AUSTRIAN VS. CHICAGO ECONOMISTS: RESPONSE TO THE 2008 FINANCIAL CRISIS

By Mark Skousen
Updated in 2019

 “Blessed paper credit! Last and best supply!
That lends corruption lighter wings to fly.”

–Alexander Pope

AUSTRIAN

Since I wrote “Vienna and Chicago, Friends or Foes?” in 2005, we’ve suffered another monetary crisis, this one so serious that it undermined the very foundation of our monetary and economic system and is known as the “Great Recession.”

How do the Austrian and Chicago economists differ when it comes to answer these questions:  What caused the financial crisis of 2007-09? What is the best way out of the crisis and Great Recession? Let’s first start with the Chicago school, and Milton Friedman’s famous article, “Why the American Economy is Depression-Proof.”

Is the US Economy Depression-Proof?

 In late 2009, I was in Stockholm, Sweden, for the Mont Pelerin Society meetings, where 300 top experts gathered from around the world. At this meeting, I organized a special ad hoc session reassessing Milton Friedman’s famous lecture “Why the American Economy is Depression-Proof.”[1]  Friedman gave this optimistic lecture in Sweden in 1954, at a time when some prominent economists and financial advisors were predicting another crash on Wall Street and a collapse in the economy. A little over 50 years later, in the face of the worst financial crisis since the Great Depression, everyone at the meeting wanted to know if Friedman, one of the founders of the international society, would change his mind. Nobody knows for sure, since Friedman died in late 2006, before the crisis started. I do know that until his death, he always defended his bold prediction. From 1954 until his death in 2006, the United States suffered numerous contractions in the economy, an S&L crisis, a major terrorist attack, and even a few stock market crashes, and still it avoided the “big one,” a massive 1930s’s style Depression characterized by an unemployment rate of 15% or more (Friedman’s definition of a depression).

In his lecture, Friedman pointed to four major institutional changes to keep another Great Depression was happening:  federal bank deposit insurance; abandonment of the international gold standard; the growth in the size of government, including welfare payments, unemployment insurance, and other “built-in” stabilizers; and most importantly, the Federal Reserve’s determination to avoid a monetary collapse at all costs. Because the public and officials are petrified by the possibility of another depression, Friedman predicted that any signs of trouble would lead the Federal Reserve to take “drastic action” and shift “rapidly and completely to an easy money policy.” Consequently, according to Friedman, rising inflation would be far more of a threat to post-war America than another Great Depression.

So far so good. But now, following the financial crisis of 2008, I suspect Friedman would be forced to revise his views if he were alive. Admittedly, Friedman is still technically correct. There was no Great Depression in 2008-09, that is, according to government statistics. The official unemployment rate rose to 10% in 2009, far below the 15% rate necessary to qualify as a “depression.”

However, it’s important to note that the official unemployment rate does not include discouraged workers who have stopped looking, and those numbers apparently are in the millions. According to economist John Williams, editor of Shadow Statistics, if you count discouraged workers, the real unemployment rate exceeds 20%. See the chart below.

AUSTRIANSource:  www.shadowstats.com

The Fed and the Federal government appear to have averted disaster once again, at least in the short term. Yet they were able to do so only by putting millions on unemployment insurance and welfare (over 47 millions on food stamps and Medicaid), taking on unprecedented powers, and adding trillions of dollars in debt that so weaken the government and the public’s trust in its financial capacity to avoid future economic difficulties, and could lead to runaway inflation or a deflationary collapse.

Clearly, bank failures are not a thing of the past, and there have been runs on commercial banks and other financial institutions (money market funds), although Friedman is right that most banks are now either taken over by the FDIC or the Treasury, or forced to merger with a bigger, safer bank. Still, major institutions like Bank of America and Citibank would not have survived had it not been for government bailouts.

Friedman also stated in his lecture, “There has been no major depression that has not been associated with and accompanied by a monetary collapse….Monetary contraction or collapse is an essential conditioning factor for the occurrence of a major depression.”

Yet a monetary expansion is no guarantee that a crisis can be avoided. In fact, the U. S. came awfully close to an economic collapse in late 2008 without any monetary contraction. During 2008, the money supply (M2) grew every month and 9% for the year. Clearly, monetary contraction isn’t the only source of instability in the economy. Economic disaster can also be precipitated by easy money, irresponsible banking practices, or perverse tax and regulatory policies. One of the weaknesses of the Friedman Chicago school approach is their belief that inflationary asset bubbles only have micro effects on the economy and can be defused without having a debilitating macroeconomic impact. The real-estate crisis of 2007-09 demonstrated otherwise, and that’s why most Chicago economists failed to predict

The Great Contraction, Updated

Interestingly, Friedman’s famous chapter, “The Great Contraction, 1929-1933,” taken from his magnum opus, A Monetary History of the United States, 1869-1960 (Princeton University Press, 1963), was reprinted in 2007, with a new introduction by his co-author, Anna J. Schwartz. The short book had long been out of print, and was brought back just before the real estate crisis started and after Milton Friedman died. It was perfect timing as we were about to witness the worst economic debacle since the Great Depression. Yet Professor Schwartz was oblivious to any evidence of a collapse. She wrote, “As the federal funds rate moves in a low and narrow range in response to low and stable inflation, volatility of the business cycle and real economy has moderated.”[2]

 

The Austrians Response

The Austrian economists, on the other hand, knew full well that the Fed’s artificial low interest rate policy and the government’s meddling with banks and mortgage companies to encourage excessive home ownership was about to blow up in their faces. Austrian financial economists, such as Peter Schiff, Bert Dohmen, and Fred Foldvary, anticipated the crisis, and said so in 2007 at FreedomFest. That is why I concluded “Advantage, Vienna” in the debate between the Austrian and Chicago schools on the business cycle (see chapter 6 of “Vienna and Chicago”).

Based on the Mises-Hayek theory of the business cycle, the Austrian economists proposed their fundamental thesis that monetary inflation is never neutral, and that asset bubbles cause unsustainable structural imbalances on a macro level. Inflation has negative unintended consequences. The Austrians knew that eventually a collapse was inevitable. As Ludwig von Mises once said, “We have outlived the short-run and are suffering from the long-run consequences of [inflationary] policies.”

At the end of our special session, I asked members of the Mont Pelerin Society how many of them still agreed with Friedman, that the American economy is “depression proof.” Only a handful raised their hands, and they were all American economists. The rest of the crowd, mostly from abroad, pointed out that most other countries did not suffer a banking crisis. The financial crisis was largely Anglo-American-induced. They agreed that until the United States adopts a stable monetary and banking system, it can no longer be considered depression-proof.

 

Government Response to the Crisis

What should the government do in response to the crisis, if anything? The United States and many other countries followed the standard Keynesian prescription — the government ran massive deficits and the central banks cut interest rates. In short, they engaged in easy money at all levels:  injecting liquidity and adopting activist fiscal and monetary policy.

