Washington, DC (Thursday, December 22, 2022):
Today, the federal government released its quarterly gross output (GO) data, as well as GDP third estimate for the third quarter 2022. The Bureau of Economic Analysis (BEA) revised third quarter real GDP growth from its second estimate of 2.9% a month ago to a robust 3.2% growth rate for the 3rd quarter.
However, GO, which is a broader measure of economic activity, tells a different story.
Inflation-adjusted real GO increased only 2.5% in the second period 2022. And the adjusted real GO[1] grew even slower, 1.6%, during the 3rd quarter. More ominously, business (B2B) spending actually declined 2.7% in real terms during the 3rd quarter.
Adjusted real GO rose 4% in the first quarter, 2.0% in the second quarter and 1.6% in the most recent period – indicating that a gradual slowing down of economic growth. This marks a sixth consecutive period of declining growth rates in the aftermath of sharp rebound following a pandemic-driven 40% drop in Q2 2020.
Regardless of the absolute magnitude of the growth rate, the relation of GO and GDP growth rates generally is a good indicator of economic growth. GO growing at a higher rate than GDP indicates economic expansion over the next few quarters. However, as you can see, GO growth of now lags the revised GDP growth rate of 3.2% in Q3.
Mark Skousen, who holds the Doti-Spogli Chair of Free Enterprise at Chapman University, concludes, “While the lower growth rates suggest a slumping economy, both of these indicators are still in positive territory and do not indicate a full on recession just yet. However, while the adjusted real GO data shows no recession in 2022, it does suggest a pattern of an economy slowing down and headed perhaps into a recession in 2023, depending on how long the Federal Reserve imposes its tight-money policy.”
In nominal terms, third-quarter 2022 GDP expanded 7.7% and GO grew 5.2%. The Adjusted GO – which includes the gross wholesale and gross retail figures (included only as net figures in the GO reported by the BEA) advanced 4.3% in Q3 2022. The difference between net and gross figures amounts to more than $11.2 trillion, which is missing from the government’s official GO figure, but we include it in our Adjusted GO measure.
To find out the direction of economic growth in 2023, we should monitor the GDP growth results when the Bureau of Economic Analysis (BEA) releases its fourth-quarter and full-year 2022 advance GDP estimates on January 26, 2023.
While our GO model has proven reliably accurate in projecting next quarter’s GDP direction under normal economic circumstances, several extraordinary conditions still lingering from pandemic-related issues, such as continued supply-chain shortages, inflation, or rising interest rates, can cause minor deviation in the model.
Business Spending Declines in 3rd Quarter
Another important factor in GDP growth is business-to-business (B2B) spending. After several periods of strong B2B growth, real-term business spending suddenly contracted in the third quarter. This is an indication that the business sector is cautious about the economies ability to expand in light of headwinds driven by rising inflation and supply-chain bottlenecks.
As evident in the graph in the “Business – Not Consumers – Drives the Economy”, B2B spending is significantly higher than consumer spending in absolute terms. However, business spending is also significantly more volatile and more sensitive to economic fluctuations than consumption. Therefore, the small business spending contraction in the third quarter could be an early signal of a slumping economy.
Most economists still use only GDP and disregard GO when gauging economic outlook. However, Gross Output (GO) is the top line in national income accounting; GDP is the bottom line. Both metrics 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.”
We see a significant difference in economic performance between GDP and GO in 2022. Using GDP, which emphasizes consumer and government spending, the economy suffered a mild recession in early 2020. However, using GO, which emphasizes business spending as the largest sector, there was slow growth but no recession in 2022.
Business – Not Consumers – Drives the Economy
GO is also helpful is analyzing what 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 assessing the underlying health of the overall economy and its potential to bounce back after economic declines. The B2B Index measures all the business spending in the supply chain and new private capital investment. In the third-quarter 2022, nominal B2B activity rose only marginally by 1.6% on an annualized basis to reach $34.1 trillion. This small B2B growth in nominal terms lagged significantly behind consumer spending expansion, which increased 6.7% to exceed $17.5 trillion in the third quarter. In real terms consumer spending expanded 3.9%, but B2B expenditures actually shrank nearly $200 billion, or 2.7%.
