Despite Higher Inflation, the U.S. Economy Continues to Boom: Gross Output (GO) Hits $50 Trillion!

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.

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. “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
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

To interview Dr. Mark Skousen on this press release, contact him at [email protected], or Ned Piplovic, Media Relations at [email protected]

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[1] The BEA currently uses a limited measure of total sales of goods and services in the production process. Once products are fabricated and packaged at the manufacturing stage, the BEA’s GO only adds “net” sales at the wholesale and retail level. Its official GO for the 2021 2nd quarter is $40.6 trillion. By including gross sales at the wholesale and retail level, the adjusted GO expands to $50.2 trillion in Q2 2021. Thus, the BEA omits more than $9.6 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.

America’s Success Story is Due to a Little-Known Clause in the Constitution

Constitution

By Mark Skousen

 

Today is Constitution Day, the anniversary of the day members of the Continental Congress signed the US Constitution on September 17, 1787. 

There are several extremely important clauses in the Constitution that very few scholars recognize but which destined America to become the superpower that it is today. 

Here is my short column on this breakthrough principle in a recent Skousen CAFE:

 

Canada Closes Its Borders for No Good Reason

We received a call from a Canadian couple who said that they had to cancel coming to FreedomFest. They wanted to attend “the greatest libertarian show on earth,” but the Canadian authorities have decided to close the border to all “non-essential” travel.

Which raises an interesting question: Why were the Canadian and Mexican borders closed in 2020 and 2021, while the borders between states remained open?

Even now, while Americans can travel or move freely between states from coast to coast, they cannot travel to and from Canada and Mexico.

Did the pandemic suddenly stop at the borders?

The reason is simple to explain, but often involves a principle taken for granted by American citizens: The United States Constitution does not allow state governors to close their borders to adjacent states. Countries can do it, but not states.

None of the 50 states can keep you from visiting, moving or working in another state. They cannot keep you from transferring money, capital or goods to another state. They cannot require a passport for you to enter their state. They cannot impose any import or export duties between states.

The only exception is for the inspection of fruits and vegetables, something California does.

It’s All in The Constitution Section 9 and 10 of Article I of the U.S. Constitution is clear:

“No Tax or Duty shall be laid on Articles exported from any State.

“No Preference shall be given by any Regulation of Commerce or Revenue to the Ports of one State over those of another: nor shall Vessels bound to, or from, one State, be obliged to enter, clear, or pay Duties in another.

“No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing it’s inspection Laws.”

And Article 4, section 2, states:

“The Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States.”

Finally, the 14th Amendment states:

“No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.”

 

Creating a Gigantic Free-Trade Zone from Coast to Coast

That’s why we are called the United States of America. The uniting of the 50 states economically is a major reason why America leads the world as an economic powerhouse.  It has created a gigantic free-trade zone from coast to coast. 

Ancient Rome had a similar arrangement.  There were no trade restrictions inside the Roman empire; it was one reason the Roman empire lasted so long. 

Recently, European nations have attempted to imitate our success with the creation of the European Union, sometimes called the “United States of Europe,” along with a single currency, the euro — to create a large free-trade zone of money, labor and capital.

Does the Constitution Limit or Expand State Powers? On the other hand, Article I, Section 8, grants extremely broad powers to Congress — to print money, expand credit, level taxes and import duties and declare war. You can drive a truck through section 8 of the Constitution.

As George Washington allegedly said, “Government is a dangerous servant and a fearful master.”

At this year’s FreedomFest, we had a big debate on “The Constitution: Conceived in Liberty or Conspiratorial Coup?”  We debated libertarian Murray Rothbard’s controversial contention that the Constitutional Convention of 1787 was a power grab to dramatically increase the state’s control of the new nation.  

Professor Patrick Newman, a fellow of the Mises Institute, argued in favor of Rothbard’s thesis, that James Madison called the Convention to secretly expand the power of the state. He was followed with commentary by legal authorities John Norton Moore (University of Virginia) and Anastasia Boden, senior attorney for the Pacific Legal Foundation, who defended the Constitution.  It was an electrifying debate. 

You can order this session for only $5 at https://miracleofamerica.com/products/21-023?_pos=2&_sid=6acae2641&_ss=r

All 200 plus sessions can be accessed at miracleofamerica.com.  Price is only $195.  

Happy Constitution Day! 

In liberty, AEIOU,

Mark Skousen

Are We Rome?

By Mark Skousen

Talk delivered on Saturday, September 11, 2021, Kimber Academy in Lehi, Utah and Liberty United Festival in Vineyard, Utah

“History does not repeat itself, but it does rhyme.” – Mark Twain

“In the end, there was no money left to pay the army, build forts or ships, or protect the frontier. The barbarian invasions were the final blow to the Roman state in the fifth century, [caused] by three centuries of deterioration in fiscal capacity…”
— Bruce Barlett, “How Excessive Government Killed Ancient Rome,” Cato Journal (1994)

It was 20 years ago today that my wife and I arrived in New York, where I was installed as president of the Foundation for Economic Education (FEE), and witnessed first hand the 9/11 terrorist attacks.  It was an unforgettable day of infamy, and has so affected our culture, our liberties and our lives that we observe the date every year. 

Looking back, one thing I remember the most was that New Yorkers and Americans in general were completely unified in spirit at this time.  For months, residents posted pictures of family members who had died on 9/11.  Everyone was kind and friendly, like we were brothers and sisters in this together.  A few weeks later, I carried a large box of books downtown, and a New Yorker offered to help carry the box up the stairs from the train station. 

The other thing that I noticed is the street vendors in New York never displayed or sold post cards or pictures of airlines flying into the Twin Towers.  They respected the depth of sorrow after this event. 

The City was shut down for some time and everyone in the New York tried to access the damage and further threats to our security. Smoke filled the city, businesses closed and events were canceled. 

The first decision I had to make as the new president of FEE was to determine if we should cancel our annual Liberty dinner scheduled in October.  Our keynote speakers was Paul Gigot, the new editor of the Wall Street Journal, and I couldn’t even get a hold of him. (The Journal had moved their headquarters temporarily from Wall Street across the river to New Jersey.)

I gathered my staff the next day to make the decision.  Most staff members thought we should cancel or postpone the Liberty dinner. Our phones were quiet.  Nobody was calling in to sign up for the dinner.  I thought about it, and then said, “My first act as president of FEE is not going to cancel our annual dinner.  If that means just all of us sitting around the kitchen table, then so be it.” 

It was the right thing to do.  Within a week the phones started ringing again, and we had a full crowd of over 200 people at the Harvard Club in October, and Paul Gigot showed up and we had a big success. 

