“By integrating the vital role of the supply chain into national income accounting, Mark Skousen’s development of gross output (GO) has created a more dynamic and broader view of the economy, and of the central role that business plays in national income, the business cycle and economic growth. I recommend that economists seriously consider his new approach to macroeconomics.”
– Finn Kydland, Professor of Economics, University of California at Santa Barbara, 2004 Nobel prize winner
Washington, DC (Thursday, March 30, 2023):
Today, the federal government released its quarterly gross output (GO) data, as well as GDP third estimate for the fourth quarter and year-end 2022. The Bureau of Economic Analysis (BEA) revised fourth quarter real GDP growth slightly lower from its second estimate of 2.7% a month ago to a 2.6% growth rate for the 4th quarter.
However, gross output (GO) – the top line in national income accounting and a broader measure of spending at all stages of production – tells a dramatically different story than the GDP data.
Inflation-adjusted real GO increased just 1.0% in the fourth period 2022.
This marks a seventh consecutive period of declining growth rates in the aftermath of a sharp rebound following a pandemic-driven 40% drop in Q2 2020. Furthermore, the current growth rate is below historically average levels.
Moreover, business (B2B) spending actually declined in real terms by over 5% in the fourth quarter.
This is an indication that the business sector – which is substantially larger than the retail sector and generally has a better view of the direction of the economy than the consumers – is cautious about the economy’s ability to expand in light of headwinds driven by the aftermath of inflation and remaining supply-chain difficulties.
Business spending is also significantly more volatile and more sensitive to economic fluctuations than consumption. Therefore, the contraction in fourth-quarter business spending could be an early signal of a slumping economy.
GO as a Leading Indicator
In our model, GO, which includes the value of the supply chain, is a leading indicator of where the economy is headed in the year. When GO grows faster than GDP, it suggests economic expansion over the next few quarters, and vice versa. Currently, real GO’s fourth-quarter growth rate of 1.0% is substantially below the annualized GDP growth rate of 2.6%.
Additionally, at just 0.5%, the real Adjusted Gross Output[1] (GO*) growth is even lower than the BEA’s GO statistic of 1%.
The low level of GO and adj. GO suggests that we are headed into a recession in 2023.
In nominal terms, fourth-quarter 2022 GDP expanded 6.6% and GO grew just 1.5%. 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 merely 1.0% in Q4 2022 in nominal terms. The difference between net and gross figures amounts to nearly $11.2 trillion, which is missing from the government’s official GO figure, but we include it in our Adjusted GO measure.
Our GO model has proven reliably accurate in projecting the direction of GDP under normal economic circumstances. While extraordinary conditions, such as supply-chain irregularities and rising interest rates that still linger from pandemic-related issues, can cause minor deviation in the model, the impact is not as prominent as it was over the past couple of years.
Silver Lining: Price Inflation in the Supply Chain is Falling Sharply
BEA’s data released today also suggests that another mitigating factor – price inflation – is coming down in the wake of the Fed’s aggressive tight-money policy. The GO price deflator shows price inflation in the supply chain almost coming to an end in the 4th quarter. It was increasing at double-digit rates a year ago, but now it’s down to 0.5% in the fourth quarter 2022.
The Importance of GO
Most economists are still unaware of the value of GO and use only GDP when gauging economic outlook. However, gross output (GO) should be viewed as the top line in national income accounting, and GDP is the bottom line. Both metrics are essential to understanding where the economy is headed.
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.”
As Steve Forbes has suggested, “GDP is the X-ray of the economy; GO is the CAT-scan.”
Business – Not Consumers – Drives the Economy
Another benefit of GO is that it dispels the myth that consumer spending drives the economy. Contrary to views of many academic economists and wide-spread media reports, consumer spending does not represent two-thirds of total economic activity. 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. After rising only marginally by 1.6% to $34.1 trillion in the third-quarter 2022, nominal B2B activity pulled back 1.6% on an annualized basis in nominal terms and fell back just below the $34 trillion mark. Unlike B2B, consumer spending continued expanding and grew 4.8% in nominal terms to $17.8 trillion for the last quarter of 2022. In real terms, consumer spending expanded 4.3%, and B2B’s expenditures pullback of nearly $360 billion was equivalent to 5.3%.
“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,” states Mark Skousen, editor of Forecasts & Strategies and the Doti-Spogli Chair of Free Enterprise at Chapman University.
While GDP includes only a small portion of investment spending, GO 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 first-quarter 2023 GDP on April 27, 2023. The full release of Q1 Gross Output data, as well as the third estimate of GDP are scheduled for June 29, 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. We also recommend that GO be elevated in the BEA’s press releases and website as the “top line” in national income accounting, since GO data often tells a very different story than GDP data.
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, approximately half of the economy’s sectors reversed course and pulled back in the last quarter of 2022. Of the 22 sectors in GO covered by the BEA, 11 were up and 11 were down in the fourth quarter.
After expanding near and at double-digit growth rates over the past few quarters, the Mining sector contracted 4% in real terms for the fourth-quarter 2022. While comprising just 1.9% share of the overall economy, the mining 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 even smaller than the Mining sector among the early stages of production that can be used as an early indication of future movements in the overall economy. After expanding for three consecutive periods, the Agriculture sector shrank 2.1% in Q4 2022.
Manufacturing – the second largest segment with a 16% share of the economy – followed four quarters of double-digit growth with another expansion, albeit at a more tepid growth rate of 4.9% Q4 2022, which was higher than preceding period’s 3.9% expansion. Despite a weak growth of just 1.7% for Nondurable goods, Durable goods grew at 8%, which drove the overall expansion of the sector.
After reversing three periods of double-digit growth with a contraction of nearly 11% for Q3 2022, the Construction sector, which accounts for 3.5% of the economy, pared down the decline in the fourth quarter 2022 to just 1.7%.
While the retail trade declined 1.6%, the wholesale trade sectors delivered a substantial contraction of 5.2% in real terms.
Finance, insurance, real estate, rental, and leasing is the largest segment that accounts for 17% of the economy. After a contraction of more than 11% in the second quarter and a growth of 3.7% in Q3 2022, this sector pulled back, but shrank just 0.5% in the last quarter of 2022. The Finance and insurance subsegment grew 0.8% in real terms, but the Real estate, rental, and leasing subsegment contracted 1.5%, which pushed the overall segment into a contraction.
While paring down its rapid growth rates from the first half of 2022, overall government spending continued to expand. After a 2.3% growth on Q3, overall government grew 3.4% in the fourth-quarter 2022. Unlike the federal government, which expanded 1.8%, government at state and local level – which account for two-thirds of total government spending – grew nearly 4.1% 
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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