The 2007 reprint of “The Great Contraction” published Fed chairman Ben Bernanke’s remarks at a 2002 conference in Chicago honoring Milton Friedman on his 90th birthday. At the end, he said, “I would like to say to Milton and Anna:  Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”[3]  Bernanke said he had learned the Friedman lesson well. The Fed would not allow the banking system to collapse and cause another Great Depression. Indeed, he lived up to his word during the 2008 financial crisis in injecting massive amounts of liquidity (fiat money).

Unfortunately, Bernanke failed to recognize the other lesson found in Friedman’s scholarly works:  activist fiscal policy doesn’t work and is unnecessary. In Friedman’s testing of Keynesian policy prescription, he found that the deficit spending multiplier was extremely low, not 4 or 5 as taught in the textbooks, but 0 to 1, in its impact on the economy. Recently Robert Barro (Harvard) concluded it was close to 0, no positive impact at all. The increase in government spending was largely offset by private spending declining (crowding out).

Friedman and the Chicago economists argued that the money multiplier resulting from the Fed buying government bonds and injecting liquidity into the banking system was much higher, as much as 3 or 4. Accordingly, Friedman advocated that the Fed should be the primary source of new stimulus to get the economy going again, and fiscal policy should remain stable.

In short, it was unnecessary and maybe even downright harmful for Ben Bernanke to have called Treasury Secretary Henry Paulson in September 2008, and encourage the Congress to get involved. According to this view, the trillion dollar deficits and TARP monies were completely unnecessary. Monetary policy could do all the heavy lifting. After TARP became law, I asked Glenn Hubbard, former president of the Council for Economic Policy under Bush and the dean of Columbia Business School, if the Fed had all the emergency powers necessary to buy any asset — Treasuries, mortgages, even stocks — to avert a meltdown, and he said emphatically, “Yes.” It was not necessary to get Congress involved.

 

Did the Fed Cause the Real Estate Bubble?

After the financial crisis, Ben Bernanke refused to take responsibility for the collapse—or the real estate bubble. He noted that the real estate boom was a worldwide phenomenon, ignoring the fact that the dollar is a world currency. But what about the Federal Reserve’s responsibility to be the chief banking regulator? I was in attendance in January 2007, when Bernanke presented a luncheon paper on “Bank Regulation,” in which he used the words “crisis” and “panic” 34 times. Surely Bernanke knew about the irresponsible “subprime” and “no doc” loans commercial and mortgage bankers were involved in. Shouldn’t Bernanke have had the “courage to act” (to use the title of his memoirs) to stop this nonsense when he became Fed chairman; and shouldn’t he have resigned in disgrace for allowing it to happen?

 

The Austrian Response: “Do Nothing”? 

The most extreme response to the financial crisis is the recommendation by some Austrian economists to “do nothing,” that is, for the government to let the malinvestments collapse on their own weight. Libertarian economist Jeffrey Miron, who teaches at Harvard, wrote an article entitled “The Case for Doing Nothing,” for Reason magazine in 2009. According to these economists, government should not increase spending (the Keynesian prescription) nor should the Fed engage in easy money and inject liquidity (the Monetarist solution)—both policies might make matters worse. If anything, the government should retrench like everyone else. This was known as the classical economic policy. Thomas E. Woods, Jr., Austrian economist with the Mises Institute, wrote about the 1920-21 period in American history as an example:

“The conventional wisdom holds that in the absence of government countercyclical policy, whether fiscal or monetary (or both), we cannot expect economic recovery — at least, not without an intolerably long delay. Yet the very opposite policies were followed during the depression of 1920–1921, and recovery was in fact not long in coming. The economic situation in 1920 was grim. By that year unemployment had jumped from 4 percent to nearly 12 percent, and GNP declined 17 percent. No wonder, then, that Secretary of Commerce Herbert Hoover — falsely characterized as a supporter of laissez-faire economics — urged President Harding to consider an array of interventions to turn the economy around. Hoover was ignored. Instead of “fiscal stimulus,” Harding cut the government’s budget nearly in half between 1920 and 1922. The rest of Harding’s approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third. The Federal Reserve’s activity, moreover, was hardly noticeable. As one economic historian puts it, ‘Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.’ By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and it was only 2.4 percent by 1923.”[4]

It takes a great deal of faith in capitalism to adopt this laissez faire policy in today’s world.

 

How to Order “Vienna and Chicago”

I refer to my book, “Vienna and Chicago, Friends or Foes?” as the Clash of the Titans. You can read more about it at http://mskousen.com/?s=vienna+and+chicago

It’s been endorsed by both sides – by Milton Friedman (Chicago school) and Roger Garrison (Austrian school). Supply side economist Art Laffer wrote me, “I don’t know whether I should love you or hate book. Your book was so good I spent half a day plus avoiding what I supposed to do in order to read it. It’s great!”

To order, go to www.skousenbooks.com. The price is US$20, and I pay the postage if mailed inside the US. (Add $30 for airmail shipment outside the US.) Or call Harold at Ensign Publishing, 1-866-254-2057.


[1] Milton Friedman, “Why the American Economy is Depression-Proof,” lecture delivered in Stockholm in April, 1954, and reprinted in Dollars and Deficits (Prentice-Hall, 1658), pp. 72-96. Friedman’s controversial lecture is still not available online, although my response, “Why the U. S. Economy is Not Depression-Proof” is:  http://mises.org/journals/rae/pdf/RAE3_1_5.pdf

[2] Anna Jacobson Schwartz, “New Preface,” The Great Contraction, 1929-1933 (Princeton University Press, 2007), p. xi.

[3] Ben S. Bernanke, “Remarks,” The Great Depression, 1929-1933, p. 247.

[4] Thomas E. Woods, Jr., “The Forgotten Depression of 1920” (Mises Institute, November 27, 2009):  http://mises.org/daily/3788

GO Confirms a Slow-Growth Economy as We Enter 2019

Washington, DC (Friday, April 19, 2019): Today the federal government released gross output (GO) for the 4th quarter 2018, and the increase (2.3% in real terms) confirmed a slow-growth economy as we enter a new year. For the entire year of 2018, real GO grew at 2.91%, slightly faster than 2.86% for real GDP.

That’s an improvement over 2016 (only 1.6% increase in real GDP) and 2017 (2.3% increase in real GDP), but not the 3-4% the Trump supply-side economists had hoped for.

No doubt the corporate tax cuts had a positive effect, but the largest factor inhibiting growth is probably the Trump trade war. Trade plays a much bigger role in the US and world economy; representing over 25% of spending in the US economy. And at the end of last year, world trade slumped, and Chinese exports plummeted.

Last month, the federal government reported that real GDP growth, the “bottom line” of national income accounting, slowed for the second consecutive quarter. After dropping from 4.2% in the second quarter to 3.4% in the third quarter, real GDP only grew 2.2% in the fourth quarter.

Today the federal government (Bureau of Economic Analysis in the US Commerce Department) released 4th quarter estimates of gross output (GO), the “top line” in national income accounting. It measures spending at all stages of production, including the supply chain.

