Washington, DC (Wednesday, June 29, 2022): Today, the federal government released gross output (GO) – the measure of total spending in the economy – for the 1st quarter 2022. Real GO rose 2.0% (after inflation).
Surprisingly, GO was positive while GDP was negative (in real terms), signifying that the economic conditions in the US are not as bad as many predicted. Whenever GO rises faster than GDP, it suggests that the economy is doing better.
The increase in nominal and real GO does not suggest a robust recovery, however. The increase in GO marks the fourth quarter in decline, equal to the average tepid growth rate over the five years prior to the economic downturn in 2022.
In addition to returning to its “normal” range, the Gross Output growth rate was higher than the real GDP, which contracted 1.6% in the first period 2022. Furthermore, after trailing the GO growth rate over the past couple periods, the Adjusted Gross Output (GO*) expanded 3.9%, which is the prevailing historical trend.
in the previous fourth-quarter 2021 GO expanded at a lower rate than GDP, which generally indicate a negative GDP outlook for the following quarter’s GDP. Indeed, real GDP for the 1st quarter fell by 1.6% on an annualized basis.
The GO growth rate for Q1 2022 indicates a positive GDP outlook for the second quarter, and we should expect a positive GDP growth when the Bureau of Economic Analysis (BEA) releases its second quarter 2022 advance GDP estimates on July 28.
One atypical factor in our model is the impact of pandemic-related issues, such as higher interest rates, price inflation, and continued supply-chain shortages. All these factors could skew the results.
However, business-to-business (B2B) spending continues to outpace consumer spending, which is a good indicator that the business sector has a high level of confidence that the economy will most likely deliver a decent recovery in place of the previously-projected severe recession. As indicated by the graph in the “Business – Not Consumers – Drives the Economy”, B2B spending is expanding at a faster rate than consumption, which is positive indicator for the future.
Most economists use only GDP and disregard GO when gauging economic outlook. However, Gross Output (GO) is the top line in national income accounting; GDP is the bottom line. Both metrics are essential to understanding where the economy is headed.
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.”
Steve Forbes puts it another way: GDP is the X-ray of the economy; GO is the CAT-scan.
In nominal terms, first-quarter 2022 GDP rose 6.4% and GO grew 12.0%. 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 13.9% in the first period 2022. The difference between net and gross figures amounts to almost $11 trillion, which is missing from the government’s official GO figure, but we include it in our Adjusted GO measure.
With the exception of fourth quarter 2021 when consumer spending outpaced business spending, consumer spending has trailed business spending expansion in five out of the last six periods, which includes the first quarter 2022. This is a positive early indication that, after contracting in the first quarter 2022, GDP should return to expanding, albeit at rates that are slightly lower than historical trends on the account of economic headwinds from higher interest rates, increased prices and persistent obstacles in the global supply chain.
Business – Not Consumers – Drives the Economy
Contrary 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 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 first quarter 2022, B2B activity rose 19.85% on an annualized basis to nearly $39 trillion in nominal terms. This growth is significantly faster than consumer spending expansion, which increased 8.7% to $16.7 trillion in the first quarter. However, the discrepancy is really revealing in real terms. While real B2B activity expanded 11.6% to $26.6 trillion, real consumer spending contracted 1.2% from $13.53 in Q4 2021 to $13.49 trillion in Q1 2022.
“B2B spending is in fact a pretty good indicator of where the economy is headed, since it is more responsive to the boom-bust economic cycle than consumer spending,” stated Skousen. “Business spending continues to expand at a faster pace than consumer spending, which is one good indicator for the longer-term economic outlook.”
While GDP includes only a small portion of investment spending, Gross Output accounts for significantly more of the business investment outlays, which tend to indicate economic direction over extended periods. 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 second-quarter 2022 GDP on July 28, 2022. The full release of Gross Output data and the third estimate of GDP are scheduled for September 29, 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 following that contraction, most sectors of the economy continued to expand in the first period of 2022.
Following a rapid decline in the first half of 2020 the Mining sector followed a 43% annualized growth in Q4 2021 with another expansion of 40% in Q1 2022. The growth was distributed across all three subsectors – Oil and gas extraction; Mining, except oil and gas; and Support activities for mining – which expanded 36.9%, 50.5% and 44.9%, respectively. While the mining sector comprises only a 1.5% share of the overall economy as measured by Gross Output, the sector represents one of 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.
Another small-share segment in the early stages of production – 1.3% of the overall economy – is the Agriculture sector. After contracting 1.3% in the last period of 2021, the Agriculture sector expanded 36.4% to begin 2022.
After reversing two periods of marginal growth with a 15.6% growth in Q3 2021 and a 17.2% expansion Q4 2021, manufacturing – the second largest segment of the economy with a 15.3% share – increased nearly 18% to start 2022. Nondurable goods increased 21.9% and Durable goods manufacturing expanded 13.8%. Every manufacturing subsector contributed to the sector’s overall growth with the Petroleum and coal products expanding the most at 89%.
The Retail and Wholesale trade sectors followed last-period 2021 expansions of 9.6% 14.5%, with even faster growth tares of 25.9% and 13.1%, respectively, in the first period 2022. Additionally, the Construction sector, which accounts for nearly 5% of the economy, followed up a 10% increase in the previous period with a 13.1% expansion in Q1 2022.
Accounting for nearly 20%, Finance, insurance, real estate, rental, and leasing is the largest segment of the economy. After increasing 6% in the previous period, the segment expanded 5% in Q1 2022. While Insurance carriers and related activities grew at a healthy rate of 16.1%, a 27.3% decline in Securities, commodity contracts, and investments resulted in the minor contraction of Finance and insurance subsegment. However, the Real estate and rental and leasing subsegment, which is more than half of the segment’s transactions, followed a 9.1% expansion last period with a 9.2% expansion and managed to keep the overall segment in the positive.
Since contracting nearly 6% in Q2 2020 amid the economic shutdown, government spending has been expanding at record rates. In the first period 2022, overall government spending expanded 8.2% on an annualized basis. This is the second highest government spending expansion since at least 2005, exceeded only by the 11.8% expansion in the first quarter 2022.
Federal government spending expanded nearly 2% in the first period of 2022. While National defense spending declined 0.7%, increased spending on Nondefense spending – up 4.9% – and Government enterprises items – 1.6% higher – drove the overall expansion of government spending.
Despite spending at the federal level expanding less than 2%, government spending at state and local levels expanded nearly 11% and drove overall government spending to expand more than 8% in the first period of 2022.
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 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
NEW! Emma Rothschild, “Where is Capital?” in Capitalism: A Journal of History and Economics 2:2 (Summer 2021), pp. 291-371. https://muse.jhu.edu/article/798746 “Essentially an attempt to apply ideas about gross output to the economic history of the industrial revolution.”
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
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
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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