Since then, many friends of liberty have asked the question, “Are our freedoms in jeopardy?  Is America in decline like ancient Rome?”  I have a dozen books on ancient Rome in my library, and after Jake Oaks, the producer of the Liberty United Festival asked me to speak on this topic on 9/11, I read through these books, including Edward Gibbon’s classic 6-volume work, The Decline and Fall of the Roman Empire, published in 1776. 

We decided to debate this question at FreedomFest in 2013. 

Are we Rome?

Our theme at FreedomFest was “Are We Rome?” to be held appropriately at Caesar’s Palace in Las Vegas.  We had a record turnout that year.

To introduce the theme, we showed this 3-minute.  Watch it here:  Are We Rome? FreedomFest 2013 on Vimeo

We had quite a group of speakers on this topic: 

Steve Forbes, author, “Power Ambition Glory: The Stunning Parallels between the Ancient World and Today.”

Lawrence W. Reed, president of FEE, “The Fall of Rome and Modern Parallels.” (Afterwards, he spoke numerous times around the country on this question, and write a pamphlet, “Are We Rome?” published by FEE:  https://fee.org/resources/are-we-rome-by-lawrence-w-reed/)

Marc Eliot, Hollywood’s #1 biographer, on “Ben Hur, Spartacus, Cleopatra, Gladiator: Epic Films of Roman Times.”

Paul Cantor, University of Virginia professor of English literature, on “Empire and the Loss of Freedom: What Shakespeare’s Rome Can Tell About Us.”

Doug Casey (author and investment writer) vs. Harry Veryser (economist at the University of Detroit-Mercy and Catholic historian) will debate “Did Christianity Cause the Fall of Rome?”

Pat Heller, Liberty Coin Co., “The Rise and Fall of Rome’s Money — And What It Means for America Today.” He has samples of Roman coins to show attendees.

David Boaz, Cato Institute, “George Washington, a Modern-day Cincinnatus: The Man Who Would NOT be King.”

Jo Ann Skousen, professor of English literature at Mercy College and director of Anthem film festival, on “Greek and Roman Mythology in 50 Minutes.”

Jim Gwartney and Randy Holcomb (Florida State economists): “The Decline of Economic Freedom in America: Are We on the Path to Rome?”

Tom Palmer: “Rome’s Last Citizen: The Life and Legacy of Cato, Mortal Enemy of Caesar” and “Cicero: The Life and Times of Rome’s Greatest Citizen” — Tom is always knowledgeable on all things historical.

J. C. Bradbury, top sports economist (Kennesaw State University), on “Who Are The Modern-Day Gladiators? Sports as an Alternative to War.”

Valerie Durham, Isadora Duncan dance instructor, “Music and Dance in Roman Times.”

We are Different….

Of course, we are different from ancient Rome in a thousand ways.  Theirs was largely agrarian.  Our standard of living and technological advances are 100 times higher than the average Roman citizen of 2000 years ago.  Life expectancy was only 41 for Roman men and 29 for women.  Life was cheap.  Over half the population in the Roman empire were slaves.  Women could not vote.  Romans worshiped a plurality of gods, and only became Christian near the end.  They loved blood sports where for entertainment the masses enjoyed watching slaves and gladiators and even Christians die.  Dictators often killed their enemies (Cicero and Cato being prime examples.) 

There was virtually no middle class – only rich and poor.  After the republic, Rome was ruled mainly by tyrants and dictators.  And Roman leaders like Caesar and Augustus would be baffled by how the United States treated the conquered nations of Germany and Japan after World War II.  Finally, we are babes in the woods compared to Rome.  Our republic has lasted nearly 250 years; Rome lasted 1,000 years. 

…And We Are Alike

But in other ways, we are much like ancient Rome.  Both nations were born in a revolt against monarchy – the American colonies against a British sovereign, Rome against its own kings – and replaced it with a republic.  Like Rome of old, America dominates the world militarily, culturally, and economically.  American English is the language of commerce and science.  Like ancient Rome, we are a melting pot of ethnic groups.  Fifty states are united into a gigantic free-trade zone, and we’ve enjoyed decades without world war. 

As Adam Smith once said, “Little else is required for a nation to go from the lowest barbarism to the highest level of opulence but peace, easy taxes and a tolerable administration of justice.” 

Books and Speeches on Ancient Rome and Today

The question “Are We Rome?” remains a popular debate topic for Americans since we became a superpower in the 20th century.  Hollywood, in particular, has been fascinated with the story of ancient Rome, and many films with Roman themes have become classics, such as Ben Hur, Spartacus, and Gladiator. 

I have the first edition of a book, The New Deal in Old Rome, published by Alfred A. Knopf in 1939, in which the author, H. J. Haskell, a reporter for the Kansas City Star, contends that the decline and fall of the Roman empire was being reenacted in the United States after we went off the gold standard, adopted a welfare state, and pursued world war. 

“The spending for non-productive public works, for the bureaucracy, and for the army, led to excessive taxation, inflation, and the ruin of the essential middle class and its leaders,” Haskell writes in the preface.

The book proved to be a bestseller at the beginning of World War II.

The latest book is Are We Rome?  The Fall of an Empire and the Fate of America, by another journalist, Cullen Murphy, published in 2007 by Houghton Mufflin. 

He answered, “Are we Rome?  In important ways we just might be.  In important ways we’re clearly making some of the same mistakes” (p. 206). 

Benefiting from Roman Traditions

It’s worth pointing out that America has drawn upon many Roman traditions.  I have a book entitled “Why We’re All Romans,” by historian Carl J. Richard.  He notes the following:  We use the Roman alphabet (rather than Greek, Chinese or Arabic).  Our months of the year, from January to December, are Roman.  July is named after Julius Caesar, August from Caesar Augustus.  Christmas grew out of an ancient Roman pagan festival honoring the agricultural go Saturn.  Most of the most influential Christian philosophers, including St Paul and Augustine, were Roman citizens.  The Bible was translated in the Latin Vulgate, and Latin was the official language of the Catholic mass until the 1960s. 

Fortunately, the West rejected the cumbersome Roman numerals and replaced them gradually with the far more productive Arabic numerals.  Ah, the benefits of cultural appropriation! 

The founders adopted many aspects of Roman law and politics, and the early years of the Roman republic were an inspiration to the American Constitution.  We have a Senate representing an upper-class group of legislators, and an assembly elected by the people (House of Representatives).  Rome and the United States share the symbol of the eagle (but so did the Nazis).  Our government building and Capitol are often an imitation of Roman architecture. 

The Rome That We Admire

The founding fathers were familiar with the history of the Roman empire and often sought to imitate their good traits.   