The results were tepid in comparison to the previous four periods. Total spending on new goods and services (adjusted GO) [1] was slightly more than $45.2 trillion in nominal terms.

Real GO advanced at an annualized rate of 2.3% in the 4th quarter – only slightly above the 2.2% real GDP growth. Business-to-business (B2B) spending rose only slightly (0.3%) above third quarter and substantially slower than the 2.2% growth rate of consumer spending in the same period.

 

Business — Not Consumers — Drives the Economy

Note:  Contrary to what the media says, consumer spending does not drive the economy, and does not represent two-thirds of the economy. Using GO as a better, more accurate measure of total spending in the economy, the business sector (B2B spending) is almost twice the size as consumer spending. Consumer spending is the effect, not the cause, of prosperity (Say’s law).

While the reduced growth of business spending in the fourth quarter suggests economic slowdown, that slowdown was affected by multiple factors. Fears of U.S.-China trade war escalation, as well as uncertainty about the actions of the Federal Reserve regarding interest rates, drove down the overall markets in late 2018.

These fears and uncertainties undoubtedly influenced the reduction in fourth quarter business spending as well. However, the December announcement that the Fed is not planning additional rate hikes in 2019 and only one hikes in 2020, as well as positive developments in trade negotiations with China, have lessened some of the concerns and the markets have been recovering since the beginning of the year.

While lower than last period, Gross Output growth was broad based across industries. All sectors of the economy – except Mining, and Arts, entertainment, recreation, accommodation, and food services – advanced in the fourth quarter. Government spending rose 3.5% in nominal terms, which was the lowest growth rate in the past six quarters.

GO 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.”

Whenever GO is growing faster than GDP, as it has been doing in most of 2018, it’s a positive sign that the economy is still robust and growing.  However, it is clearly growing at a slower pace as we enter 2019.  And GO* is clearly growing far less than GDP in the 4th quarter 2018.

The advance estimate of first-quarter GDP will be released next week, April 26, and is expected to be 2% or less.

 

Report on Various Sectors of the Economy

After growing at double-digit percentages and nearly doubling over the previous four quarters, the mining sector pulled back 7.2% in the fourth quarter on an annualized basis. However, the sector comprises less than 2% of the entire Gross Output and the fourth quarter decline has only a small impact.

Similarly, the Arts, entertainment, recreation, accommodation, and food services– the other declining segment – contributed only 4% to the total GO. Therefore, this segment’s 1.6% annualized decline also had minimal impact on the growth of the overall GO.

However, as the second largest segment that accounts for more than 17% of GO, the 1% growth of the manufacturing sector had a much bigger impact on the modest GO growth in the fourth quarter. More importantly, while nondurable goods declined 1.9%, the durable goods subsegment – which is a much better indicators of long-term economic expansion – advanced 3.9%.

The finance, insurance, real estate, rental and leasing sector is the largest GO sector with a 19% share of GO. This sector advanced at the same 4.8% rate as it did in the previous period and 26% faster than the 3.8% growth rate from two periods ago.

The fastest growing sectors were utilities, transportation and warehousing. Utilities, which account for just 1.4% of GO, advanced at 12.9% which advanced at 11%. Transportation and warehousing grew at 11%. While growing at a slightly lower rate than utilities, transportation and warehousing – with a 3.4% share — had a bigger positive impact on the growth of the overall GO.

Total government spending accounts for 10.6% of the total GO spending and increased 3.5% in the fourth quarter. However, this growth rate was the lowest since the second quarter of 2017. While federal government increased 3.3%, state and local government expanded a slightly higher rate of 3.5%.

Gross output

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 similar to the “bottom line” (gross profits) of an accounting statement, which determined the “value added” or the value of final use.

GO tends to be more sensitive to the business cycle, and more volatile, than GDP. During the financial crisis of 2008-09, GO fell much faster than GDP, and afterwards, recovered more quickly than GDP. Still, it wasn’t until late 2013 that GO fully recovered from its peak in 2007. Recently quarterly GO has been outpacing GDP, suggesting a growing economy.

 

Business Spending (B2B) Grew Slower Than Consumer Spending First Time Since Second Quarter 2017

Our business-to-business (B2B) index is also useful. It measures all the business spending in the supply chain and new private capital investment. Nominal B2B activity increased 1.7% in the third quarter to $26.37 trillion. Meanwhile, consumer spending rose to $14.2 trillion, which is equivalent to a 3.9% annualized growth rate. In real terms, B2B activity rose at an annualized rate of 0.3% and consumer spending rose at a significantly slower rate of 2.2%.

Gross output

“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. “The business activity slowed considerably in the 4th quarter, although it’s probably a temporary situation.”

 

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 new output statistic 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 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.”

Note: Ned Piplovic assisted in providing technical data for this release.

 

For More Information

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: BEA – Gross Output by Industry

For more information on Gross Output (GO), the Skousen B2B Index, and their relationship to GDP, see the following:

To interview Dr. Mark Skousen on this press release, contact him at mskousen@chapman.edu, or Ned Piplovic, Media Relations at skousenpub@gmail.com.

# # #

________________________________________
[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 2018 4th quarter is slightly above $37.15 trillion. By including gross sales at the wholesale and retail level, the adjusted GO increases to more than $45.2 trillion in Q4 2018. Thus, the BEA omits more than $8 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.

The US Economy is NOT Slowing Down. Business Spending Soars!

By Mark Skousen

Editor, Forecasts & Strategies

Washington, DC (Thursday, February 21, 2018): “Gross Output provides an important new perspective on the economy and a powerful new set of tools of analysis, one that is closer to the way many businesses see themselves.” –Former BEA director Steve Landefeld

Is the US economic boom coming to an end?

Last month the federal government reported that real GDP growth, the “bottom line” of national income accounting, slowed from 4.2% in the second quarter to 3.4% in the third quarter. Many pundits said that the slowdown will continue and that a recession is inevitable by 2020.

But today’s economic numbers suggest otherwise. Business spending, in particular, is rising at a faster pace.

Today the federal government (Bureau of Economic Analysis in the US Commerce Department) released 3rd quarter estimates of gross output (GO), the “top line” in national income accounting. It measures spending at all stages of production.

The results were eye-popping. Total spending on new goods and services (adj. GO) topped $45 trillion for the first time.

Real GO climbed at an annualized rate of 4.6% in the 3rd quarter, much faster than GDP. Business-to-business (B2B) spending rose even faster, 5.8% in real terms, much more than consumer spending (up 3.2%).

Business — Not Consumers — Drives the Economy

Note:  Contrary to what the media says, consumer spending does not drive the economy, and does not represent two-thirds of the economy. Using GO as a better, more accurate measure of total spending in the economy, business spending (B2B) is almost twice the size as consumer spending. Consumer spending is the effect, not the cause, of prosperity (Say’s law).

There is no slowdown at all in the supply chain and business spending – in fact, they are growing faster.