“B2B spending is in fact a pretty good indicator of where the economy is headed, since it is more responsive to the boom-bust economic cycle than consumer spending,” stated Skousen. “Business spending is now declining in real terms compared to consumer spending, which is an indicator of a possible recession in 2023.”
While GDP includes only a small portion of investment spending, Gross Output accounts for significantly more of the business investment outlays, which tend to indicate economic direction over extended periods. 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 fourth-quarter 2022 GDP on January 23, 2023. The full release of Q4 and year-end Gross Output data, as well as the third estimate of GDP are scheduled for March 30, 2023.
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 steady recovery following that contraction, most sector and subsectors of the economy continued to expand expanded in Q3 2022, albeit at lower rates.
After expanding at double-digit growth rates over the past few quarters, the Mining sector expanded 9.4% in real terms for the third-quarter 2022. The mining sector is small, and accounts for 1.9% share of the overall economy as measured by Gross Output. However, the sector represents one of the earliest stages of production. Therefore, we keep an eye on the expansion and contraction of the Mining segment, which can be an early indicators and a good predictor of which direction other sectors further down the supply chain might be headed in subsequent periods.
With a 1.4% share of the overall economy, the Agriculture sector is another small-share segment in the early stages of production that can be used as an early indication of future movements in the overall economy. After contracting slightly in the last period of 2021, the Agriculture sector expanded for the third consecutive period and delivered a real-terms expansion of 1.2% in Q3 2022.
After reversing two periods of marginal growth with four quarters of double-digit growth, Manufacturing – the second largest segment of the economy with a 16% share of the economy – expanded at a more tepid rate of 3.9% in Q3 2022. Nondurable goods remained almost flat with an annualized growth of just 0.6%. However, Durable goods manufacturing delivered a relatively healthy real-terms expansion of 7.2%.
Additionally, the Construction sector, which accounts for 3.6% of the economy, reversed three periods of double-digit growth with a contraction of nearly 11% for Q3 2022. While the retail trade expanded slightly less than 2% the wholesale trade sectors shrank 1.5%.
Finance, insurance, real estate, rental, and leasing is the largest segment that accounts for nearly 17% of the economy. After breaking two periods of expansion with a contraction of more than 11% in the second quarter, the segment expanded 3.7% in Q3 2022. While the Real estate, rental, and leasing subsegment remained flat, the Finance and insurance subsegment grew 8.8% in real terms, which drove the segments overall expansion.
Although contracting nearly 6% in Q2 2020 amid the economic shutdown, government has been expanding at record rates over the past several periods since then. Not only has government spending been expanding, but the expansion rates have accelerated over the last few periods – 6.1% in Q4 2021, 8.2% in Q1 2022 and 21% in Q2 2022. While not expanding quite at these high rates, total government spending increased 2.34% in the third-quarter 2022,
Over few of the recent periods, spending at the State and local levels tended to outpace spending at the federal level by a two-to-one margin. The spending growth was approximately equal in the previous quarter. In Q3 2022 spending expansion of 3.6% at the federal level was double the spending expansion of 1.8% at the State and local level.
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
For a complete analysis of GO, go to https://www.grossoutput.com/gross-output/
Mark Skousen, “Recession Fears May Not Pass GO: GDP is Slumping, but There’s a Better Way to Gauge the Economy.” Wall Street Journal, August 11, 2022: Recession Fears May Not Pass GO – WSJ
If you are not a WSJ subscriber, you can read a copy of the article on: https://www.grossoutput.com/2022/09/12/recession-fears-may-not-pass-go/
Emma Rothschild, “Where is Capital?” in Capitalism: A Journal of History and Economics 2:2 (Summer 2021), pp. 291-371. https://muse.jhu.edu/article/798746 “Essentially an attempt to apply ideas about gross output to the economic history of the industrial revolution.”
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
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.
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