There are aspects of Roman leadership that we greatly admire, such as their building of their roads, bridges and aqueducts.  At the height of the Roman Empire, they had 370 separate highways stretching 53,000 miles, about the length of the US interstate system.  The roads were built to last, paved of stone and iron, and 10 feet deep.  Can we say the same for America’s infrastructure?  Many Roman roads, bridges and aqueducts can still be seen today, an engineering wonder.  How many presidents can say, as Augustus Caesar did, “I found it brick and left it marble”?

We admire the Roman Empire as a gigantic free-trade zone, and even though Augustus Caesar was a dictator, he lived frugally and modestly, and focused on a competent and efficient administration.  

For a period of time, Rome allowed free speech.  Anyone could criticize the emperor as long as he spoke inside the Forum. 

It has been a tradition to write or speak on liberty when visiting the Forum.  In 1854, John Stuart Mill and his wife Harriet visited the Forum and Mill came up with the idea of writing his libertarian tract, On Liberty, published in 1860.  In 1954, Friedrich Hayek followed in Mill’s footsteps and at the Forum decided to write his book The Constitution of Liberty, published in 1960.  Continuing this tradition, in 2009 I wore a toga and spoke freely in favor of “persuasion over force” in the Roman forum. See Persuasion vs. Force – MSKOUSEN.COM

Rome depended on the rule of law based on the Twelve Tables.  The United States created a Constitution that drew upon the ideas of Roman statesmen, including the idea of representative government, checks and balances, a judiciary, and limits (veto power) on our leaders. 

The founders admired the great statesmen, military leaders, orators, and philosophers from ancient Greece and Rome.  George Washington admired Cincinnatus, the Roman general who twice rescued Rome from attack, and each time retired to his farm.  John Adams sought to imitate Cicero, the famous orator, and Cato, the Young, public servants who spent their career battling the likes of Julius Caesar.  “Pushed and injured and provoked as I am, I blush not to imitation the Roman [Cicero],” said Adams.    

King George III was compared to Julius Caesar.  “We will have no Caesars in this country!” declared Benjamin Rush. 

One of the purposes of the US Constitution was to contain the power of ambitious and avarice leaders.  Benjamin Franklin warned, “We see the revenues of princes constantly increasing, and we see that they are never satisfied, but always in want of more.  I am apprehensive, perhaps too apprehensive, that the government of these states may in future times, end in a monarchy, and a King will sooner be set over us.” 

Lessons from Rome’s Mistakes

What lessons can we learn from Rome’s decline and fall? 

The founders saw that ancient Rome had no succession plan.  During the 2nd and 3rd centuries, 23 emperors were murdered.  It was always uncertain who would take their place.  The American founders provided a way to get rid of bad rulers through the impeachment process, and if a president died in office, to replace him with the vice president. 

Ancient Rome had a constitution based on a powerful devotion for centuries to custom, precedent and consensus, but which was not written.  That make it easier for an overzealous politician to bent the rules or simply disobey them.  For centuries Rome had two consuls running the government who were elected each year, and there were term limits.  But at the end of the Republic, ambitious generals ignored this tradition and sought to become dictators for life. 

This was one reason the founders insisted on a written constitution, although even then we know how easy it is to get around it. 

Historians point to over 200 reasons for Rome’s fall.  Rome destroyed itself internally and externally. Gradually its citizens became rich and decadent, demanding more free benefits from the government.  “Bread and circuses” were the rallying cry.  The welfare program offered free grain, olive oil and wine, and eventually eliminated a means test so that everyone qualified. 

Internally, the growing and expensive welfare state destroy not only destroyed the character of the Roman citizens, but its fiscal sanity.  The welfare state led to confiscatory taxation, excessive debt, inflation, and wage-price controls.  

We Americans are no fans of excessive government bureaucracy that Rome was famous for – tax collectors, administrators and soldiers were all a drain on the economy, and eventually leading to runaway inflation (coin clipping), and draconian wage and price controls edict under Diocletian in 301. 

Ancient Rome was also done in by costly foreign wars.  Just as Rome spread itself too thin around the ancient world, today the United States has 2.5 million troops stationed at over 700 bases in sixty countries. 

Will America split in two like Rome did into East (Constantinople) and West (Rome)? 

Mindful of these destructive policies in ancient Rome, our founders created the US Constitution to reduce the chances that America would follow the same fate.  Unfortunately, the Constitution can only do so much. 

As a student of history, I conclude that it is premature to say America is destined to collapse like the Roman empire.  But we are headed in that direction.  We are in many ways in decline.  Certainly China – the most serious threat to America’s dominance as the world’s #1 military and economic prowess – believes that the West is in decline and is doing everything in its military and economic power to take its place and achieve world domination by 1949, the 100th anniversary of the Communist takeover of China, what President Xi Jinping calls “the long game.” 

To summarize my view, I’m reminded of the story of a young man who approached Adam Smith, the venerable professor of moral philosophy at Glasgow University, and author of “The Wealth of Nations.”  The young man informed Dr. Smith that the British had lost to the Americans at Sarasota in 1777, a turning point in the War of Independence, and declared, “We are lost!”  To which Adam Smith replied, “There is much ruin in a nation.” 

There’s a great many good people residing her in America; let’s not sell America short. 

But let us not be blind to our growing problems.  We are in the early stages of decline, but there is no reason why we can turn things around.  All we need to for good men and women to fight for our rights and our liberties.  To quote a line from Shakespeare’s Caesar, “The fault, dear Brutus, is not in our stars, but in ourselves.” 

Interestingly, the first Roman king was named Romulus.  Fittingly, a thousand years later, the last emperor of Rome was also named Romulus.  So beware if we have a future president by the name of Washington. 

Despite First Decline in More Than a Decade for Q1, Gross Output (GO) Might Still Offer Hope for a Robust Recovery in Late 2020

Washington, DC (Tuesday, July 7, 2020):  On July 6, 2020, the federal Bureau of Economic Analysis (BEA) announced that gross output (GO) – the most comprehensive measure of total spending in the economy, including the supply chain – slowed dramatically in the 1st quarter 2020.

Gross Output declined in the aftermath of current political unrests, as well as negative effects of the COVID-19 pandemic and government shutdown of the economy in response to the pandemic. However, GO might offer still some promise for a strong recovery, even over the short term. Business spending, which is a better indicator of economic recovery, declined significantly less than consumer spending. This might be an indication that the economy is more fundamentally sound than currently anticipated.

While some of the business spending was to fight the current epidemic, businesses also used a significant portion of that spending to transform and set up their operations for opening after government closing mandates are lifted. If that is correct, the economy might recover quicker than expected. The most recent jobs report also offered an indication that a relatively fast recovery is certainly a strong possibility.

