“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
“It’s at least conceivable that gross output is a leading indicator of the economy.”
– Peter Coy, Economics Editor, New York Times (Aug 7, 2023)
Washington, DC (Thursday, December 21, 2023): The economy is growing again at a robust pace, according to today’s gross output (GO) data for the third quarter. The federal government (BEA) released today the figures for the third-quarter gross output (GO) – the top line in national income accounting – and confirmed the rapid expansion of GDP previously reported.
GO measures spending at all stages of production. Real GO rose 3.5% – substantially better than the 2.7% growth from the previous period – but still lagged behind the 4.9% growth figure for real GDP (the bottom line of national accounting). Consumer spending continued its expansion with a 2.6% uptick in the most recent quarter. However, business spending expanded even faster at 3.3% – after contracting nearly 5% in the second period 2023.
The 3.5% expansion pushed up real GO just shy of $39 trillion in the third-quarter 2023. In nominal terms, GO advanced 4.9% to $48.1 trillion. These growth rates are higher than historical averages and would generally indicate economic expansion ahead. However, there are reasons to be anxious about the direction of the economy as 2023 concludes and we head towards 2024. Furthermore, a more detailed look at some of line-item details sends mixed signals regarding economic expansion.
After declining more than 13% over three consecutive quarters, business (B2B) turned around and expanded 3.3% in the third quarter 2023. 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 anticipating an economic expansion despite the resistant inflationary pressures, global conflicts, and the competition with China for economic supremacy.
Next year is a presidential election year in the United States, and – based on past election-year experience – there is a good probability that the Federal Reserve (Fed) might adopt a looser money policy in an effort to juice the economy. At its December meeting, the Federal Open Markets Committee (FOMC) decided to hold the rate in the 5.25%-to-5.5% range, but indicated its intention to implement three quarter-point rate cuts in 2024.
Unlike consumption, which maintains a steady uptrend over the long term, business spending is significantly more volatile and more sensitive to economic fluctuations. Therefore, the business spending trend reversal after declining for three consecutive quarters, could indicate a milder recession predicted by GO trailing GDP growth.
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 third-quarter growth rate of 3.5% is lower than the annualized GDP growth rate of 4.9%, which is usually a sign of potential economic contraction.
Furthermore, in addition to the BEA’s GO statistic 3.3% expansion, the real Adjusted Gross Output (GO*)[1] growth rate of 4.1% is also lower than GDP growth, which can mean a stagnating economy. However, both GO and Adjusted GO are higher in the third quarter than in the previous period – 1.4% and 0.4%, respectively – which might indicate that any potentially upcoming recession might be only mild and short-lived.
Third-quarter data sends mixed signals regarding the direction of the economy in the near term – the relationship between GO growth and GDP growth indicates a potential recession, but business spending expansion outpacing consumer spending shows business sector’s positive outlook on economic growth. While not available until late March 2024, fourth-quarter and year-end economic data will hopefully be able to sort out these mixed signals and shed more light on the direction of the economy in the next year.
In nominal terms, third-quarter 2023 GDP expanded 8.3% and GO grew just 6.7%. The Q1 2023 Adjusted GO – which includes the gross wholesale and gross retail figures (included only as net figures in the GO reported by the BEA) – advanced 7.3% in nominal terms. The difference between net and gross figures amounts to nearly $11 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 can cause minor deviation in the model, the impact is not as prominent as it was over the past couple of years.
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. Nominal B2B expanded 7.2% to $33.7 trillion in the third quarter 2023. Real B2B spending grew 3.5% to $27.4 trillion. Unlike the previous three periods when B2B spending declined and consumer spending continued to expand, consumer spending growth trailed B2B expansion in Q3 2023 with a 5.8% expansion to $18.7 trillion in nominal terms, and grew 2.6% to $15.1 trillion in real terms.
“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 fourth-quarter 2023 GDP on January 25, 2024. The full release of Q4 Gross Output data, as well as the third estimate of GDP are scheduled for March 28, 2024.
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
While seven of the economy’s 22 sectors experienced a pullback in Q3 2023, only three small sectors contracted more than 1.5% on an annualized basis, and several sector delivered double-digit gains to offset the contracting sectors for an overall expansion of the economy. Furthermore, only one sector contracted in the very early stages of production, which is a better predictor for the direction of the economy over the next few periods.
After contracting approximately 1% in the previous period, the Agriculture sector experienced a 1.3% real-term contraction in third quarter. The Mining sector reversed its contraction of more than 7% in the previous quarter and expanded 1.3% in the most recent period. While the Utilities sector accelerated its growth from 2.8% in the second quarter to more than 10% in the third quarter, the Construction sector doubled its growth rate from the prior period and expanded 14.7% in Q3 2023.
While these four sectors – Agriculture, Mining, Utilities, and Construction – account for only 8% of the overall economy, those sectors represent the early stages of production, and can be good early indicators of which direction other sectors further down the supply chain might be headed in subsequent periods.
With a 14% share, Manufacturing is the second largest segment and has a significant impact on the performance of the overall economy. In the third quarter, Manufacturing expanded 1.6% – driven mostly by the 3.1% expansion for Nondurable goods. Durable goods were flat to the previous period, which should be seen as a caution about the near-term economic growth.
An additional indicator of a potentially tepid economic growth over the medium-to-long term is the direction of the Wholesale sector, which contracted 1.2%. A point for concern is that the third quarter 2023 marks a sixth consecutive decline for the Wholesale sector. However, the retail sector expanded 12%, which could indicate either a reversal of the 2% contraction from the previous period, or a positive short-term economic outlook as we close 2023 and head into 2024.
Finance, insurance, real estate, rental, and leasing is the largest segment that accounts for 19% of the economy. After a minimal expansion of 0.37% in the previous period, this sector remained flat with an equally minimal contraction of 0.4%. The other segments that contracted in Q3 2023 are Arts, entertainment, and recreation (-8.8%) and Other services, except government (-8.5%). However, despite large pullbacks, these two segments did not have a major impact, as the combine for merely 3% of the overall economy and are in the late stages of production.
After growing only 1.8% in the second quarter, overall government expanded 3.3% in Q3 2023. The growth was spread relatively evenly between the Federal government (3.43%) and State and local government (3.27%).
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/
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: https://apps.bea.gov/iTable/?reqid=150&step=2&isuri=1&categories=gdpxind
Peter Coy, “What GDP’s Cousin Can Tell Us about the Economy,” August 7, 2023, New York Times: https://www.nytimes.com/2023/08/07/opinion/gdp-recession-gross-output.html?searchResultPosition=1
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; he compared GDP to an X-ray of the economy, and GO to a CAT-scan: : 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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