By: Matt Benjamin | Senior Macroeconomic Analyst | The Oxford Club
Who is more important to the economy, the consumer or the businessperson?
This is a question with major implications for policymakers and investors alike.
Conventional economic wisdom holds that the consumer is more important. That position is firmly entrenched in data published by the government and used by economists and investors to gauge where the economy and financial markets are headed.
But that wisdom may be misguided. Economist Dr. Mark Skousen has been fighting for three decades to get the government and the economics world to recognize that.
And he just scored a major victory.
It’s Not the Consumer
Mark is an economics professor at Chapman University, a bestselling author, a friend of The Oxford Club for years and a frequent contributor to our publications, including Liberty Through Wealth.
I first learned about Mark’s unorthodox take on consumer spending about a year ago when I wrote an article on consumers and holiday season spending. Mark sent a rejoinder in a pleasant email to me:
I was intrigued by this theory about business spending but also skeptical. After all, Economics 101 states consumer spending accounts for about two-thirds of U.S. economic activity.
Not true, says Mark.
Instead of looking at gross domestic product (GDP), he looks at gross output (GO) as a better, broader measure of economic activity and a more accurate indicator of the health of the economy.
GO includes not only business-to-consumer sales and investment but also intermediate business-to-business sales (that’s business spending). When looked at this way, consumer spending accounts for about only 38% of the economy.
Steve Forbes, editor-in-chief of Forbes magazine, is a longtime fan of Mark and his unrelenting advocacy for GO. “GDP is like an X-ray of the economy,” says Forbes. “GO is like a CAT scan.” In fact, Forbes filmed a short video on the topic, which you can watch here.
GDP virtually ignores business-to-business activity and brushes aside supply chains, says Forbes. By doing so, it leaves out more than half the spending in the economy. The business sector, he adds, is vastly more important than the consumer or government when it comes to the health of the economy. And consumer spending is the effect, not the cause, of economic prosperity.
Mark has been pushing that view for decades, and he’s been trying to get the government on board since 1990. He’s been doing this by writing and speaking about GO and meeting periodically with officials at the U.S. Bureau of Economic Analysis (BEA). His first victory came in 2014 when he got the BEA to at least monitor GO.
And this past September 30, the BEA finally reported GO along with GDP, significantly upgrading the status of GO as an economic indicator and giving it – almost – equal weight to GDP. There’s much more about GO, which Mark calls the “missing piece in the macroeconomic puzzle,” right here.
Mark’s victory means there is an effective new tool for savvy investors looking for a window into where the economy is heading… and an advantage over other investors.
The Power of GO
Because it’s a more accurate measure of economic growth, GO can help policymakers – both in the federal government and at the Federal Reserve – do a better job of formulating fiscal and monetary policy. For example, because business spending – what companies spend on materials from other companies to make final products for consumers – is so important to GO, giving it more weight would push policymakers to recognize the destructive impact of higher corporate taxes and overregulation.
As for us investors, GO is a new leading indicator that reflects what businesspeople are seeing in terms of consumer expectations. “GO does a pretty good job predicting what the GDP does three months from now,” Mark told me on the phone yesterday.
The GDP report with GO in it will be released quarterly, and the next release is on December 22. The government revises each GDP report twice, and GO will be in the third estimate each time. A schedule of releases is here.
The data released by the BEA on September 30 shows that GO fell slightly less than GDP (by 8.4% in quarterly, nonannualized terms). Importantly, GO didn’t collapse by multiples of GDP as it has in past recessions, Mark wrote recently in an op-ed in The Wall Street Journal. So while consumer spending dropped significantly, businesses “looked toward the long term, expected a recovery and adjusted accordingly.”
That means this economy is more resilient than many analysts (particularly those looking at only GDP) thought and that the recovery may be faster than anticipated.
That, of course, has major implications for the stock and bond markets. So investors who monitor GO data will have additional clarity about the economy and markets going forward. And they can thank Mark Skousen for it.
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Appeared in the October 22, 2020, The Oxford Insight newsletter.