After delivering steady increases over the past 42 consecutive quarters, first quarter 2020 Gross Output declined 4% in real-terms. Last time real GO declined — in the second quarter 2009 — was in the aftermath of the 2008 economic pullback. While still growing, GO had already slowed its growth rate to 1.1% in the fourth quarter 2019 from nearly 2.5% in the previous period.

This growth slowdown in the last period last year, and a decline in the first period 2020 offered a leading indication that the overall economy was already cooling. GO appears to have anticipated the pullback already in the first quarter even before the economy experienced the full effects of the COVID-19 pandemic and government-mandated shutdowns.

However, while gross output generally declines more than GDP during economic pullbacks, this period’s data presents an anomaly. Despite declining 4% on annualized basis, GO fell less than real GDP, which pulled back 5.1% in the same period.

One reason for this anomaly – and potential s positive sign pointing to a faster-than-expected recovery – is that business spending decreased at a slower rate than consumer spending. Businesses generally anticipate economic contractions and begin spending cuts earlier than consumers. Therefore, Gross Output, which includes business-to business transactions, generally offers earlier signs of pending economic contractions than GDP, which measures only final output.

While consumer spending fell 5.9% in the first quarter 2020, business spending contracted only 5.4%. Despite a relatively small magnitude, this is a significant margin as back-tested date indicates that business spending tends to decline at significantly higher rates than consumer spending during periods of “normal” economic contractions. The margin is even more significant in nominal terms where business spending fell just 4% compared to the 5.7% consumer spending decline. It appears that businesses anticipated the full impact of the COVID-19 epidemic based on just one month of information and adjusted their economic activity by reducing buying activities.

The disruptions in the domestic and global supply chain caused by the COVID-19 pandemic, as well as civic unrest in the U.S., have been in the news lately.  GO is the only macro statistic that includes the value of B2B spending and supply chain. “It deserves to be watched closely and updated frequently,” said Dr. Mark Skousen, presidential fellow at Chapman University and a leading advocate of GO as a better, more comprehensive indicator of economic performance.

 

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).

The continued business spending decline suggests that the economy began slowing down as a response to early signs that the COVID-19 epidemic’s impact could be significantly more serious than initially anticipated in December 2019. The U.S.–China Phase One trade agreement — signed on January 15, 2020, in Washington D.C. by China’s Vice Premier Liu He and U.S. President Donald Trump – went into effect on July 1, 2002.  However, there are accusations from both sides regarding the origin of the COVID-19 virus and new information that suggests Chinese government officials might have been aware that the epidemic began in China much earlier than they disclosed it in December 2019. Therefore this agreement might not have the intended economic impact as originally anticipated. Furthermore, protests and civil unrests in the U.S. create additional headwinds that the economy will have to overcome even after the COVID-19 pandemic is under control.

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 did in most of 2018, it’s a positive sign that the economy is still robust and growing.  However, GO has grown at a slower pace than the GDP in the last three quarters, a sign that the economy was slowing down as it entered 2020.

The federal government will release the advance estimate for second-quarter GDP on July 30, 2020 and a full release of second-quarter GO on September 30, 2020.

 

Report on Various Sectors of the Economy

In the first quarter 2020, 17 of 22 industry sectors groups contracted to drive the overall GO contraction. The second largest sector – Manufacturing – contracted 7.1% on an annualized basis. This pullback marked a third consecutive contraction after the sector declined 1.2% and 1.5% in the previous two periods of 2019. However, a bigger concern is that manufacturing of Durable goods declined nearly 10%. Durable goods, which include capital expense items by businesses and have bigger impact on long-term economic activity, declined considerably more than Nondurable goods, which contracted just 4.5%, less than half the rate for Durable goods.

Finance, insurance, real estate, rental, and leasing – the largest segment that accounts for nearly one-fifth of total Gross Output – was one of just few bright spots in the first quarter. After expanding 1.3% in Q4 2019, this sector more than doubled its growth to 3.2% in the first quarter 2020. The Finance and insurance sub-segment advanced 3.5% and Real estate rental and leasing still grew at a respectable 3.0%.

After briefly breaking a streak of declining for three consecutive periods in Q4 2019, the Mining sector posted a 42% drop in the first quarter 2020. While an important sector among the leading indicators in the early stages of production, the Mining sector only accounts for approximately 1.3% of the overall GO, which minimizes the impact of the decline on the economy overall.

Similarly to the Mining sector, the Utilities sector delivered a single-period increase in Q4 after two negative periods. However, in Q1 2020, the Utilities sector pulled back more than 21%. The Transportation and warehousing sector also suffered a large decline of nearly 16% after expanding 4.7% in the previous period.

Another positive contributor was the Construction sector. After increasing its expansion rate from 2.5% in Q3 to 4.4% Q4 2020, this sector expanded nearly 14% in the first period 2020.

Several other sectors, such as professional, business, educational, health care and social assistance, contracted between 1% and 5%. Under the lockdown directives, the    Arts, entertainment, recreation, accommodation, and food services sector declined more than 40%.

Another sector that continued its steady expansion was Government spending, albeit at a slightly slower pace. After expanding more than 4% in the last period of 2019, overall government spending rose 1.8% in the first quarter 2020. The main driver was a 3.7% growth of Federal government spending. State and local government spending increased at relatively small 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. Until mid-2018, GO outpaced GDP, suggesting a growing economy.  However, since then GO has slowed dramatically, threatening the economic boom.

Consumer Spending Declined Significantly More Than Business Spending in Q1 2020, Which Could Indicate That the Economy Has Solid Fundamentals and is Ready to Bounce Back as Soon as the COVID-19 Pandemic is Under Control and Government Restrictions Mandates Are Lifted

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 contracted 4% in the fourth quarter to $26.3 trillion. Meanwhile, consumer spending contracted 5.7% on an annualized basis to $14.6 trillion. In real terms, B2B activity decreased at an annualized rate of 5.4% and consumer spending declined 5.9%.

 

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. “After slowing its growth in the fourth quarter at the end of 2019, business activity declined 5.4% in real terms during the first-quarter 2020.

After the initial decline in early-2020, the stock market continues to experience volatility. However, since the mid-March lows, the markets have rebounded strongly and recovered most of those losses. The S&P 500 has risen 40% and has already recovered nearly 90% of its losses between the beginning of 2020 and its year-to-date low on March 23.

While lower than in the previous period, total business spending indicates that the overall economy might surge back in the second half of the year. One stumbling block for the economic recovery might be renewed and continued interference by government officials, such as Governor Sisolak’s (D-NV) decision to extend the current shutdown phase through the end of July in Las Vegas, which forced a cancellation of our FreedomFest conference for the first time since it began in 2007. Similar decisions might put additional pressure on businesses across the country and suppress economic recovery deeper into the year.”