The growth was broad based. Every sector of the economy in the 3rd quarter grew except utilities and agriculture. Government spending rose 4.4% in real terms. (Does it ever go down?)

Faster GO Means No Recession in Sight for 2019

GO 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.”

Whenever GO is growing faster than GDP, as it has been doing in 2018, it’s a positive sign that the economy is still robust and growing. That’s what we are seeing.

Fourth quarter GDP will be released next week, February 28. I expect real GDP to growth faster than 3.4%.

Report on Various Sectors of the Economy

The mining sector slowed its growth compared to the previous quarter but was still the fastest growing sector in the third quarter with an annualized growth rate of 22.8%. While business growth in this sector provides a solid foundation for various industries later in the supply chain, the mining castor makes up just 1.8% of the total GO and has a lesser impact on the GO growth compared to some of the larger sectors.

Because the manufacturing sector comprises more than 17% of the total GO, the 9.1% growth rate of this sector has a much greater impact on the growth of the overall GO. Furthermore, within this sector, Durable goods production advanced at nearly 13%, which more than twice the 5.3% growth rate for Nondurable goods.

The Finance, insurance, real estate, rental and leasing sector is the largest GO sector with a 19% share, this sector advanced at 4.8%, which was more than 26% better than the 3.8% growth rate from the previous period.

Additionally, the Construction sector advanced 7%, Arts, entertainment, recreation, accommodation, and food services sector grew 6.4% and   Educational services, health care, and social assistance sector expanded 8.1%. Another indication that businesses and individuals are spending with a long-term horizon outlook is that Wholesale trade spending growth of 5.2% is substantially higher than the 3.2% expansion of Retail spending.

The only two sectors that retracted in the third quarter were Agriculture, forestry, fishing, and hunting, which declined 8.2%, and Utilities with a 6.5% contraction.

Total government spending – 10.6% of the total GO – increase of 4.4% is 10% larger than the 4% growth from the previous quarter. However, the growth was distributed more evenly between the federal government (+4.2%) and State and local government growth (4.5%). While state government expanded just slightly faster than the 4.3% in previous period, the federal government’s spending grew at a pace that its more than 31% faster than its growth the second quarter of 2018.

Business Spending

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 similar to the “bottom line” (gross profits) of an accounting statement, which determined the “value added” or the value of final use.

GO tends to be more sensitive to the business cycle, and more volatile, than GDP. During the financial crisis of 2008-09, GO fell much faster than GDP, and afterwards, recovered more quickly than GDP. Still, it wasn’t until late 2013 that GO fully recovered from its peak in 2007. Recently quarterly GO has been outpacing GDP, suggesting a growing economy.

Business Spending (B2B) Continues to Grows Faster Than Consumer Spending

Our business-to-business (B2B) index is also useful. It measures all the business spending in the supply chain and new private capital investment. Nominal B2B activity increased 8.1% in the third quarter to $26.37 trillion. Meanwhile, consumer spending rose to $14 trillion, which is equivalent to a 5% annualized growth rate. In real terms, B2B activity rose at an annualized rate of 5.8% and consumer spending rose at a significantly slower rate of 3.2%.

Business Spending

“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. “The business activity resumed a strong growth trend after bucking some of the tariff, interest rates, and market correction concerns from the first quarter. Without the reduction in some of those concerns and a strong earnings season, the business community refocused on taking advantage of the tax reform bill in December 2017, and an improved business environment and a reduction in obstructive business regulations.”

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. 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.”

Note: Ned Piplovic assisted in providing technical data for this release.

 

For More Information

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: BEA – Gross Output by Industry

For more information on Gross Output (GO), the Skousen B2B Index, and their relationship to GDP, see the following:

To interview Dr. Mark Skousen on this press release, contact him at mskousen@chapman.edu, or Ned Piplovic, Media Relations at skousenpub@gmail.com.

# # #

________________________________________
[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 2018 3rd quarter is slightly above $36.8 trillion. By including gross sales at the wholesale and retail level, the adjusted GO increases to more than $45 trillion in Q3 2018. Thus, the BEA omits more than $8.2 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.

Gross Output Indicates Continued Boom in the U.S. Economy as Business Spending Expands Rapidly in Q2

Washington, DC (Thursday, November 1, 2018):  Gross output (GO), the top line of national accounting that measures spending at all stages of production, continued to build on the growth from the first quarter and advanced at an even faster pace than GDP in the second quarter.

Based on data released on Thursday, November 1, 2018 by the BEA, adjusted GO (GO*)[1] increased in real terms at an annualized rate of 4.6% in the second quarter of 2018. This increase is over 50% higher than the last period’s 2.7% growth rate and substantially higher than the real GDP’s 4.1% growth rate in the second quarter of 2018.

Mark Skousen, editor of Forecasts & Strategies and a Presidential Fellow at Chapman University, states, “When GO grows faster than GDP, this is a good sign of an expanding economy. Additionally, the data indicates that business investment and spending continued to expand rapidly, probably because of positive corporate earnings reports, the slightly lower concerns regarding tariffs, the new full depreciation rules and the usual weather-related uptick business activity during the spring.”

According to a recent study by David Ranson, chief economist at HCWE & Co., GO anticipates changes in GDP by as much as 12 weeks in advance and thus serves as a reliable leading indicator: http://www.hcwe.com/guest/EW-0118.pdf

The second quarter Skousen B2B Index, a measure of business spending throughout the supply chain, increased at 7.8% in nominal terms, which is significantly higher than the 4.5% growth rate from the previous quarter. After a slowdown in the previous quarter, the growth in the second quarter is the highest strongest growth rate since the first quarter of 2017. In the second quarter of 2018, B2B transactions rose at an annual rate of 4.4% in real terms, which is three times higher than the growth rate from the previous quarter, and faster than GDP.  Furthermore, B2B spending increase was 36% higher than the growth of consumer spending in the second quarter.

The nominal adj. GO increased at an outstanding 7.9% in the second quarter of 2018 to reach $44.4 trillion. This current adjusted GO is more than double the size of the current $20.4 trillion GDP figure, which measures final output only. After a lackluster growth in the first quarter, the broader GO* growth rate of 4.6% in real terms indicates a heating up in economic activity expansion again, most likely because of the HUGE wholesale and retail trade increase in the fourth quarter dampened the first quarter results and second quarter performance moved closer to normal levels. “I view the slower growth in GO in the 1st quarter as temporary and the economy is likely to recover in the 2nd quarter,” commented Skousen about the results in the previous quarter. The current quarter’s results indicate that Skousen’s assessment was accurate.

While growth in some industrial sectors was minor, every single sector advanced versus the previous quarter, which drove the growth of GO in the second quarter of 2018. While spending increased at mild rates the previous quarter, the current quarter’s numbers indicate a continuation of robust growth across the economy, and especially in the early stages of production, such as mining and construction. Growth in the early stages is usually a reliable leading economic indicator that overall economic growth should continue to expand.

Gross Output

Report on Various Sectors of the Economy

After a brief slowdown in the previous period, the mining sector’s growth advanced at the highest rate of any sector – 38%.

