“By integrating the vital role of the supply chain into national income accounting, Mark Skousen’s development of gross output (GO) has created a more dynamic and broader view of the economy, and of the central role that business plays in national income, the business cycle and economic growth. I recommend that economists seriously consider his new approach to macroeconomics.”
– Finn Kydland, Professor of Economics, University of California at Santa Barbara, 2004 Nobel prize winner
“It’s at least conceivable that gross output is a leading indicator of the economy.”
– Peter Coy, Economics Editor, New York Times (Aug 7, 2023)
Washington, DC (Thursday, March 28, 2024): While continuing to grow in the aftermath of the 2020 economic downturn, the Gross Output (GO) has been rather anemic and trailing GDP growth rate for the past few quarters, and the trend continued in Q4 2023.
Most alarming, business (B2B) spending has shown virtually no growth in real terms since the beginning of 2022.
The federal government (BEA) released today the figures for the fourth-quarter gross output (GO) – the top line in national income accounting. GO measures spending at all stages of production, and is a much broader measure of economic activity than GDP.
Real GO rose 2.4% –substantially less than the 3.5% growth from the previous period – and lagged behind the 3.4% growth figure for real GDP (the bottom line of national accounting). With an annualized growth rate of 5.1% in nominal terms, consumer spending outpaced business spending growth of just 1.3% in Q4 2024. The differential is even greater in real terms, where consumer spending expanded 4.1% against a 0.3% contraction of the business (B2B) spending segment.
The 3.5% expansion pushed up real GO just shy of $39 trillion in the third quarter 2023. In nominal terms, GO advanced 4.9% to $48.1 trillion. These growth rates are higher than historical averages and would generally indicate economic expansion ahead. However, both of these growth rates are lower than the real GDP expansion rate, which is a reason to be uneasy about the direction of the economy as we head deeper into 2024.
After declining cumulatively more than 13% over three consecutive quarters and then surging 3.3% in the third-quarter 2023, business spending (B2B) growth flattened out and posted a 0.3% annualized fourth-quarter 2023 decline in real terms. This continues to indicate that the business sector – which is substantially larger than the retail sector and generally has a better view of the direction of the economy than the consumers – is not on a healthy growth trend. The data suggests that we are headed into a significant slowdown in the second half of 2024 – if not an outright recession.
In general, when GO growth trails GDP, it usually spells trouble down the road, and could lead the Federal Reserve to cut interest rates later in the year. Normally, we would not expect the Fed to cut rates right before a major presidential election, but if a commercial real estate crisis arises or a sudden recession hits the US, the Fed could act. Otherwise, with just five meeting remaining in 2024 after May and the economy showing no clear signs of rapid growth, it is difficult to see how three interest cuts are possible this year.
Unlike consumption, which maintains a steady uptrend over the long term, business spending is significantly more volatile and more sensitive to economic fluctuations. Note the tepid business spending growth since the 1st quarter 2022. This sharp slowdown in B2B spending could indicate a mild recession in the near future.
GO as a Leading Indicator
In our model, GO, which includes the value of the supply chain, is a leading indicator of where the economy is headed in the year. When GO grows faster than GDP, it suggests economic expansion over the next few quarters, and vice versa. Currently, real GO’s fourth-quarter growth rate of 2.4% is lower than the annualized GDP growth rate of 3.4%, which is usually a sign of potential economic contraction.
Furthermore, in addition to the BEA’s GO statistic 3.4% expansion, the real Adjusted Gross Output[1] (GO*) growth rate of 2.1% is also lower than GDP growth, which can mean a stagnating economy. Furthermore, both GO and Adjusted GO are lower in the fourth quarter 2023 than in the previous period – 3.3% and 4.1%, respectively – which might indicate that we are potentially looking at a significant late-year economic slowdown, or even an outright recession.
While not available until late June, we are eagerly anticipating the release of first-quarter 2024 data for GO to see whether early 2024 data can clarify what direction the economy will take as we enter into the second half of 2024.
In nominal terms, fourth-quarter 2023 GDP expanded 5.1% and GO grew just 3.5%. The Q4 2023 Adjusted GO – which includes the gross wholesale and gross retail figures (included only as net figures in the GO reported by the BEA) – advanced 3.1% in nominal terms. The difference between net and gross figures amounts to nearly $11 trillion, which is missing from the government’s official GO figure, but we include it in our Adjusted GO measure.
Our GO model has proven relatively accurate in projecting the direction of GDP under normal economic circumstances. While extraordinary conditions can cause minor deviation in the model, the impact is not as prominent as it was over the past couple of years.
