Washington, DC (Wednesday, December 22, 2021): Today, the federal government released gross output (GO) – the measure of total spending in the economy – for the 3rd quarter. Real GO rose 4.4% (after inflation), a slowdown in the economy compared to the 2nd quarter. However, real GO grew faster than real GDP (2.3%), suggesting that the outlook for the economy and the stock market is still positive as we enter 2022, despite the supply-chain shortages. While government and consumer spending were slightly negative for the third quarter, business spending rose sharply.
Gross Output (GO) is the top line in national income accounting; GDP is the bottom line. Both are essential to understanding where the economy is headed. According to Steve Forbes, GDP is the X-ray of the economy; GO is the CAT-scan.
Worries about bottlenecks in the supply chain demonstrate the importance of GO, which includes intermediate purchases by businesses. GDP leaves out all intermediate production.
Many economists feared a long economic downturn and marginal growth in the aftermath of the sharp economic decline in the second quarter 2020. However, with each additional quarter after that steep decline, it appears that the second-quarter 2020 downturn was just an immediate and short-term reaction to the 2020 economic slowdown caused primarily by government restrictions and business shutdowns in responses to the COVID-19 epidemic.
The 2021 economic data indicates that the U.S. economy is continuing full-steam ahead and is riding a steady growth trend. After robust expansions in the first two quarters, GDP and GO continued the trend and expanded again in Q3 2021, although at a slower pace due to supply-chain interruptions.
GO grew 11.9% and GDP rose 8.1% in nominal terms. In real terms, GO rose 4.4% and outpaced GDP’s 2.3% expansion in the third quarter 2021. Due to a slight contraction in retail activity, the Adjusted Gross Output (GO*) – which includes the gross wholesale and gross retail figures (included only as net figures in the GO reported by the BEA) advanced 11.2% in the third quarter 2021. The difference between net and gross figures amounts to more than $9.8 trillion, which is missing from the government’s official GO figure.
Following the initial impact of the pandemic in Q2 2020, economic indicators retreated to 2017 levels. However, all indicators have been recovering steadily and Gross Output reached several new milestones. Nominal Gross Output ($41.85 trillion) exceeded the $41 trillion mark for the first time ever in Q2 2021. In real terms, GO ($35.34 trillion) broke for the first time above $35 trillion. Also, after crossing over the $50 trillion mark in the previous quarter, Adjusted GO ($51.66 trillion) pushed past the $51 trillion mark for the first time.
Despite renewed concerns of COVID infections resurgence, the positive growth figures released by the government today offer support for the optimistic outlook regarding economic growth, at least over the near term. Even with potential concerns of the spread of the COVID omicron variant in some states and some countries around the world, many states are continuing to lift business restrictions and reopen their economies. While vigilant about implementing procedures to protect their employees and customers, many businesses feel confident that they have enough information about COVID to resume relatively normal business practices. As long as state and federal governments lessen regulatory burdens and do not impose new mandates, near-normal economic activities should return, which would continue to fuel the current economic growth trends.
While most of the economic data support cautious optimism about continued economic expansion, there are some headwinds that could slow growth considerably over the longer term. They include supply-chain bottlenecks, and rising inflation. After being held down by the Fed’s expansion of the money supply, the currently reported inflation rate of nearly 7% (https://www.bls.gov/news.release/cpi.nr0.htm) is significantly higher than historical averages and many economists believe that it will get worse. Even the Federal Reserve is considering revising its long-term inflation target from 2% to 3%.
Additionally, the U.S. Congress and the current executive branch are putting in a coordinated effort to implement higher taxes – especially higher corporate tax rates – increase minimum wages, as well as a slew of other policies that would stifle economic growth.
However, the Biden administration’s efforts to push through a tax-and-spending bill have been postponed after U.S. Senator Joe Manchin (D-WV) released a statement stating that he will not be voting for the current Build Back Better Act, which according to the Congressional Budget Office (CBO) would add more than $4.5 trillion to the national debt. (https://www.manchin.senate.gov/newsroom/press-releases/manchin-statement-on-build-back-better-act). The economy is still operating on the Trump tax cuts.
Business – Not Consumers – Drives the Economy
As it did during the previous four periods, business spending continues to outpace consumer spending in the third quarter 2021.
