GDP numbers look great, but a leading indicator signals trouble ahead
By Mark Skousen
April 4, 2024
The Bureau of Economic Analysis last week estimated that real gross domestic product grew at a robust annual rate of 3.4% in the fourth quarter of 2023 and 2.5% for the year. Team Biden hopes this trend will continue ahead of the election. Less noticed, however, was a macrostatistic, gross output or GO, in the same report. It indicates that the economy may be headed for trouble later this year.
While GDP measures only final output, GO measures spending at all stages of production, including the supply chain’s value. My research shows that gross output—especially business-to-business spending—is a leading barometer of economic health.
The metric can make a big difference in assessing the economy’s performance, as was the case in 2022. Real GDP declined in the first two quarters of that year, suggesting a recession. But real GO continued to increase, and there was no recession.
The situation has since flipped. Real gross output was a full percentage point below GDP in the fourth quarter of 2023, at 2.4%. While consumer and government spending remained strong, business spending fell 0.3% and has been in steady decline since the third quarter of 2022.
In last year’s final two quarters, real GO grew more slowly than GDP. That spells danger. Whenever gross output grows at a slower pace than GDP, it suggests a slowdown and perhaps a recession. Fear of a recession is one reason Fed officials anticipate cutting interest rates later this year.
Another indicator that the U.S. economy may be headed for trouble is the Conference Board’s latest U.S. Leading Economic Index. The survey tracks data connected to business activity, such as manufacturing, new orders, industrial production, credit conditions and the stock market. Like business-to-business spending, these indicators have been trending downward since 2021.
Most financial reporters focus on retail sales as the economy’s driver, since consumer spending accounts for about 70% of GDP. Using the gross output measure, however, consumer spending makes up only about one-third of the total economy, while business spending represents almost two-thirds. Business-to-business spending is also more volatile: It declines faster during a recession and recovers faster during an expansion.
Most economists still use only GDP for economic outlooks. But both measures—GDP and GO—are essential to understanding where the economy is headed, and they often tell different stories. We should view gross output as the top line in national income accounting and GDP as the bottom line.
In their 2006 book, “A New Architecture for the U.S. National Accounts,” economists Dale Jorgenson, Steve Landefeld, and William Nordhaus write: “Gross output is the natural measure for the production sector, while net output”—GDP—“is appropriate as a measure of welfare. Both are required in a complete system of accounts.” In a 2019 article, Steve Forbes suggested a simpler comparison between GDP and GO: “It’s like the difference between an X-ray and a CAT scan.”
Unfortunately, the Bureau of Economic Analysis typically releases gross output data two months after its initial GDP estimates. For decades, publicly traded companies have released their earnings reports every quarter, reporting sales (top line) and earnings (bottom line) simultaneously. The federal government should do the same.
This article appeared originally April 4, 2024 on the wsj.com website, and in the printed edition of the Wall Street Journal on April 5, 2024.
Notes:
The federal government (BEA) has published GO quarterly since 2014…..and three Nobel Prize economists now recognize its value….but the AEA, the textbooks, and the financial media are slow to recognized that national income accounting now has a “top line” (GO) and a “bottom line” (GDP), just like financial statements are released every quarter by publicly traded companies….and they often tell very different stories.
Last year the Concise Encyclopedia of Economics added it to its glossary:
Economists are finally catching up with the finance and accounting profession. As Bill Nordhaus says, “it’s been a long slog.”
See https://www.grossoutput.com/2023/04/01/three-nobel-prize-winners-endorse-new-macro-statistic/
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