 

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 [email protected], or Ned Piplovic, Media Relations at [email protected]

# # #

________________________________________
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 2020 1st quarter is $37.8 trillion. By including gross sales at the wholesale and retail level, the adjusted GO increases to nearly $46.1 trillion in Q1 2020. 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 (GO) Anticipated Slowdown in 2020 – Before the Deluge

Washington, DC (Monday, April 6, 2020): On April 6, 2020, the federal Bureau of Economic Analysis (BEA) announced that gross output (GO) – the most comprehensive measure of total spending in the economy, including the supply chain – slowed dramatically in the 4th quarter 2019.

The 1.1% real-term growth in the fourth-quarter 2019 was substantially lower than the 2.5% expansion in the previous period, and much slower than 4th quarter real GDP (2.1%).  This growth slowdown at the end of last year indicated that the overall economy was cooling already coming into 2020.

Furthermore, after surging more than 4% in the second quarter and rising 2% in the third-quarter 2019, business-to-business (B2B) in the supply chain declined 1.7% in the last quarter of the year.

It appears that the businesses anticipated the full impact of the COVID-19 epidemic based on just one month of information and adjusted their economic activity by reducing buying activities.

The disruptions in the global supply chain have been in the news lately.  GO is the only macro statistic that includes the value of B2B spending and supply chain.  “It deserves to be watched closely and updated for frequently,” said Dr. Mark Skousen, presidential fellow at Chapman University and a leading advocate of GO as a better, more comprehensive indicator of economic performance.

After growing faster than the GDP in the first three periods of the year, GO growth of 1.1% in real terms underperformed substantially the 2.1% GDP growth rate for the fourth quarter. Total spending on new goods and services (adjusted GO) [1] increased to above $46.45 trillion. While GO still managed to expand, albeit at a slower pace than in the previous period, B2B spending declined 0.8% (-1.7% in real terms). Additionally, consumer spending growth slowed for the second consecutive period 3.2% (1.9% in real terms) for the current 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).

The business spending decline suggests that the economy began slowing down amid early signs that the COVID-19 epidemic might have a bigger impact than initially anticipated in December 2019. China’s Vice Premier Liu He and U.S. President Donald Trump signed the U.S.–China Phase One trade agreement on January 15, 2020, in Washington D.C. However, this agreement might not have the intended economic  impact in the midst of accusations from both sides regarding the origin of the COVID-19 virus.

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 did in most of 2018, it’s a positive sign that the economy is still robust and growing.  However, GO has grown at a slower pace than the GDP in the last three quarters, a sign that the economy was slowing down as it entered 2020.

The federal government will release the advance estimate for first-quarter GDP on April 29, 2020 and second-quarter GDP on July 30, 2020.  Both are expected to show a sharp drop in GDP growth and another recession.

 

Report on Various Sectors of the Economy

The second largest sector – Manufacturing – contracted 1.2% on annualized basis. However, this fourth-quarter contraction was actually lower than the 1.5% pullback in the previous period. However, a concern is that manufacturing of Durable goods declined 3%. Durable goods, which include capital expense items by businesses and have bigger impact on long-term economic activity, declined considerably while Nondurable goods still expanded at 0.8%.

Finance, insurance, real estate, rental, and leasing – the largest segment that accounts for nearly one-fifth of the total gross output – expanded at just 1.3%. The tempered growth rate was driven by a 2.2% contraction in the Finance and insurance subsegment.

After declining for three consecutive periods, the Mining sector reversed trend and delivered a 1.4% expansion in the fourth quarter. While an important sector among the leading indicators in the early stages of production, the Mining sector only accounts for approximately 1.5% of the overall GO, which minimizes the impact of the decline on the economy overall.

Reversing direction after two negative periods with a 2.7% expansion in the third quarter, Utilities expanded again 1.4% in the fourth-quarter 2019. Transportation and warehousing expanded 4.7%. Construction improved its growth rate from 2.5% in Q3 to 4.4% for the last period of the year. Alternatively, Professional and business services, which accounts for more than one tenth of GO, grew only 2.9% in the fourth quarter after surging 6.9% in the preceding period.

Another troublesome indicator is that Government spending increased again after declining briefly in the third quarter. Overall government spending increased 4.1%. Federal spending led with a 4.6% growth over the previous period. State and local government spending increased 3.9%

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 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. Until mid-2018, GO outpaced GDP, suggesting a growing economy.  However, since then GO has slowed dramatically, threatening the economic boom.

 

While Consumer Spending Continued to Advance in Q4, Business Spending (B2B) Began Contracting at The End of 2019 in Anticipation of the Current Economic Downturn.

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 contracted 0.8% in the fourth quarter to $26.6 trillion. Meanwhile, consumer spending rose to $14.8 trillion, equivalent to a 3.2% annualized growth rate. In real terms, B2B activity decreased at an annualized rate of -1.7% and consumer spending rose at 1.9%.

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. “After slowing considerably in the first-quarter 2019, business activity picked up the pace and expanded 1.1% in real terms during each of the two subsequent periods. However, business spending reversed direction and contracted 1.7% in real terms for the last period of 2019. The stock market continued to advance and the overall economy appeared to maintain its upward trajectory in October and November 2019. However, private businesses gleaned enough information from the early stage of the COVID-19 outbreak in December to reduce their overall buying on concerns that the mild outbreak could turn into a full pandemic. Overall business spending trend continues to be an early indicator that anticipates the direction that the overall economy will take over the subsequent few quarters.”

About GO and B2B Index

The BEA’s decision in 2014 to publish GO on a quarterly basis in its “GDP by Industry” data is a major achievement in national income accounting. GO is the first output statistic to be published on a quarterly basis since GDP was invented in the 1940s.

The BEA now defines GDP in terms of GO. GDP is defined as “the value of the goods and services produced by the nation’s economy [GO] less the value of the goods and services used up in production (Intermediate Inputs or II].” See definitions at https://www.bea.gov/newsreleases/industry/gdpindustry/gdpindnewsrelease.htm.

With GO and GDP being produced on a timely basis, the federal government now offers a complete system of accounts. As Dale Jorgenson, Steve Landefeld, and William Nordhaus conclude in their book, A New Architecture for the U. S. National Accounts, “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”

Skousen adds, “Gross Output and GDP are complementary aspects of the economy, but GO does a better job of measuring total economic activity and the business cycle, and demonstrates that business spending is more significant than consumer spending,” he says. “By using GO data, we see that consumer spending is actually only about a third of economic activity, not two-thirds that is often reported by the media. As the chart above demonstrates, business spending is in fact almost twice the size of consumer spending in the US economy.”

 

For More Information

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 [email protected], or Ned Piplovic, Media Relations at [email protected]

# # #

________________________________________
[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 2019 3rd quarter is $38 trillion. By including gross sales at the wholesale and retail level, the adjusted GO increases to more than $46 trillion in Q3 2019. 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.