The Importance of GO
Most economists are still unaware of the value of GO and use only GDP when gauging economic outlook. However, gross output (GO) should be viewed as the top line in national income accounting, and 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.” As Steve Forbes has suggested, “GDP is the X-ray of the economy; GO is the CAT-scan.”
Business – Not Consumers – Drives the Economy
Another benefit of GO is that it dispels the myth that consumer spending drives the economy. Contrary to views of many academic economists and wide-spread media reports, consumer spending does not represent two-thirds of total economic activity. 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 underlying health of the overall economy and its potential to bounce back after economic declines. The B2B Index measures all the business spending in the supply chain and new private capital investment. After breaking a three-quarter 13% decline from Q4 2022 to Q2 2023 with a 7.2% increase in Q3 2023, nominal B2B spending expanded again in Q4 2023, albeit only 1.3% to nearly $33.8 trillion. This low-rate expansion in nominal terms was not sufficient to keep up with inflation, and resulted in a real B2B contraction of 0.3% in Q4 2023. After trailing B2B growth for one period, Consumer spending growth of 5.1% to $18.9 trillion in nominal terms outpaced B2B expansion by a significant margin. In real terms consumer spending expanded 4.1% to $15.3 trillion.
“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,” states Mark Skousen, editor of Forecasts & Strategies and the Doti-Spogli Chair of Free Enterprise at Chapman University.
While GDP includes only a small portion of investment spending, GO 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 first-quarter 2024 GDP on April 25, 2024. The full release of Q4 Gross Output data, as well as the third estimate of GDP are scheduled for June 27, 2024.
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. We also recommend that GO be elevated in the BEA’s press releases and website as the “top line” in national income accounting, since GO data often tells a very different story than GDP data.
Report on Various Sectors of the Economy
While only five of the economy’s 22 sectors experienced a pullback in Q4 2023, three of those sectors are in the very early stages of production, which can be good early indicators of which direction other sectors further down the supply chain might be headed in subsequent periods.
After expanding the same 1.3% in real terms in Q3, the Agriculture and the Mining sectors contracted 0.8% and 3.6%, respectively, in the last period of 2024. After growing 2.8% in the second quarter and more than 10% in the third quarter, the Utilities sector declined 5.7% in real terms for the fourth quarter. Construction is the only early-stage sector that followed up its significant growth of 14.7% in Q3, with a 16.3% expansion fi the last quarter of 2024.
With a 14% share, Manufacturing is the second largest segment and has a significant impact on the performance of the overall economy. In the fourth quarter, Manufacturing expanded less than 1%. More concerning than the low growth rate is the fact that Nondurable goods expanded 2.9% and Durable goods contracted 1%, which generally indicates potential economic headwinds over extended horizons. This is just a part of the Q4 2023 overall spending trend where consumer spending rose and business spending declined. The 1.8% Wholesale sector contraction and the 4.5% Retail sector growth further support the business vs. consumer spending pattern.
The largest segment that accounts for 19% of the economy – Finance, insurance, real estate, rental, and leasing – followed two quarters of flat performance with a 2.1% real-term decline in Q4 2024. Professional and business services, and Educational services, health care, and social assistance – which account combined for more than a fifth of the overall economy, expanded 4.9% and 6.7%, respectively.
Despite slowing its expansion from 3.3% in Q3 2023, overall government continued its growth at 1.84% in Q4. However, unlike the preceding period, where federal and local government expanded roughly at the same pace, in the fourth-quarter 2024, Federal government contracted 0.6% in real terms, but State and local governments grew nearly 2.9%.
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/
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: https://apps.bea.gov/iTable/?reqid=150&step=2&isuri=1&categories=gdpxind
Peter Coy, “What GDP’s Cousin Can Tell Us about the Economy,” August 7, 2023, New York Times: https://www.nytimes.com/2023/08/07/opinion/gdp-recession-gross-output.html?searchResultPosition=1
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; he compared GDP to an X-ray of the economy, and GO to a CAT-scan: : 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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[1] The BEA currently uses a limited measure of total sales of goods and services in the production process. Once products are fabricated and packaged at the manufacturing stage, the BEA’s GO only adds “net” sales at the wholesale and retail level. Its official GO for the fourth quarter of 2023 is more than $48.5 trillion. By including gross sales at the wholesale and retail level, the Adjusted GO (GO*) expanded to more than $59.4 trillion in Q4 2023. Thus, the BEA omits nearly $11 trillion in business-to-business (B2B) transactions in its GO statistics. We include them as a legitimate economic activity that should be accounted for in GO, which we call Adjusted GO. See the new introduction to Mark Skousen, The Structure of Production, 3rd ed. (New York University Press, 2015), pp. xv-xvi
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