Washington, DC (Thursday, September 29, 2022): Today, the federal government released gross output (GO) – the measure of total spending in the economy – for the second-quarter 2022. Inflation-adjusted real GO increased 1.6% in the second period 2022. While this marks a fifth consecutive period of declining growth rates in the aftermath of sharp rebound following a pandemic-driven 40% drop in Q2 2020, the current growth rate is back to historically average levels.
In addition to returning to its “normal” range, the real Gross Output growth rate was higher once again than the real GDP, which contracted another 0.6% in Q2 2022, after declining 1.6% in the first period of the year. Furthermore, after trailing the GO growth rate over several recent periods, the Adjusted Gross Output (GO*)[1] expanded 2.0% this quarter.
In nominal terms, second-quarter 2022 GDP expanded 8.2% and GO grew 12.5%. 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 12.8% in Q2 2022. The difference between net and gross figures amounts to more than $11 trillion, which is missing from the government’s official GO figure, but we include it in our Adjusted GO measure.
GO Predicts Slow Growth, No Recession
First-quarter 2022 GO expanded at a higher rate than GDP as well, which generally indicate a positive outlook for the next-quarter GDP. With another period of GO advancing ahead of the declining GO in Q2 2022, we should expect positive GDP growth results when the Bureau of Economic Analysis (BEA) releases its third-quarter 2022 advance GDP estimates on October 27.
While our GO model has proven reliably accurate in projecting next quarter’s GDP direction under normal economic circumstances, several extraordinary still lingering from pandemic-related issues, such as continued supply-chain shortages, inflation, or rising interest rates, can cause minor deviation in the model.
Nevertheless, another factor for optimism about GDP growth in the next period is the continued and steady increase in business-to-business (B2B) spending, which continues to outpace consumer spending in real terms. This is an indication of the business sector’s confidence that the economy should sidestep a recession and should be on its way to a satisfactory recovery, as opposed to a severe recession projected just a couple of periods ago.
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.
“GDP is the X-ray of the Economy; GO is the CAT-Scan”
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. According to Steve Forbes, GDP is the X-ray of the economy; GO is the CAT-scan.
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.”
Mark Skousen, who holds the new Doti-Spogli Endowed Chair of Free Enterprise at Chapman University, concludes, “GO gives a more complete picture of the economy; it is the missing piece of the macroeconomic puzzle.”
Recession or No Recession?
The sharp economic decline in the second quarter 2020 compelled many economists to predict marginal growth and substantial economic downturn over an extended period following the initial COVID pandemic breakout. However, the steep one-period drop in the second-quarter 2020 appears to have been merely 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 – not an indicator of long-term economic slowdown.
Another indication that the economic pullback in 2020 was only a temporary event is the relationship between the GO and GDP decline during that period. Earlier stages of production are generally more sensitive and more volatile in their response to economic disruptions. Therefore, during past recessions, GO commonly declined significantly more than GDP, which captures only final outputs in the economy.
For instance, GO declined more than 26% during the last quarter 2008. In the same period, GDP pulled back less than 8%. The 2020 economic slowdown broke from this pattern and saw GO decline at similar rates as the GDP. Over the last three quarters, GO has been recovering and expanding faster than GDP.
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 second-quarter 2022, nominal B2B activity rose 13.4% on an annualized basis to reach $34 trillion. This B2B growth in nominal terms lagged slightly behind consumer spending expansion, which increased 14.2% and reached $17.3 trillion in the second quarter. However, in real terms B2B expenditures grew 3.15%, more than triple the 0.9% real consumer spending growth.
“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 third-quarter 2022 GDP on October 27, 2022. The full release of Gross Output data and the third estimate of GDP are scheduled for December 22, 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, all but one sector and most subsectors of the economy expanded in Q2 2022.
Following a 43% annualized growth in the last-quarter 2021 and another expansion of 40% in the first-quarter 2022, the Mining sector delivered an annualized upsurge of 37.2% in nominal terms. While all three subsectors – Oil and Gas Extraction; Mining, except Oil and Gas; and Support Activities for Mining – expanded, the sector growth was driven primarily by the Oil and Gas Extraction segment, which benefited from high oil prices. The mining sector is small, and accounts for 2.1% share of the overall economy as measured by Gross Output. However, the sector represents one of the earliest stages of production. Therefore, we keep an eye on the expansion and contraction of the Mining segment, which can be an early indicator and a good predictor of which direction other sectors further down the supply chain might be headed in subsequent periods.
With a 1.4% share of the overall economy, the Agriculture sector is another small-share segment in the early stages of production that can be used as an early indication of future movements in the overall economy. After contracting 1.3% in the last period of 2021, the Agriculture sector expanded for the second consecutive period and delivered a 13.1% expansion in Q2 2022.
After reversing two periods of marginal growth with three quarters of double-digit growth, Manufacturing – the second largest segment of the economy with a 16% share of the economy – increased nearly 17% in Q2 2022. Nondurable Goods increased 14.9% and Durable Goods Manufacturing expanded 18.7%.
Additionally, the Construction sector, which accounts for nearly 5% of the economy, followed up two periods of double-digit growth with an expansion of 11.7% in Q2 2022. The Retail and Wholesale trade sectors continued their above-average growth over the last few periods by expanding in the second period 2022 5.7% and 5.6% respectively.
Finance, Insurance, Real estate, Rental, and Leasing are the largest segment that accounts for nearly 18% of the economy. After expanding over the previous two periods, the segment contracted 2% in Q2 2022. While the Real Estate, Rental, and Leasing subsegment expanded at a healthy rate of 11.5%, it was unable to overcome the contraction of nearly 19% by the Finance and Insurance subsegment, which drove the overall segment slightly negative for the period.
While contracting nearly 6% in Q2 2020 amid the economic shutdown, Government has been expanding at record rates. Not only has it been expanding, but the expansion rates have accelerated over the last three periods, After growing 6.1% and 8.2% in Q4 2021 and Q1 2022, respectively, total government spending increased by more than 21% in the second-quarter 2022,
Over the past few periods, spending at the State and Local levels tended to outpace spending at the federal level by a two-to-one margin. However, in Q2 2022 spending at both levels expanded at similar rates. While Federal government expanded 21%, State and Local government spending expanded 21.4% in the second-quarter 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
For a complete analysis of GO, go to https://www.grossoutput.com/gross-output/
Mark Skousen, “Recession Fears May Not Pass GO: GDP is Slumping, but There’s a Better Way to Gauge the Economy.” Wall Street Journal, August 11, 2022: Recession Fears May Not Pass GO – WSJ
If you are not a WSJ subscriber, you can read a copy of the article on: https://www.grossoutput.com/2022/09/12/recession-fears-may-not-pass-go/
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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