U.S. Economy on the GO: Total Spending Accelerates

Washington, DC (Thursday, January 9, 2020):  On January 9, 2020, the Bureau of Economic Analysis (BEA) released the “top line” measure of total spending at all stages of the economy, known as gross output (GO), for the 3rd quarter 2019.

Real GO rose 2.5%, 25% than the 2.0% growth in the previous period, and faster than real GDP (2.1%).

The latest GO data suggests that the overall economy continues its growth at a slightly faster pace than it did in the first half of 2019. However, after surging more than 4% in the previous period, business-to-business (B2B) in the supply chain advanced just 2% in the third quarter.

After trailing GDP growth for two consecutive periods to begin 2019, GO growth has accelerated toward the end of 2019, and implies continued growth into 2020.  Total spending on new goods and services (adjusted GO) [1] increased to above $46 trillion for the first time.  While GO expanded at a faster pace than in the previous period, B2B spending advanced just 2% (1.3% in real terms), which was only half the growth rate from the previous period. Additionally, consumer spending growth slowed as well from 6.9% (4.4% real) in the second quarter to 4.6% (2.8% real) for the current period. (4.4% in real terms).

 

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. Consumption represents only about one-third of total economic demand.  Consumer spending is the effect, not the cause, of prosperity (Say’s law).

The renewed increase in business spending suggests that the economy is likely to continue expanding at a moderate pace. Strong corporate earnings, prediction that the Federal Reserve is likely to maintain current interest rate levels for 2020 and reliable indications that government representatives of China and the United States will sign phase-one trade deal as early as next week might be drivers of the continued business spending.

In addition to an overall GO growth of 2.5%, most of the individual sectors expanded as well. Just like in the previous period, only two sectors contracted in the third quarter. Furthermore, after a 5.4% expansion in the previous period, government spending growth cooled slightly to “only“ 3.5%.

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 is now doing, it’s a positive sign that the economy is still robust and growing.

The federal government will release the advance estimate for fourth-quarter GDP on January 30, 2020. If 3rd quarter GO serves as a good forecaster, GDP is likely to grow faster than 2.1%.

 

Report on Various Sectors of the Economy

The mining sector declined now for the third consecutive period. Additionally, the pullback of nearly 26% is significantly higher than the 7% contraction in the previous period. Fortunately, while Mining is a very important sector in the early stages of production, the segment only accounts for approximately 1.5% of the overall GO, which minimizes the impact of the decline on the economy overall.

The second sector that contracted in the third quarter was manufacturing. While manufacturing is the second largest sector with a 16% share, the sector contracted just 1.5%. Despite the segments size, the 1.5% contraction had a smaller effect on the overall economy than the Mining sector’s pullback. Some positive news would be that the 1.9% Non-Durable goods contraction represents nearly 60% of manufacturing’s overall decline. Durable goods, which include capital expense items by businesses and have bigger impact on long-term economic activity, declined just 1.2%, which is lower than the 4.2% decline in the previous period and the 11.7% pullback in the first-quarter 2019.

Similarly, utilities continued to move in the positive direction. After contracting 13.6% in the first quarter and 4.2% in the second quarter of the year, utilities expanded 2.7% in the third-quarter 2019. Transportation remained virtually flat compared to previous period.

After pausing growth and remaining flat in the previous period, construction expanded 2.5%.  Professional and business services, which accounts for more than one tenth of GO, delivered annualized growth of 6.9%, which was the highest growth rate of any sector this period. However, while slightly lower at 6.6%, the growth of the finance, insurance, real estate, rental, and leasing sector was a bigger driver of economic expansion on the account of the largest share of the economy at 16%.

Government spending at all levels increased at an annualized rate of 3.45%. The growth was well balanced between the federal level which expanded at 3.41% and the state and local level growth of 3.49%. However, a positive sign is that government expansion overall and at each individual level was lower than in the previous period. In the second quarter overall government grew 5.4%, 4.6% on the federal level and 6.7% locally.

 GO

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. Lately, GO has outpaced GDP, suggesting a growing economy.

 

Business Spending (B2B) Continues to Advance at a Slower Pace Than Consumer Spending in both Nominal and Real Terms.

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 expanded just 2% in the third second quarter to $26.4 trillion. Meanwhile, consumer spending rose to $14.7 trillion, which is equivalent to a 4.6% annualized growth rate. In real terms, B2B activity rose at an annualized rate of 1.3% and consumer spending rose at 2.8%.

GO“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 slowing considerably in the fourth-quarter 2018 and first-quarter 2019, business activity picked up the pace in the second quarter and third quarters. While lower than in the previous period, business spending still expanded 2% in the third-quarter 2019, which indicates that the economy might still have enough momentum to maintain a moderate expansion trend, unless prevented by negative developments in trade or monetary policy.”

 

About GO and B2B Index

The BEA’s decision in 2014 to publish GO on a quarterly basis in its “GDP by Industry” data is a major achievement in national income accounting. GO is the first output statistic to be published on a quarterly basis since GDP was invented in the 1940s.

The BEA now defines GDP in terms of GO. GDP is defined as “the value of the goods and services produced by the nation’s economy [GO] less the value of the goods and services used up in production (Intermediate Inputs or II].” See definitions at https://www.bea.gov/newsreleases/industry/gdpindustry/gdpindnewsrelease.htm.

With GO and GDP being produced on a timely basis, the federal government now offers a complete system of accounts. As Dale Jorgenson, Steve Landefeld, and William Nordhaus conclude in their book, A New Architecture for the U. S. National Accounts, “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”

Skousen adds, “Gross Output and GDP are complementary aspects of the economy, but GO does a better job of measuring total economic activity and the business cycle, and demonstrates that business spending is more significant than consumer spending,” he says. “By using GO data, we see that consumer spending is actually only about a third of economic activity, not two-thirds that is often reported by the media. As the chart above demonstrates, business spending is in fact almost twice the size of consumer spending in the US economy.”

 

For More Information

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 [email protected], or Ned Piplovic, Media Relations at [email protected]

# # #

________________________________________
[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 2019 3rd quarter is $38 trillion. By including gross sales at the wholesale and retail level, the adjusted GO increases to more than $46 trillion in Q3 2019. 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.

U.S. Enjoys a Modest Recovery – No Recession in Sight!

Washington, DC (Tuesday, October 29, 2019):

On October 29, 2019, the Bureau of Economic Analysis released gross output (GO) data for the 2nd quarter 2019. The 2.0% real-term growth in the second-quarter 2019 was 25% higher than the 1.6% growth in the previous period.  Adj. GO[1] grew even faster, 2.9% in real terms for the 2nd quarter.