While the growth of the mining sector is quite robust and a leading indicator, it has a relatively small impact on the growth of the overall GO due to the mining sector’s low share of just 1.7% of total GO. Conversely, the manufacturing sector, which accounts for 17% of the total GO, advanced 7.2%, which was close to last period’s 7.6% growth rate. At 9.2%, the growth rate for Nondurable Goods was significantly higher than the 5.2% growth rate for Durable Goods.

The largest sector – Finance, insurance, real estate, rental and leasing – advanced at 3.8%, which was substantially lower than previous period’s growth rate of nearly 10%.

Additionally, two more segments posted double-digit percentage growth rates for the second quarter. While the Wholesale trade sector increased 10.8%, the Arts, entertainment, recreation, accommodation, and food services sector advanced 12.7%. The growth in this sector was most likely driven by the low unemployment, wage growth and overall economic growth, which provided consumer with additional funds for discretionary spending. These two segments account for a 9% combined share of total GO.

Total government spending (11% share of total GO) increased at 4%, which was higher than the 3.8% from the previous period but still considerably lower than the 6.7% average growth rate over the past two years. Additionally, this two-year average growth rate of total government spending declined for the second consecutive period after rising for five consecutive quarters. State and local government spending increased at 4.3% which was higher than the 3.2% growth of government spending at the federal level.

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 similar to the “bottom line” (gross profits) of an accounting statement, which determined the “value added” or the value of final use.

GO tends to be more sensitive to the business cycle, and more volatile, than GDP. During the financial crisis of 2008-09, GO fell much faster than GDP, and afterwards, recovered more quickly than GDP. Still, it wasn’t until late 2013 that GO fully recovered from its peak in 2007. Recently quarterly GO and GDP have both been growing at a similar pace.

Business Spending (B2B) Continues to Grows Faster Than Consumer Spending

Our business-to-business (B2B) index is also useful. It measures all the business spending in the supply chain and new private capital investment. Nominal B2B activity increased 7.8% in the second quarter to $25.85 trillion. Meanwhile, consumer spending rose to $13.8 trillion, which is equivalent to a 5.7% annualized growth rate. In real terms, B2B activity rose at an annualized rate of 4.4% and consumer spending rose at a significantly slower rate of 2.7%.

Gross Output

“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. “The business activity resumed a strong growth trend after bucking some of the tariff, interest rates, and market correction concerns from the first quarter. Without the reduction in some of those concerns and a strong earnings season, the business community refocused on taking advantage of the tax reform bill in December 2017, and an improved business environment and a reduction in obstructive business regulations.”

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. 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.”

Note: Ned Piplovic assisted in providing technical data for this release.

For More Information

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: BEA – Gross Output by Industry

For more information on Gross Output (GO), the Skousen B2B Index, and their relationship to GDP, see the following:

To interview Dr. Mark Skousen on this press release, contact him at mskousen@chapman.edu, or Ned Piplovic, Media Relations at skousenpub@gmail.com.

# # #

________________________________________
[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 2018 2nd quarter is slightly above $36.2 trillion. By including gross sales at the wholesale and retail level, the adjusted GO increases to more than $44.4 trillion in Q2 2018. Thus, the BEA omits more than $8 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.

US Economy Continues to Expand, but Business Spending Slows Temporarily

Washington, DC (Friday, July 20, 2018):  Gross output (GO), the top line of national accounting that measures spending at all stages of production, continued to expand in the first quarter, but at a slower pace than the previous quarter.

Based on data released on Friday, July 20, 2018 by the BEA, real GO increased at an annualized rate of 2.7% in the first quarter of 2018. This increase lags behind the last period’s 4.3% growth rate, but faster than real GDP, which increased only 2.0% in the first quarter of 2018.

Mark Skousen, editor of Forecasts & Strategies and a Presidential Fellow at Chapman University, states, “When Gross output grows faster than GDP, this is a good sign of an expanding economy.  However, the latest GO data indicates that business investment and spending grew at a reduced rate in the 1st quarter, probably because of concerns over Federal Reserve’s potential interest rate hikes, uncertainties regarding tariffs and possible trade wars with our trading partners, and the usual weather-related slowdown in business activity during the winter.”

Real GDP, the bottom line of national income accounting, rose at an annualized rate of 2.0% in the first quarter of 2018. The 2.7% real GO growth rate in Q1 2018 is a good indication that, while growing slower than in the Q4 2017, intermediate business activity is still expanding and should translate into continued GDP growth in the near future.

According to a recent study by David Ranson, chief economist at HCWE & Co., GO anticipates changes in GDP by as much as 12 weeks in advance and thus serves as a reliable leading indicator: http://www.hcwe.com/guest/EW-0118.pdf.

The first quarter Skousen B2B Index, a measure of business spending throughout the supply chain, increased at 4.5% in nominal terms, which is significantly lower than the 12.2% growth rate from the previous quarter. After a spike in the previous quarter, the growth in the first quarter puts the business spending increase at almost the same level it was in the third quarter 2017. In the first quarter of 2018, B2B transactions rose at an annual rate of 1.36% in real terms, which is just a fraction of the 8.5% rate from the previous quarter.

After experiencing its highest quarterly growth rate over the past three years in the fourth quarter of 2017, the nominal adjusted GO (GO*)[1] increased at 4.1% in the first quarter of 2018 to reach $43.1 trillion. This current adjusted GO is more than double the size of the current $20.0 trillion real GDP, which measures final output only. However, the broader GO* growth rate of just 1% in real terms indicates a cooling of in economic activity  expansion – most likely because of the HUGE wholesale and retail trade increase in the fourth quarter.  “I view the slower growth in GO in the 1st quarter as temporary,” commented Skousen.  “The economy is likely to recover in the 2nd quarter.”

All but two industrial sectors increased versus the previous quarter, which drove the growth of GO in the first quarter of 2018. While spending increased at extraordinary rates in the previous quarter, the current quarter’s numbers still indicated a robust growth in the early stages of production, such as mining, manufacturing and construction, which is usually a reliable leading economic indicator that overall economic growth should continue to expand.

Supply Chain Activity Continues to Expand

The mining sector’s growth slowed from 46% in the previous quarter to the current 12.2% rate. While lower than the Q4 2017 rate, the current growth rate is still significantly higher than the 4.7% increase in Q3 2017. However, the growth of the mining sector is still robust, it has a relatively small impact on the growth of the overall GO due to the mining sector’s low share of just 1.5% of total GO. Conversely, the manufacturing sector’s 7.6% spending increase has a much bigger impact since the manufacturing sector accounts for nearly a fifth of total GO (18.2% share). Therefore, the 7.6% current growth of the manufacturing sector, while lower than last period’s 13%, has a much greater positive impact on the total GO and should be an even better indicator of a continued economic expansion. The 5.8% growth rate for durable goods was lower than the growth rate for non-durable goods, which rose 9.5% in the first quarter.

