While Inflation Threatens, the U.S. Economy is Firing on All Cylinders

Washington, DC (Thursday, June 24, 2021): On June 24, 2021, the federal Bureau of Economic Analysis (BEA) released data for the first quarter 2021 Gross Output (GO) – the most comprehensive measure of total spending in the economy, including the supply chain. The data reveled that Gross Output advanced significantly in the first quarter 2021 and dramatically outpaced GDP growth for the same period.

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.

Another quarter of economic data indicates that the U.S. economy continues to fire on all cylinders and maintains a steady growth trend. After fourth-quarter expansions of 6.1% and 10.6% in nominal terms, GDP and GO expanded even faster in the first quarter 2021 at 10.5 and 16.1%, respectively.

In real terms, GDP grew 6.4% and GO expanded 8.9% in the first quarter 2021. The nominal adjusted gross output, which includes an additional $9 trillion in gross retail and gross wholesale activity omitted from the official government’s GO figures, advanced nearly 20%, which is equivalent to an 11.5% expansion in real terms.

While the rising GDP is still approximately 1% short of its all-time high from Q4 2019, both GO and Adjusted GO (GO*) reached new all-time highs in Q1 2021. Moreover, GO* broke above $48 trillion in real terms and above $42 trillion in real terms for the first time ever.

The positive economic growth figures released today further solidify a steady economic recovery. As more states lift business restrictions and reopen their economies, economic stability appears more likely, which should translate to a continuation of the current economic expansion. At the end of May, the U.S. crossed the 50% mark in terms of population share that has received at least on dose of COVID vaccination. This is just another factor that will provide people with confidence to resume normal economic activities and fuel economic growth.

While first quarter results paint a mostly positive picture, we are concerned that inflation will threaten the recovery. Based on the comparison of nominal and real GDP and GO figures, the annualized inflation in the first quarter 2021 exceeded 8%, which is significantly higher than reported annualized CPI inflation figure of 1.7%.

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 two 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 fourth quarter, business spending continued to outpace consumer spending in the first 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 first quarter 2021, nominal B2B activity expanded more than 23% to $28.3 trillion. At the same time, consumer spending grew 14.7% on an annualized basis to $14.1 trillion. In real terms, B2B activity expanded at an annualized rate of 18.7% to $24.5 trillion and consumer grew 7.2% to $13.3 trillion.


“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 recovering from the decline in the first half of 2020, business activity continued its expansion and followed of 39% and 12% real-term growth in last two quarters of 2020, with an 18.7% advancement in the first quarter 2021.”


GO Increase Outpaces GDP Growth in Third Quarter to Indicate Potentially Accelerated Economic Recovery

Despite significant declines in the first two quarters of 2020, Gross Output indicates robust long-term growth. 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 quick recovery in the past three periods indicate that, barring any new “black swan” events, the robust economic growth is likely to continue for the remainder of 2021. 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 second-quarter 2021 GDP on July 29, 2021 and the full release of Gross Output, as well as the third estimate of GDP on September 30, 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 2020 and a robust recovery in the second half of that year, almost all economic sectors continue to expand in the first quarter 2021.

After reversing a down trend from the previous three-quarters and expanding at nearly 10% in Q4 2020, the mining sector cooled off and grew at an annualized rate of 0.5% in real terms for the first quarter 2021. The main driver for this tepid growth is a 13% decline in the Oil and gas extraction sub-segment, which expanded at more than 5% in the previous period. While expanding more than 20% in the first quarter, the other mining operations in this segment could not compensate for the decline in the oil and gas extraction, which accounts for more than 80% of the overall Mining segment.

Despite accounting for just 1.7% of the overall economy, mining 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 was 5.6% smaller than in the previous period and was one of just three the three segments that experienced contractions in Q1 2021. Manufacturing – which is the second largest segment of the economy with an 18% share – reversed its one one-quarter growth of 5.7% from the previous period and declined 3.7% in Q1. While accounting for approximately half of the segment, Nondurable goods contracted nearly 7% and Durable goods diminished 1%.

The third declining segment this period was Educational services, health care, and social assistance. While 8.6% higher for the period, the Education sub-segment accounts only for 12.5% of the overall segment, so the 2.9% decline in healthcare and social assistance – 87.5% share of the category – drove the overall segment’s 1.5% contraction.

On the positive side, the remaining 14 out of 17 industries expanded at least 5%. The largest segment of the economy, Finance, insurance, real estate, rental, and leasing, which accounts for one-fifth of GO, built on its 5% expansion in the previous period and grew 10.2% in Q1 2021.

Real estate rental and leasing sub-segment contributed to that growth by expanding nearly 4%. However, the Finance and insurance sub-segment grew more than 18%. One point of caution amid positive results is that the sub-segment with the highest growth rate – 20.65% – in this industry segment was Federal Reserve banks, credit intermediation, and related activities. However, the largest sub-segment – Insurance carriers and related activities – grew at 20%, which should lessen some of the concerns from Federal Reserve activities.

The Construction sector could not maintain its growth of nearly 12% from the previous period, bust still expanded 5.4% in Q1 2021. The Transportation and warehousing sector maintained its high growth rate and followed its 17.4% rate from Q4 2020 with a 17.7% expansion in the first period 2021. After nearly doubling in the prior period, Transit and ground passenger transportation sub-segment pulled back 20%. However, this pullback was offset by other modes of transportation that continued to expand at rates similar to the previous period. Water transportation volume improved 19.4%, trucking expanded 4.9% and Air transportation grew 63.2%.

Unfortunately, after no expansion in Q4 2020, government spending kicked into high gear in the first quarter 2021. While State and local spending advanced at a modest 1.5%, Federal spending surged more than 15%. While the federal government’s growth rate is significantly higher, State and local government spending accounts for two thirds of total government spending. Therefore, the State and local government’s modest spending increase kept the combined government spending increase below 6%. Within Federal spending, Defense spending declined 4.4%. However, Nondefense spending was 51.4% higher than in the previous period.


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.”


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

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

# # #

[1] The BEA currently uses a limited measure of total sales of goods and services in the production process. Once products are fabricated and packaged at the manufacturing stage, the BEA’s GO only adds “net” sales at the wholesale and retail level. Its official GO for the 2021 1st quarter is $39.5 trillion. By including gross sales at the wholesale and retail level, the adjusted GO expands to $48.6 trillion in Q1 2021. Thus, the BEA omits more than $9 trillion in business-to-business (B2B) transactions in its GO statistics. We include them as a legitimate economic activity that should be accounted for in GO, which we call Adjusted GO. See the new introduction to Mark Skousen, The Structure of Production, 3rd ed. (New York University Press, 2015), pp. xv-xvi.

Leave a Reply