After experiencing a lower growth rate in the first-quarter 2019, adj. GO growth resumed its trend from the prior three periods and advanced 4% in nominal terms and 2.9% in real terms in the second quarter. Interestingly, nominal GDP grew 4.6% in nominal terms in the 2nd quarter.

Total spending on new goods and services (adjusted GO) rose to nearly $45.7 trillion. In line with the GO indications, B2B spending advanced 5.9% (3.8% in real terms) and consumer spending expanded 6.9% (4.4% in real terms).  All second quarter growth rates were substantially higher than growth rates from the previous period, which ranged from 0.5% to 1.5%.

Mark Skousen, a presidential fellow at Chapman University and editor of Forecasts & Strategies, states, “This expansion implies that the economy is currently still recovering modestly without any major recession indicators in sight.  After a flat performance in the first quarter, business-to-business (B2B) in the supply chain advanced nearly 6% in the second quarter. That’s good news.”

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.”

Recently, Steve Forbes compared GDP to an x-ray of the economy, and GO to a CAT-scan.  See his commentary in the October 31, 2019, issue of Forbes magazine:  https://www.forbes.com/sites/steveforbes/2019/10/08/gdp-is-the-wrong-measure-to-truly-gauge-an-economys-health/#4be5ff3c13ce

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

 

Business — Not Consumers — Drives the Economy

According to Skousen, the introduction of GO has important implications for the economy and economic policy.  Contrary to what the media says, consumer spending does not represent two-thirds of the economy. GO is a better, more accurate measure of total spending in the economy.  It turns out that 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).

The renewed increase in business spending suggests that the economy might be able to avert a major slowdown and continue expanding at a moderate pace. Strong corporate earnings, interest rate cuts by the Fed, and optimism about resolving the trade conflicts with China might be drivers behind renewed business spending.

In addition to an overall GO expansion of 4.9% (2.9% in real terms), most of the individual industrial sectors grew as well. Unlike the first quarter when five sectors contracted, only two sectors (Mining and Utilities) declined in the second quarter.  Interestingly, government spending growth expanded more than two-fold.

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 did in most of 2018, it’s a positive sign that the economy is still robust and growing.  However, GO has grown at a slower pace than the GDP in 2019.

The federal government will release the advance estimate for third-quarter GDP on January 9, 2020.  Brian Moyer, the director of the BEA, expects top-line GO and bottom-line GDP to be released simultaneously in September 2020.

 

Report on Various Sectors of the Economy

While the Mining sector declined for the third consecutive period, the 6.8% pullback was significantly lower than the 26% contraction in the previous period. The Utilities sector also delivered a second consecutive pullback. Just like the Mining sector, the 8.9% contraction was lower than the previous period’s pullback of 13.6%. However, these two sectors combine for less than 3% share of total GO. Therefore, while important indicators as early stages of production, the impact on the overall GO is minor.

More importantly, Manufacturing – the second-largest segment with 17% share of Gross Output – remained relatively flat and expanded only 0.5%. While experiencing only minimal growth, the Manufacturing sector still performed significantly better than it did in the previous period when the sector contracted 3.7%.

While lower than the 11.7% pullback in the previous period, Durable goods’ 4.2% decline in the second quarter limited growth of the overall Manufacturing sector despite a 1.5% expansion of non-durable gods. After a 12% growth in the previous period, Construction remined flat in the second quarter.

The Information sector was the fastest growing sector with 8.1%. While growing at a slightly lower rate of 6.8%, the Finance, insurance, real estate, rental, and leasing sector contributed the most to GO growth as it is the largest sector with nearly 20% share to total GO. Driven by a 6% expansion of the health care segment, the Educational services, health care, and social assistance sector, which accounts for 8% share of GO, expanded 5.6%.

Unfortunately, the overall expansion of GO brought along an increase in government spending as well. With an 11% share of Gross Output, total government spending increased 5.4%, which is an order of magnitude higher than the growth rate of only 1.5% in the previous period. Generally, state and local government spending tends to grow faster than federal spending. However, in the second-quarter 2019, State and local government spending grew ”only” 4.8% and the Federal government increased its spending by 6.7%. Since early 2016, this has been the second period in a row where federal government grew faster than state and local government spending.

 

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. Until mid-2018, GO outpaced GDP, suggesting a growing economy.

 

Currently Business Spending (B2B) has Advanced at a Slower Pace Than Consumer Spending in both Nominal and Real Terms.

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 expanded 5.9% in the second quarter to $26.4 trillion. Meanwhile, consumer spending rose to $14.5 trillion, which is equivalent to a 6.9% annualized growth rate. In real terms, B2B activity rose at an annualized rate of 3.8% and consumer spending rose at 4.4%.

 

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. “After slowing considerably in the fourth-quarter 2018 and first-quarter 2019, business activity picked up the pace in the second quarter, which indicates that the economy might still have enough momentum to maintain a moderate expansion trend, unless prevented by negative developments in trade or monetary policy.”

 

About GO and B2B Index

The BEA’s decision in 2014 to publish GO on a quarterly basis in its “GDP by Industry” data is a major achievement in national income accounting. GO is the first output statistic to be published on a quarterly basis since GDP was invented in the 1940s.

The BEA now defines GDP in terms of GO. GDP is defined as “the value of the goods and services produced by the nation’s economy [GO] less the value of the goods and services used up in production (Intermediate Inputs or II].” See definitions at https://www.bea.gov/newsreleases/industry/gdpindustry/gdpindnewsrelease.htm.

With GO and GDP being produced on a timely basis, the federal government now offers a complete system of accounts. As Dale Jorgenson, Steve Landefeld, and William Nordhaus conclude in their book, A New Architecture for the U. S. National Accounts, “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”

Skousen adds, “Gross Output and GDP are complementary aspects of the economy, but GO does a better job of measuring total economic activity and the business cycle, and demonstrates that business spending is more significant than consumer spending,” he says. “By using GO data, we see that consumer spending is actually only about a third of economic activity, not two-thirds that is often reported by the media. As the chart above demonstrates, business spending is in fact almost twice the size of consumer spending in the US economy.”

 

For More Information

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 [email protected], or Ned Piplovic, Media Relations at [email protected]

# # #

________________________________________
[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 2019 2nd quarter is $37.7 trillion. By including gross sales at the wholesale and retail level, the adjusted GO increases to $45.6 trillion in Q2 2019. Thus, the BEA omits $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.

MY INTELLECTUAL ANCESTORS

BY MARK SKOUSEN
Presidential Fellow, Chapman University

“If I have seen a little further, it is by standing on the shoulders of giants.”
— Sir Isaac Newton

Dear readers,

I thought you’d get a kick out of this series of photos and quotes — looks like some of the great economic philosophers and writers rubbed off on me!