Another sector with an 18% share of GO is the Finance, insurance, real estate, rental and leasing sector. This is one of the few sectors that expanded at a greater rate than in the previous quarter. After increasing its growth rate from 2.8% in Q3 2017 to 6% in the in Q4 2017, this sector expanded at nearly 10% in the first quarter of 2018. Within the overall sector, the Finance and insurance sub-segment rose at 16.4%, which is the highest rate increase of any sector or segment for the current period. Additionally, after rising 6.4% in the previous quarter, the real estate, rental and leasing sub-segment expanded at a slightly lower, but still respectable 5.4%.

Additionally, two more segments posted growth rates in excess of 9% for the first quarter. While the Construction sector increased 9.9%, the transportation and warehousing sector rose 9.1%. These two segments account for a combined GO share of 7.7%.

Only two segments reduced spending from the previous quarter. The Arts, entertainment, recreation, accommodation, and food services sector accounts for just 4% of the total GO and declined almost 3% which is the same decline as in the previous quarter. Additionally, the spending classified as “Other services, except government”, which accounts for 2.2% of GO, declined 2% versus Q4 2017.

Total government spending (11% share of total GO) increased at 3.8%. This rate was significantly lower than the 6.75% two-year average. The two-year average growth rate of total government spending declined for the first time after rising for five consecutive quarters. State and local government spending and Federal government spending rose at nearly identical rates of 3.8% and 3.7%, respectively.

Gross output

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 similar to the “bottom line” (gross profits) of an accounting statement, which determined the “value added” or the value of final use.

GO tends to be more sensitive to the business cycle, and more volatile, than GDP. During the financial crisis of 2008-09, GO fell much faster than GDP, and afterwards, recovered more quickly than GDP. Still, it wasn’t until late 2013 that GO fully recovered from its peak in 2007. Recently quarterly GO and GDP have both been growing at a similar pace.

Skousen states, “The GDP growth rate of 2.0% failed to take into account what happened behind the scenes in the supply chain in the 1st quarter.  By focusing solely on final spending and the end of the economic chain, GDP can sometimes be a misleading indicator of economic performance. GO is a much better, more comprehensive view of total economic activity along the entire supply chain.”

Business Spending (B2B) Grows Faster Than Consumer Spending

Our business-to-business (B2B) index is also useful. It measures all the business spending in the supply chain and new private capital investment. Nominal B2B activity increased 4.5% in the first quarter to $24.9 trillion. Meanwhile, consumer spending rose to $13.8 trillion, which is equivalent to a 3.4% annualized growth rate. In real terms, B2B activity rose at an annualized rate of 1.4% and consumer spending rose 1.2%.

Gross output

 

“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. “The business activity cooled slightly in the first quarter of 2018 on tariff, interest rates, and market correction concerns, but still grew, partially because the business community saw the passing of the tax reform bill in December 2017 as a sign that President Trump and Congress are serious about living up to their promises that they will improve the business environment through tax cuts, as well as reduction of obstructive business regulation.”

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. 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.”

Note: Ned Piplovic assisted in providing technical data for this release.

 

For More Information

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: BEA – Gross Output by Industry

For more information on Gross Output (GO), the Skousen B2B Index, and their relationship to GDP, see the following:

To interview Dr. Mark Skousen on this press release, contact him at mskousen@chapman.edu, or Ned Piplovic, Media Relations at skousenpub@gmail.com.

# # #

________________________________________
[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 2018 1st quarter is slightly below $35 trillion. By including gross sales at the wholesale and retail level, the adjusted GO increases to $43.1 trillion in Q1 2018. Thus, the BEA omits more than $8 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.

GO Slow: New Leading Indicator Predicted Slowdown in GDP

by Mark Skousen
Presidential Fellow, Chapman University
Editor, Forecasts & Strategies

For the previous two quarters (Q2 and Q3, 2017) Gross Output, the new broader measure of the economy that includes the supply chain, was growing at a slower rate than GDP.  According to my research, that suggested a slowdown in GDP.

Today the Bureau of Economic Analysis released the advance estimate for Q4 2014 GDP.  After two consecutive quarters (Q2 & Q3) of 3%-plus growth in real terms, the GDP grew only 2.6% in Q4 — just as GO predicted.

For some time now, I’ve been arguing that gross output (GO), the top line in national income accounting, is a more accurate measure of total economic activity.  Because it includes business-to-business (B2B) transactions in the earlier stages of production, GO can anticipate changes in GDP (the bottom line) as much as 12 weeks in advance.

Since the first quarter of 2017, GO has been growing at slower rate than GDP.  In Q2, real GO rose at a tepid 1.7%, substantially less than 3.1% for GDP, and in Q3 2017, real GO accelerated at 2.7% growth rate, but still less than the 3.1% real GDP growth for the 3rd quarter.  I concluded in November, “Second quarter GO suggests potential slowdown in the economy, despite the currently rising GDP.”  Please reference the 2017 Q2 and 2017 Q3 press releases for more information.

The following chart provided by David Ranson, chief economist at HCWE & Co., shows the relationship between GO, II and GDP since the third quarter of 2016.

GO

Data: Quarterly seasonally-adjusted chain-type quantity indices of intermediate inputs, gross output and gross domestic product (Bureau of Economic Analysis).

 

As David Ranson comments:  “In this chart we compare the growth of gross output (GO) and intermediate output (II) with the growth of GDP over the past year (all in real terms). The chart begins with the third quarter of 2016 because, prior to that, all three variables were moving in close parallel. At that point a substantial divergence opened up, as the growth of intermediate output (and GO) raced ahead of GDP growth. That implied an acceleration in GDP growth which we have been experiencing. Now, just-released third-quarter figures for GO and II suggest that a re-convergence has begun: in the second and third quarters of 2017 growth in GO and II has fallen below the growth rate of GDP. That implies that GDP will stabilize and possibly decelerate later in 2018.”

 


For more information on Gross Output (GO), the Skousen B2B Index, and their relationship to GDP, see the following:

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,” Economic Watch, July 24, 2017. HCWE, Inc. 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 mskousen@chapman.edu, or Ned Piplovic, Media Relations at skousenpub@gmail.com.

 

 

Groundbreaking

SQUARING THE MISES CIRCLE

“Eureka!  Skousen has done the impossible.  Students love it!  I will never go back to another textbook.”

Professor Harry Veryser, University of Detroit-Mercy

Economic Logic

They said it couldn’t be done.  Austrian economics is so different, they said, that it couldn’t be integrated into standard “neo-classical” textbooks.  Consequently, college students learn little or nothing about the great Austrian economists (Mises, Hayek, Schumpeter).

 Starting with Menger’s “Theory of the Good” and the Profit-and-Loss Income Statement

Professor Mark Skousen’s Economic Logic (now in its new 5th edition) aims to change that.  Based on his popular course taught at Chapman University, Columbia Business School, and other institutions, Skousen starts his “micro” section with Carl Menger’s “theory of the good” and the profit-and-loss income statement to explain the dynamics of the market process, entrepreneurship, and the advantages of saving.  Business students find this approach especially valuable.  After analyzing the dynamics of the P&L statement, supply and demand diagrams are introduced.

