded nearly 10% in real terms during the fourth-quarter 2020. The Oil and gas extraction sub-segment, which accounts for more than 60% of the overall mining sector, expanded 5.3% in the previous quarter. While exhibiting significant growth, the mining sector’s share of only 1.7% of the economy contributes very little to the overall GO. However, since mining represents the earliest stages of production, we watch its expansion and contraction as an early indicator of what other sectors further down the supply chain might do in subsequent periods. The Agriculture sector expanded slower in the last quarter than in the third quarter 2020, but still grew 3.3% on an annualized basis. Furthermore, Manufacturing grew 5.7% after spiking more than 40% in the previous period. The two manufacturing sub-segments with highest growth in the most recent periods were Computer and electronic products with 18% and the Fabricated metal products sub-segment with a 16.2% expansion. More importantly Manufacturing of durable goods expanded at 10% versus the growth of only 1% for Nondurable goods. All these results suggest that, while short-term consumer spending is still lagging, businesses and consumers are confident about the long-term outlook for the economy. The largest segment of the economy, Finance, insurance, real estate, rental, and leasing, which accounts for one-fifth of GO, grew nearly 5%. The finance and insurance sub-segment expanded 7.6% and the Real estate rental and leasing sub-segment contributed to the growth with an annualized expansion of nearly 3% in the fourth quarter. The Construction sector delivered a strong growth of nearly 12% – its highest expansion rate last year. However, the Transportation and warehousing sector advanced even faster at 17.4% in real terms. Except for the Pipeline transportation sub-segment, which contracted 8.2%, most other transportation sub-sectors expanded at double-digit percentages. The Transit and ground passenger transportation sub-segment nearly doubled compared to the third quarter, Air transportation grew more than 60%, Rail transportation increased 27.4%, Water transportation volume improved 23% and trucking expanded 5.2%. Government spending was a mixed bag of results. Federal spending fell 1.2%, but government spending at the state and local level rose 0.5%. While the federal government’s decline rate is higher, State and local government spending accounts for two thirds of total government spending. Therefore, State and local government spending increase erased all spending reductions at the federal level. On the upside, the offset was almost exact and total government spending was flat compared to the previous period. 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 not quite the same as the “bottom line” (profit, or net income) of an accounting statement, but rather the “value added” or the value of final use. GO tends to be more sensitive to the business cycle, and more volatile, than GDP.
About GO and B2B IndexSkousen 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 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 InformationSteve 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 GO-Day podcast discussion panel hosted Mark Skousen that included Steve Forbes, Sean Flynn, Steve Hanke, and David Ranson, September 30, 2020: https://chapman.zoom.us/rec/share/KJ17YjuR_6zthmgOA5fNprv2e65F-jICOsf430bJvnu8qWzdPYPfTohPC48qRLe9.Q8rmnlXynnTN74Tv?startTime=1601488807000 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: http://www.bea.gov/iTable/iTable.cfm?ReqID=51&step=1#reqid=51&step=3&isuri=1&5102=15 For more information on Gross Output (GO), the Skousen B2B Index, and their relationship to GDP, see the following: Mark Skousen, “If GDP Lags, Watch the Economy Grow,” Wall Street Journal, April 24, 2018: https://www.grossoutput.com/2018/04/26/away-go-economy-growing-faster-expected/ Mark Skousen, “At Last, a Better Way to 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 To interview Dr. Mark Skousen on this press release, contact him at [email protected], or Ned Piplovic, Media Relations at [email protected].
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Alan Wolin says
Hi Mr. Skousen:
If my memory serves me correctly, I believe that I subscribed to one of your earlier publications and bought your book on privacy. I am happy to see you are still involved with a newsletter. I still have the book, but I will have to dig it out of many other volumes. Your newsletter is complex and I will have to read it again for complete absorption.
Alan Bruce Wolin