Contrary to views of many academic economists and widespread 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 assessing 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 third quarter 2021, B2B activity rose 14.7% to $30.26 trillion in nominal terms. This growth is significantly faster than consumer spending expansion, which increased 7.2% to $15.97 trillion in the third quarter. However, the discrepancy is even more pronounced in real terms. While real B2B activity expanded 8.7% to $25.38 trillion, real consumer spending declined 0.3% from $13.487 trillion to $13.479 trillion in Q3.
“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 rebounding 39% in the period immediately after the decline in the first half of 2020, business activity is continuing to expand at high single-digit rates in real terms, which is significantly higher than the low single-digit historical average.”
Gross Output Growth Continues to Outpace GDP Expansion in the Third Quarter to Suggest Continued Economic Recovery
Gross Output indicates robust long-term growth in the first two quarters in 2020. GO’s continued and steady recovery over the last five periods indicates that, barring any new “black swan” events, the robust economic growth is likely to continue as we draw closer to the end of 2021.
The Gross Output data report for Q4 and year-end 2021 is scheduled for release in late March 2022. The current trend supports optimism that the recovery should continue into 2022, unless supply disruptions and rising inflation, taxes, and interest rates dampen the recovery.
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 latest GO data suggests that the economy will continue to expand, albeit probably at a slower rate. Stagflation is still a possibility in 2022.
The federal government will release the advance estimate for fourth-quarter and full-year 2021 GDP on January 27, 2022. The full release of Gross Output data and the third estimate of GDP are scheduled for March 30, 2022.
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 Economy
After the general decline in the first two periods of 2020 and a robust recovery in the second half of that year, most sectors of the economy are continuing their expansion in 2021.
Following a rapid decline in the first half of 2020 and steady expansion over the next four quarters, the mining sector remained flat for Q3 2021. This result was driven by the Oil and gas extraction sub-segment which also delivered no change over the previous period and which accounts for more than 80%of the entire Mining sector. The mining sector comprises only a 1.8% share of the overall economy, but it represents the earliest stages of production. Therefore, we watch the expansion and contraction of the Mining segment as early indicators of what other sectors further down the supply chain might do in subsequent periods.
While declining for the third consecutive quarter, the Agriculture sector seems to be going in the right direction as the declines are getting smaller. After contracting 5.7% in Q1 and 4.1% in Q2, the segment declined only 3.6% in the third period 2021.
Following a 1.7% pullback in the previous period, manufacturing – the second largest segment of the economy with a 16.7% share – declined 0.9% in the third quarter. While the overall segment contracted, the expansion of few sub-segments, such as Primary metals (4.4%), Machinery (8%), Computer and electronic products (1.6%), Petroleum and coal products (15.6%), and Chemical products (6.6%), indicates that there still might be enough business spending to support steady economic growth as we approach the beginning of 2022.
Similarly, while the retail trade contracted 4.5% – primarily driven by a 25% decline in Motor vehicle and parts dealers buying activity – the Wholesale trade notched an expansion of 9.4% in the third quarter, after growing 10.5% in the previous period.
After several periods of steady growth, the Construction sector delivered its second consecutive contraction and declined 8.4% in the third quarter.
Behind a substantially lower growth of only 4.2% in Q2, the Transportation and warehousing sector expanded 18.4%, which is closer to the 19.1% and 18.8% expansions from Q4 2020 and Q1 2021, respectively. The sub-segment with the highest growth was Air transportation, which expanded 86% in Q3, after recording 65% and 73% surges in the previous two periods. Additionally, the Water transportation sub-segment advanced 34%, and the Transit and ground passenger transportation sub-segment expanded 59%.
Following a 4.2% contraction in Q1 and a 9.5% expansion in Q2 2021, the educational services, health care, and social assistance segment grew another 4.1% in the most recent period. After faltering in Q2 with a paltry 1.5% growth rate, Finance, insurance, real estate, rental, and leasing – the largest segment which accounts for nearly one-fifth of GO – grew 6.6% in Q3.
With virtually no expansion in Q2 2021, total government spending followed suit and inched just 0.3% higher in Q3. However, government spending at local and state levels, which accounts for two-thirds of total government spending, rose 4.3% after expanding 4% in Q2.
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 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 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 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
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
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
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