 Linking Micro and Macro

Then he incorporates a simplified version of “Hayek’s Triangles,” a powerful four-stage model of the economy to link micro and macro economics for the first time.  For micro, he uses Stanford Professor John Taylor’s 4-stage process of making coffee:

Coffee_Chart_02Figure 1.  Four Stages of Production of Espresso Coffee.

 Then for the macro model, Dr. Skousen uses this universal 4-stage diagram:

4-stage_model_02bNotice that this Hayekian 4-stage model ties into national income accounting.  GDP represents the final stage of production – the value of all finished goods and services produced in a year.

GO Behind GDP:  Measuring Hayek’s Triangle

Every quarter a public-traded company releases a financial statement that includes both the “top line” (revenues/sales) and a “bottom line” (earnings, net income).

Using the 4-stage model of the economy, Skousen applies the same approach to national income accounting.  Based on his work, The Structure of Production (NYU Press, 1990), he identifies gross output (GO) as the value of all 4 stages of production (#1 through #4 above) or the “top line” in national income accounting, and GDP (stage #4) as the “bottom line.”

GO is a measure of Hayek’s triangle.  It adds up sales or revenues at all stages of production throughout the year, while GDP counts only final sales.

GO is a vital statistic, as it includes the value of the supply chain, all the business-to-business (B2B) transactions that move the production process toward final use.  It is a measure of the “make” economy, while GDP estimates the value of the “use” economy.

In Economic Logic, GO is incorporated as a more comprehensive measure of the economy, serves as a valuable tool in analyzing the business cycle, restores the business sector as the major driver of the economy, and deserves to be updated on a quarterly basis along with GDP.

GO is now a reality.  In April, 2014, the Bureau of Economic Analysis (BEA) in the Department of Commerce announced it will publish GO every quarter along with GDP.  Austrian economics (Hayek’s triangles) is now officially part of macroeconomic accounting!   (For Skousen’s latest press release on GO, go to www.mskousen.com.)

For the first time, the 5th edition of Economic Logic fully integrates GO in the chapters 14-15 on national income accounting and throughout the textbook.  GO is presented as the top line, and GDP as the bottom line in national accounting.  As economists Dale W. Jorgenson, Stephen Landefeld, and Bill Nordhaus state in their book “A New Architecture in US 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.”

 Added Highlights to the 5th Edition

In addition, here’s new material found in the 5th edition:

  • John Mackey’s “stakeholder” model of capitalism has been incorporated into the stages-of-production process in chapter 3. Moving the production process along requires the cooperation of all economic inputs or stakeholders.
  • Updated discussions on job creation, the labor force participation rate, and the recovery after the Great Recession is discussed in detail in chapters 10 and 25. Chapter 10 also addresses the unemployment issues in Europe and America, and the prospects for renewed growth under a Trump administration.
  • Recent government regulations (Sarbanes-Oxley, Dodd-Frank, SEC) following the 2008 financial crisis and the Bernie Madoff fraud are discussed in chapter 13.
  • The consumption and savings rate patterns of China are compared to those of the United States in chapter 17. This comparison helps to determine what drives the economy, consumer spending or savings/investment?
  • The end of the Federal Reserve’s “easy money” policies of ZIRP (zero interest rate policy) and Quantitative Easing (QE) in 2017 are debated in chapter 19.
  • The on-going debate on “austerity” vs. “stimulus” has been added to chapter 22.
  • What factor is more significant in the business cycle, Keynesian lack of “aggregate demand” or Hayekian “malinvestment”? See chapter 25.
  • The rise of state capitalism in China is highlighted in chapter 27.
  • The international gold standard, the defects of central banking, and the Mises/Hayek theory of the business cycle.
  • A full critique of the Keynesian Aggregate Supply and Demand (AS-AD) model, and a revolutionary Austrian alternative (chapters 22 and 25).  Plus a critique of Marxism and socialist central planning (chapter 27).
  • Entrepreneurship, the financial markets, environmental economics, monetary policy and inflation, federal spending and taxes, and government regulation.
  • Leaders of all schools, including Austrian, Keynesians, Marxist, Chicago, and Public Choice.
  • Austrians highlighted include Ludwig von Mises (chapter 2), Carl Menger (3), Joseph Schumpeter and Israel Kirzner (8) Eugen Böhm-Bawerk (11), Peter F. Drucker (12), Murray Rothbard (18), and Friedrich Hayek (25).  Other highlighted free-market economists include Adam Smith, Gary Becker, George Stigler, John Bates Clark, J. B. Say, Milton Friedman, James Buchanan, Art Laffer, Ronald Coase, Julian Simon, and Robert Mundell.
  • Economic Logic is dedicated to Friedrich Hayek and Milton Friedman, thus drawing from the best of the Austrian and Chicago schools of free-market economics.
  • A glossary of terms has been added to this edition.

 What Economists Are Saying

“An excellent balance of theory and the real world that no other text has achieved.”

– Charles Baird, CalState East Bay


“Better than any book out there!  Skousen presents real business economics in a clear, provocative and logical fashion.”

– Ian Mackechnie, University of Wales


“Perfect for any economics student — designed to maximize learning while minimizing monotony.  Simple, direct, and comprehensive.”

– K. Au, home school instructor


“My college econ classes, filled with perplexing theories like the paradox of thrift, GDP and Keynesian fiscal policy, were completely refuted by this excellent free-market textbook.  Students, if your professors don’t use this text, get it for yourself so you can really understand the concepts of sound economics.”

– Amazon review


 

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 About the Author

Mark Skousen, Ph. D., is a Presidential Professor at Chapman University, has taught economics at Columbia University, is the former president of FEE, and is the author of over 25 books, including several in Austrian economics:  The Structure of Production (NYU Press); Vienna and Chicago, Friends or Foes? (Capital Press), The Making of Modern Economics (Routledge), and A Viennese Waltz Down Wall Street:  Austrian Economics for Investors (LFB Books).  For more information, go to www.mskousen.com.

http://mskousen.com/2017/10/2322squaring-the-mises-circle/

RAPID GROWTH IN 1ST QUARTER GO: ECONOMY IS NOT SLOWING DOWN

By: MARK SKOUSEN

Washington, DC (Wednesday, July 26, 2017): Gross output (GO), the top line of national accounting that measures spending at all stages of production, continued to increase much faster than GDP in the first quarter 2017, indicating a continued strong economy for 2017.  Mark Skousen, editor of Forecasts & Strategies and a Presidential Fellow at Chapman University, states, “First quarter GO suggests that a robust economy, despite a slowdown in GDP.”

Based on data released on Friday, July 21, 2017 by the BEA and adjusted to include all sales throughout the production process, nominal adjusted GO (GO*) increased at an annualized rate of 6.0% in the first quarter of 2017, which is just slightly lower than the previous quarter’s increase of 6.2%[1]. Nominal adjusted GO for the first quarter of 2017 increased substantially faster than 3.3% GDP growth and faster than the 5.6% growth of the unadjusted GO reported by the BEA.

