GDP is slumping, but there’s a better way to gauge the economy.
By Mark Skousen
Originally appeared in the Wall Street Journal on Aug. 10, 2022 and on wsj.com
How can the U.S. be in a recession when the number of jobs is growing at a healthy clip? According to the National Bureau of Economic Research, two consecutive quarters of declining real gross domestic product is enough for a recession. The Bureau of Economic Analysis (BEA) reported just that—real GDP declined at an annual rate of 1.6% in the first quarter and 0.9% in the second.
But a host of statistics suggest that the economy is still growing, not the least of which is last week’s robust jobs report and unemployment rate. While the Conference Board’s leading economic indicator suggests a mild recession may be on the way, it reports: “The coincident economic index which rose in June suggests the economy grew through the second quarter.”
The BEA also produces a statistic called gross domestic income, which adds up wages, profits and other income. Theoretically it should align with GDP, but it no longer does. Real GDI rose 1.8% in the first quarter, and is expected to have risen slightly in the second quarter (the official number will be announced on Aug. 25). Economists have noted the unprecedented gap between GDP and GDI. The BEA uses different surveys to come up with GDI, but the growing gap can’t be explained by a statistical “discrepancy.”
In addition, the relatively new statistic gross output, or GO—which measures spending at all stages of production, including the supply chain—rose at an annual rate of 2% in real terms in the first quarter. Second-quarter GO won’t be released until Sept. 29.
Why is GO a better measure of the economy than GDP? Because GDP has a serious flaw—it leaves out the supply chain. It accounts for final output only, finished goods and services bought by consumers, business and government. Intermediate production—all the goods in process along the way—are ignored.
That means that GDP only measures about 44% of economic activity. According to the BEA, intermediate production amounted to $19.5 trillion in the past year, compared with $24.8 trillion GDP. For technical reasons, that former figure leaves out an additional $11 trillion of wholesale and retail trade.
For several years, I’ve championed GO as the “top line” in national income accounting and a better snapshot of the economy. Many economists consider it a better, more comprehensive measure than GDP. The biggest drawback is the BEA’s delays in releasing GO two months after the initial estimates of GDP.
For decades, publicly traded companies have released their earnings reports every quarter, reporting sales (top line) and earnings (bottom line) at the same time. The federal government should do the same. It’s time national income accounting caught up with the accounting profession.
Mr. Skousen holds the Doti-Spogli chair in free enterprise at Chapman University, is editor of Forecasts & Strategies and author of “The Structure of Production.”