Washington, DC (Wednesday, September 30, 2020): On September 30, 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 2nd quarter 2020.
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, Gross Output continued its first-quarter decline and fell substantially more in the second- quarter 2020. However, the outlook might be better than many economists fear as the current decline does not follow the pattern observed during past economic downturns and recessions.
During past recessions, GO generally declines significantly more than GDP. In the fourth-quarter 2008 GO dropped more than 26% while GDP declined less than 8%. However, in the first two quarters of 2020, GO and GDP have declined by similar rates with GDP declining at slightly higher rates. This pattern suggests that business and supply chain spending is still robust. Therefore, the economy’s fundamentals appear strong and ready for rapid recovery as soon as government restrictions imposed in response to the COVID-19 pandemic are lifted.
After delivering steady increases over the previous 42 consecutive quarters and a first-quarter drop of 4%, second-quarter 2020 Gross Output declined 33.4% in real terms. Prior to the current downturn, GO’s last decline occurred in the second quarter 2009, which was in the aftermath of the 2008 economic pullback. However, even before the 2020 decline, GO appeared to be cooling as the growth already slowed from nearly 2.5% in the third quarter 2019 to just 1.1% in the final period of last year.
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).
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 of 2019, a sign that the economy was slowing down as it entered 2020.
Furthermore, during a discussion panel hosted Mark Skousen that included Steve Forbes, Sean Flynn, Steve Hanke, and David Ranson indicated that he sees an inherent resilience in the economy and shared his confidence that the economy is in relatively good shape and poised for a robust comeback once underlying conditions normalize.
To get more information about the GO-Day and the most recent GO data release, you can stream a recording of the entire discussion panel at:
CELEBRATING GO-DAY: FILLING IN THE MISSING PIECE IN THE MACROECONOMIC PUZZLE Panel DIscussion
The federal government will release the advance estimate for third-quarter GDP on October 29, 2020 and a full release of third-quarter GO on December 22, 2020.
Important Note: We are hopeful that in the near future, the BEA releases 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
In the second-quarter 2020, contraction occurred across all sectors of the economy. Manufacturing, the second largest sector –– contracted more than 51% on an annualized basis. This pullback marked a fourth consecutive period of contraction. However, a bigger concern is that manufacturing of durable goods declined more than 55%. Durable goods, which include capital expense items by businesses and have bigger impact on long-term economic activity, declined more than nondurable goods. While declining less than durable goods, nondurable goods spending still fell nearly 47%.
Finance, insurance, real estate, rental, and leasing – the largest segment that accounts for nearly one-fifth of total Gross Output – fared relatively well with an 8.3% slowdown in the second quarter. The finance and insurance sub-segment performed even better and remained steady with a 0.2% increase over the previous period. However, the real estate rental and leasing sub-segment declined 14.7%
The only other sector that managed to keep its second-quarter decline in single digits was the utilities sector, which contracted just 2.3%. While this pullback is relatively small, it was the sector’s fourth contraction in the past five quarters.
The construction sector reversed its 14% growth in the first period 2020 to a 14.9% contraction in the second period. Several other sectors, such as professional, business, educational, health care and social assistance, contracted between 35% and 50%.
The transportation and warehousing sector was one of the worst performers with a decline of nearly 25% in just one quarter, which is equivalent to a contraction of nearly 100% on an annualized basis. The mining sector and the arts, entertainment, recreation, accommodation, and food services sector suffered largest declines of 35.5% and 40.5%, respectively, which translate to annualized declines in excess of 100% for each sector.
In a reversal of the recent trend, overall government spending declined more than 9% in the second-quarter 2020. However, the main driver behind that decline was a 20.3% contraction of government spending at state and local levels. Unfortunately, the reduced state and local government spending was offset by a federal government spending expansion at an annualized rate of 15.6%.
Federal government spending has not risen at a double-digit annual rate since fourth-quarter 2009. Since then, federal spending growth has averaged less than 2% per quarter. Most of this federal government spending increase is for costs related to the COVID-19 response, which includes supplemental unemployment insurance payments. However, with the limited economic activity and lowered tax revenues, all this spending will transfer directly to increasing the national debt. As it approaches $27 trillion, the national debt certainly will put downward pressure on future economic growth.
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.
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 44.2% in the second quarter to $23.2 trillion. Meanwhile, consumer spending contracted 39.8% on an annualized basis to $13.1 trillion. In real terms, B2B activity decreased at an annualized rate of 42.6% and consumer spending declined 35.6%.
“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 declining 5.4% in the first quarter, business activity declined at an annualized rate of 44% in real terms during the second-quarter 2020.
While the first-quarter decline included the sharp economic slowdown in March, the second quarter suffered the impact of declining economic activity for full three months. However, the stock market continues to perform well, despite increased volatility. After a substantial drop in early March, the markets have rebounded to recover all those losses by mid-August and extend gains to reach new highs. The S&P 500 gained 60% between its mid-March low and its recent high of 3580.84 on September 2, 2020. Even with a pullback from its high in early September, the S&P 500 is still 51% above its March low and is nearly 4% higher than it was at the onset of 2020.
About GO and B2B Index
Skousen champions Gross Output as a more comprehensive measure of economic activity. “GDP leaves out the supply chain and business to business transactions in the production of intermediate inputs,” he notes. “That’s a big part of the economy, bigger than GDP itself. GO includes B2B activity that is vital to the production process. No one should ignore what is going on in the supply chain of the economy.”
Skousen first introduced Gross Output as a macroeconomic tool in his work The Structure of Production (New York University Press, 1990). A new third edition was published in late 2015, and is now available on Amazon.
Click here: Structure of Production on Amazon
The BEA’s decision in 2014 to publish GO on a quarterly basis in its “GDP by Industry” data is a major achievement in national income accounting. GO is the first output statistic to be published on a quarterly basis since GDP was invented in the 1940s.
The BEA now defines GDP in terms of GO. GDP is defined as “the value of the goods and services produced by the nation’s economy [GO] less the value of the goods and services used up in production (Intermediate Inputs or II].” See definitions at https://www.bea.gov/newsreleases/industry/gdpindustry/gdpindnewsrelease.htm
With GO and GDP being produced on a timely basis, the federal government now offers a complete system of accounts. As Dale Jorgenson, Steve Landefeld, and William Nordhaus conclude in their book, A New Architecture for the U. S. National Accounts, “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”
Skousen adds, “Gross Output and GDP are complementary aspects of the economy, but GO does a better job of measuring total economic activity and the business cycle, and demonstrates that business spending is more significant than consumer spending,” he says. “By using GO data, we see that consumer spending is actually only about a third of economic activity, not two-thirds that is often reported by the media. As the chart above demonstrates, business spending is in fact almost twice the size of consumer spending in the US economy.”
For More Information
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
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 firstname.lastname@example.org, or Ned Piplovic, Media Relations at email@example.com.
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