I’ll try not to get it go to my head…..I still get rejection letters from the American Economic Review!

Henry_Hazlit_tribute_1984

Courtesy:  Mises Institute

My paying tribute to Henry Hazlitt and his classic book, “Economics in One Lesson” in celebration of his 90th birthday (1984)

“Mark Skousen is America’s finest economist.  He has a genius for explaining complex issues in a clear way and connecting ideas.  He is the Henry Hazlitt of our time.”
— Steve Mariotti, President, National Foundation for Teaching Entrepreneurship (NFTE)

MAS_with_Friedrich Hayek_Austria_1985_01

Courtesy:  John Mauldin, 1985

Interviewing Friedrich Hayek in the Austrian alps in 1985

“Mark Skousen is America’s leading economic author because he roots his luminous books in the real world, in the grand tradition of the great Austrian economists.  He is the Hayek of our era.”
— George Gilder

MAS_with_Milton Friedman_San_Francisco_2006_01

Courtesy:  photo by Van Simmons

Meeting with Milton Friedman in his favorite San Francisco restaurant, 2006

“Mark Skousen has emerged as one of the clearest writers on all matters economic today, the next Milton Friedman!” 
— Michael Shermer, Scientific American

Trade War Threatens Recession

Washington, DC (Monday, July 29, 2019):

On July 19, 2019, the federal government released gross output (GO) for the 1st quarter 2019, and the 1.6% real-term growth — which was 30% lower than the 2.3% advancement from the previous period – strengthened the implication that the economic growth might be slowing.  Business-to-business (B2B) in the supply chain actually declined in the first quarter.

While corporate tax cuts and the elimination of some of the burdensome business regulations undoubtedly had positive effects on economic growth, the effects of tariffs and trade restrictions are significantly higher, as trade plays a much bigger role in the US and world economy. Trade accounts for more than 25% of spending in the US economy and nearly 60% of the global economy.

Whereas GO growth decreased in the first quarter after rising in the tree previous periods, GDP reversed direction after falling for three consecutive quarters and advanced at 3.1%, which was nearly 30% higher than the 2.2% growth rate from the fourth-quarter 2018.  But the decline in the value of the supply chain suggests that the rise in real GDP is temporary.

Total spending on new goods and services (adjusted GO) [1] exceeded $45 trillion by a small margin. In line with the GO indications, B2B spending declined 0.3% (0.4% in real terms) and consumer spending expanded 1.4% (0.5% in real terms), which was lower than the 2.2% consumer spending growth rate from the previous 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).

The continued slowdown in business spending suggests a potential economic slowdown and the end of the longest bull market since the Great Depression, if business spending growth stalls. However, the trend might still reverse on a potential resolution of the trade conflict as Trump Administration’s delegation is heading to China for the next round of trade negotiations.

Furthermore, the overall economy and markets are waiting in anticipation for the results of the Federal Open Market Committee meetings next Tuesday and Wednesday. The primary interest is whether the Fed will decide to counter its quarter-point hike from December 2018 and revert its target rate back to 2% to 2.25%, or go even further and announce a half-point interest rate reduction to June-2018 levels.

The fears of continued trade war with China has certainly influenced business spending slowdown. However, positive impressions from the upcoming trade negotiations with China and a potential Fed funds rate cut of up to half percent might alleviate some of the reservations, which could result in a renewed push to increase business spending in the second half of the year.

In addition to a lower growth of the overall GO, more sectors experienced a decline – five in the first-quarter 2019 versus only two in the fourth-quarter 2018. However, on the positive side, government spending rose only 1.5% in nominal terms at annual rates, which was the lowest growth rate in the past seven 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 did in most of 2018, it’s a positive sign that the economy is still robust and growing.  However, GO has grown at a slower pace than the GDP in the last two quarters.

The advance estimate of second-quarter GDP was released on July 26, 2019. As implied by the slower GO growth in the first quarter, the second-quarter GDP rose at 2.1% in real terms, which is 32% lower than the 3.1% advancement from the first quarter 2019.

Report on Various Sectors of the Economy

After growing at double-digit percentages and nearly doubling over four quarters, the Mining sector pulled back 7.2% in the fourth quarter 2018. Unfortunately, the Mining sector extended its decline and contracted more than 26% on an annualized basis for the first-quarter 2019. The Mining sector comprises only 1.6% of the entire Gross Output and the first-quarter decline has only a small impact on the overall economic output in the current period. However, the Mining sector is one of the early stages of production and often an early indicator of potential economic downturns in the near future.

Similarly, the Agriculture, forestry, fishing, and hunting sector – another early stage of production sector – also contracted 1.5%. Furthermore, Manufacturing – the second-largest segment with 17% share of Gross Output – declined 3.7%. One promising development within the Manufacturing sector was that production of Durable Goods increased 4%. Non-durable Goods declined 11.7%. Additionally, Transportation & Warehousing — another indicator of economic activity strength — also contracted 5.6%.

Among the expanding sectors, Construction – 4.6% share of GO – advanced at an annualized rate of nearly 12%, Educational services, health care, and social assistance, which accounts for 8.2% share of GO expanded 7.6%. Also, the largest sector that accounts for 19% of GO – Finance, insurance, real estate, rental, and leasing – expanded 2.2%.

Total government spending accounted for 10.6% of the total GO spending and increased 1.5% in the first-quarter 2019, which is significantly lower than the 3.5% growth in the previous quarter. This growth rate is the lowest since the second quarter 2017. While federal government increased 2.4%, state and local government expanded only 1.1%, which is less than one-third the 3.5% growth from the previous period. Additionally, the federal government grew more than state and local governments for the first time since the second quarter 2016.

Trade

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. Until mid-2018, GO outpaced GDP, suggesting a growing economy.  However, since then GO has slowed dramatically, threatening the economic boom.

Currently Business Spending (B2B) Is Advanced at a Slower Pace Than Consumer Spending in both Nominal and Real Terms.

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 pulled back 0.3% in the first quarter to slightly below $26 trillion. Meanwhile, consumer spending rose to $14.24 trillion, which is equivalent to a 1.4% annualized growth rate. In real terms, B2B activity declined at an annualized rate of 0.4% and consumer spending rose at 0.5%.

Trade

“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 and 1st quarters, although it could be a temporary situation, depending on trade policy.”

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 provided 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 [email protected], or Ned Piplovic, Media Relations at [email protected]

# # #

________________________________________
[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 2019 1st quarter is slightly above $37.25 trillion. By including gross sales at the wholesale and retail level, the adjusted GO increases to nearly $45 trillion in Q1 2019. Thus, the BEA omits almost $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.

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