Washington, DC (Thursday, September 30, 2021): For the first time in history, total spending in the economy, Gross Output (GO), hit $50 trillion 2021, based on the latest economic data release.
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.
On September 30, 2021, the federal Bureau of Economic Analysis (BEA) released data for the second quarter 2021 Gross Output – the most comprehensive measure of total spending in the economy, including the supply chain. The data indicates that Gross Output continued to expand in the second quarter 2021 and its expansion outperformed GDP growth for the third consecutive period.
Business-to-business (B2B) spending also is growing faster than consumer spending, another good sign.
Many economists feared a long economic downturn and marginal growth in the aftermath of the sharp economic decline in the second quarter 2020. However, it appears that the second-quarter downturn was just a 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 Q4 2020 and Q1 2021 of 7.0% and 8.8%, respectively, GDP and GO continued the trend and expanded again in Q2 2021.
GDP rose 12.8% and GO grew 14.2% in nominal terms. In real terms, GDP rose 6.7% and outpaced GO’s expansion of 5.5% in the second quarter 2021. However, accounting for the full impact of gross wholesale and gross retail – which are included only as net figures in the GO reported by the BEA – the Adjusted Gross Output (GO*) advanced 7.4% in the second quarter 2021. The difference between in net and gross figures amounts to more than $9.6 trillion, which is missing from the government’s official GO figure.
Following the initial impact of the pandemic, GDP declined in Q2 2020 to its lowest level since Q2 2017. However, GDP has been recovering ever since then. After surpassing its previous high from Q4 2019 in the first quarter this year, GDP set another new high in Q2 2021. However, both GO and Adjusted GO (GO*) reached new milestones as well. Gross Output exceeded $40 trillion for the first time ever in Q2 2021, and Adjusted GO broke above the $50 trillion mark.
The latest set of positive growth figures affirms once more that the economic growth outlook remains positive. Even with potential concerns of the spread of the COVID delta variant, more states are lifting business restrictions and reopening their economies. This is just another factor that could offer people the needed confidence to resume normal economic activities, which will fuel economic growth further.
However, there are few concerns that might hinder the progress and dampen future economic growth. After years of deflation fears, inflation is rearing its ugly head once again. The currently reported rate of inflation of 5% is significantly higher than historical averages and many economists believe that it will get worse. Even the Federal Reserve is looking to revise its inflation target from 2% to 3%.
Furthermore, 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, and a slew of other policies that would stifle economic growth. You can read more about these concerns that could derail our economic recovery in today’s edition of Mark Skousen’s free weekly newsletter, Skousen CAFÉ. (https://www.markskousen.com/signups/skousen-investor-cafe/)
Another indication that the economic pullback last year 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.
This anomaly from the established historical pattern, provides another indication that the underlying business fundamentals are significantly stronger than originally anticipated, that government shutdowns in response to the COVID-19 epidemic might have been unnecessary. Those responses might have even amplified the initial economic contraction in the second-quarter 2020.
More importantly, as it did during the previous four periods, business spending continues to outpace consumer spending in the second quarter 2021.
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 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 second quarter 2021, B2B activity and consumer spending increased at similar rates – B2B at 17.4% to $29. trillion and consumer spending at 18% to $15.7 trillion. However in real terms, B2B activity expanded at a faster annualized rate of 11.3% to $24.8 trillion than consumer spending, which increased 9.1% to $13.5 trillion.
“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 double digit rates in real terms, which is significantly higher than the low single digit average historical trend.”
Adjusted Gross Output Growth Continues to Outpace GDP Expansion in Second Quarter to Suggest Continued Economic Recovery
Despite significant declines in the first two quarters of 2020, Gross Output indicates robust long-term growth since then. 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 continued and steady recovery over the last four 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 next Gross Output data report for Q3, which is scheduled for release in late-December 2021, should provide early indications whether the recovery will continue into 2022, or whether rising inflation, taxes and interest rates will 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 federal government will release the advance estimate for third-quarter 2021 GDP on October 28, 2021 and the full release of Gross Output, as well as the third estimate of GDP on December 22, 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 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 the first half of 2021.
Following a rapid decline in the first half of 2020, the mining sector delivered its fourth consecutive expansion in Q2 2021. Driven by a 20% expansion of the Oil and gas extraction sub-segment, the mining sector expanded 13.1% in real terms. While comprising only a 1.8% share of the overall economy, the mining sector 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.
The Agriculture sector followed a 5.7% contraction from Q1 with a 4.1% real-term decline in Q2. Manufacturing – which is the second largest segment of the economy with a 16.7% share – declined 1.7% after contracting 0.7% in the previous period. While accounting for more than half of the segment, Nondurable goods contracted nearly 1.3% and Durable goods declined 2.1%.
After contracting 4.2% in the previous period, Educational services, health care, and social assistance expanded 9.5% in Q2 2021. The largest segment of the economy, Finance, insurance, real estate, rental, and leasing segment, which accounts for nearly one-fifth of GO, followed a 10% growth in the last quarter with a more tepid increase of 1.5% in Q2. One of the reasons for this slow second-quarter growth is that the Finance and insurance sub-segment declined 1.2% after surging more than 17% in the previous period. On a positive note, after surging more than 20% in Q1, the Federal Reserve banks, credit intermediation, and related activities sub-segment contracted nearly 11%. While this might seem like a positive development, one concern is that the decline in Fed’s activity might be an early warning of a tightening money policy, which would push interest rates higher.
After several periods of steady growth, the Construction sector reversed trend and pulled back 8.6% in Q2. While unable to maintain its growth rate of more than 17% in the previous two periods, the Transportation and warehousing sector still expanded in Q2, albeit at 4.2%. The sub-segment with the highest growth was Air transportation, which expanded 73.4% in Q2 after recording a 65% surge in the previous period. Alternatively, the Pipeline transportation sub-segment contracted nearly 47%, after a 68% first-quarter expansion.
After no expansion in Q4 2020 and modest 1.5% growth in Q1 2021, total government spending declined 1.6% in Q2 2021. While federal spending fell 6.6% for the period, government spending at the local and state levels expanded 0.8%. Since spending at local and state levels is nearly twice the federal spending, the small increase at the local and state levels offset the large federal decline and minimized the overall spending decline.
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.”
More Information about GO
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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