Real GDP, the bottom line of national income accounting, rose at an annualized rate of 1.4% in the first quarter 2017.  Real GO* continues to grow much faster at a 2.5% rate.

Skousen states, “By focusing solely on final spending and the end of the economic chain, GDP can sometimes be a misleading indicator of economic performance.  GO is a much better, more comprehensive view of total economic activity along the entire supply chain, and indicates a much more positive outlook.”

Moreover, according to a recent study by David Ranson, chief economist at HCWE & Co., GO anticipates changes in GDP by as much as 12 weeks in advance and thus serves as a reliable leading indicator:  http://www.hcwe.com/guest/EW-0717.pdf

The Skousen B2B Index, a measure of business spending throughout the supply chain, continued growing at a brisk pace in the first quarter 2017. This continued growth indicates a sustained business activity recovery that started in the fourth quarter 2016 following the November presidential election of Donald Trump and continued through the first quarter of President Trump’s administration. In the first quarter, B2B transactions rose at an annual rate of 6.6% in nominal terms or 3.12% in real terms. Over the past two quarters – Q4 2016 and Q1 2017 – business spending increased a total of 15%. Last time that the Skousen B2B Index showed a business spending growth of 15% or more over two quarters was in the beginning of 2014.

After breaking the $40 trillion mark for the first time in the previous quarter, adjusted GO rose to $41.2 trillion and reached another first by exceeding the $41 trillion mark in the first quarter 2017. The current adj. GO is more than double the size of GDP ($19 trillion), which measures final output only.

The overall growth of GO resulted from the growth of almost all individual industries and sectors – especially industries in the early stages of production. Increased spending in the early stages, which tend to be leading economic indicators, is a good indication that the overall economy should continue expanding over the next few quarters.

Supply Chain Activity Continues Increasing

Out of the 29 Industries and sectors defined within GO, 26 sectors rose compared to the previous quarter. The mining sector followed a 30.2% annualized growth in the fourth quarter 2016 with a 62.7% boost in the first quarter 2017. However, the mining sector accounts for just 1% share of total GO, which diminishes the impact of this large increase on the overall GO. On the contrary, the manufacturing sector is almost a fifth of total GO (18% share). Therefore, the 6.3% annualized growth of the manufacturing sector has a much greater positive impact on the total GO. With a 9.6% annualized growth rate, non-durable goods outpaced durable goods, which rose at 4%.

Another sector with an 18% share of GO is the finance, insurance, real estate, rental and leasing sector. In the first quarter, this sector grew at a 6.7% annualized rate in nominal terms, which is 71% higher than the 4% increase in the fourth quarter 2016. The real estate, rental and leasing subsector, which accounts for 11.4% of total GO by itself, rose 5.6%

Compared to the previous quarter, spending fell in only three sectors. The largest drop of 12.7% is in the utilities sector. The arts, entertainment & recreation sector is down 3.6% and management of companies and enterprises fell 1.8%. However, these three sectors combined account for just 4.1% share of the total GO. Therefore, the negative performance of these few sectors could not dampen the continued growth of the GO overall.
Total government spending (11% share of total GO) increased 3% in the first quarter. While that growth rate is not particularly high, it is 50% higher than the previous quarter’s growth rate of 2%. The federal government grew at an annualized rate of only 0.5% in nominal terms and state and local government grew at a significantly higher rate of 4.1%.

Gross Output

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 similar to the “bottom line” (gross profits) of an accounting statement, which determined the “value added” or the value of final use.

GO tends to be more sensitive to the business cycle, and more volatile, than GDP. During the financial crisis of 2008-09, GO fell much faster than GDP, and afterwards, recovered more quickly than GDP. Still, it wasn’t until late 2013 that GO fully recovered from its peak in 2007. The fact that the adjusted GO continued to grow faster than GDP is a positive sign.

Business Spending (B2B) Grows Faster Than Consumer Spending

We have also created a new business-to-business (B2B) index based on GO data.  It measures all the business spending in the supply chain and new private capital investment.  Nominal B2B activity increased 7.7% to $23.75 trillion.  Meanwhile, consumer spending rose to $13.1 trillion in the first quarter, which is equivalent to a 3.4% annualized growth rate. In real terms, B2B activity rose at an annualized rate of 4.2% and consumer spending rose 1.5%.

Gross Output

“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. “There is no doubt that business activity has picked up in expectation of pro-business legislation in 2017.”

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.  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.”

Note: Ned Piplovic assisted in providing technical data for this release.

For More Information

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, “At Last, a Better Economic Measure” lead editorial, Wall Street Journal, April 23, 2014: https://www.wsj.com/articles/mark-skousen-at-last-a-better-economic-measure-1398209717 

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,” Economic Watch, July 24, 2017.  HCWE, Inc. http://www.hcwe.com/guest/EW-0717.pdf

New:  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 mskousen@chapman.edu, or Ned Piplovic, Media Relations at skousenpub@gmail.com.

# # #

________________________________________
[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 2017 1st quarter is $33.3 trillion.  By including gross sales at the wholesale and retail level, the adjusted GO is $41.2 trillion in Q1 2017.  Thus, the BEA omits $7.9 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.

Mark Skousen In the News and On the Web

Has Keynes Trumped Adam Smith?
By Mark Skousen
February 27, 2009
A nice reprint of one of my articles on a web blog. A great way to spread the word.

“Market Monitor” — Mark Skousen, Editor, Forecasts & Strategies
with Paul Kangas, Nightly Business Report, PBS, Friday, March 06, 2009

Link to transcript of the show

Steve’s Serendipities: Persuasion vs. Force by Mark Skousen
A discovery of my pamphlet on the principles of freedom. Worth a read!

With China We Trade,’ Historical Ties between China and Founding Fathers
by Jeffrey Bingham Mead, History Education Council of Hawaii
March 11, 2009, Honolulu Advertiser
This writer uses my work compiling The Compleated Autobiography by Benjamin Franklin, which revealed a lot of the great Founding Father in his later, significant years, in a fascinating new analysis of China and its trade practices. Take a look!

Plus, some nice reader reviews of Investing in One Lesson on Cheap Best Books. An important book to read in today’s investing climate.

Yours in liberty, AEIOU,

Glenn Beck puts Cleon Skousen at #1 on Amazon

Well, he did it. Glenn Beck has put my uncle Cleon’s book, The 5,000 Year Leap: 28 Principles that Changed the World (How the US Constitution Inspired America’s Greatness) #1 on Amazon.com.

The guy is incredible.

I was on his show a couple of weeks ago, and he told me between commercials, “Cleon Skousen’s book changed my life.” He has written an introduction to a new version of the book, which is expected to come out soon.

Glenn just announced his “912 Project”–go to www.the912project.com. I wonder where this will all lead.

In liberty, AEIOU,

MAS