“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, June 27, 2024): The federal government (BEA) released today the figures for the first-quarter 2024 gross output (GO) – the top line in national income accounting. Adj. GO, which measures spending at all stages of production, slowed to only 1% after taking inflation into account, slightly less than the Q1 2024 growth rate of 1.4% for GDP (the bottom line of national accounting). Both figures suggest a sluggish economy and persistent inflation.
For the first time in several years, the BEA’s narrowly defined GO grew much faster than the adjusted GO figure. Using BEA’s net figure, real GO grew 2.5%, much higher than the Adjusted Gross Output (GO*), which expanded only 1% in real terms.[1] While the BEA’s GO growth numbers send positive signals about economic growth over the next few quarters, the low number for the adjusted real GO suggests caution with continued evidence of stagflation in 2024.
Another reason to be cautious about economic growth is that business spending continues to underperform compared to consumer spending, a trend that began in Q4 2023. In nominal terms, business (B2B) spending grew at a rate of only 2.8% in the first quarter, while consumer spending expanded at over 4%. In real terms, business spending fell 0.3%, while consumer spending grew 2.1% on an annualized basis.
In nominal terms, the BEA’s GO advanced 5.4% to exceed $49 trillion for the first time. These growth rates exceed historical averages, as well as exceed GDP growth rates, which generally indicates a potential economic expansion ahead. However, the lackluster performance of the adjusted GO sends a mixed message about the direction of the economy as we head into the second half of 2024.
Business spending (B2B) growth was flat for the second consecutive quarter. This continues to indicate 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 still under the impression that the economy might not be ready to take off. Indeed, an economic slowdown in the second half of 2024 is still a possibility.
Concerns about the outcome of the 2024 presidential election, sustained uncertainties about the Federal Reserve’s upcoming actions to combat continued inflationary pressures, as well as a number of global conflicts, and the continued U.S. competition with China for global economic supremacy are just some reasons contributing to these concerns about the economic future in the near term.
The Federal Reserve kept the interest rate unchanged at its March and June meeting. With only four meeting remaining in 2024 and the economy showing no clear signs of rapid growth, the Fed indicated potentially only one interest rate cut for the rest of 2024 – possibly at the September meeting.
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 tepid business spending growth over the past several quarters, could indicate a mild recession predicted by Adj. 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, the BEA’s real GO’s first-quarter real growth rate of 2.5% is higher than the annualized GDP growth rate of 1.4%, which is usually a sign of an upcoming economic expansion. However, the real Adjusted Gross Output (GO*) growth rate of just 1% is lower than GDP and GO growth, which can mean a stagnating economy.
After two quarters of mixed signals regarding the direction of the economy in the near term, economic data for the first quarter did not offer much to indicate categorically the direction of the economy in late 2024 or early 2025. While not available until late September, we are hoping that the release of second-quarter 2024 GO data will send a clearer signal for the near-term direction of the economy.
In nominal terms, fourth-quarter 2023 GDP expanded 4.5% to $28.3 trillion, and the BEA’s GO grew 5.4% to $49.2 trillion. 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 just 1.0% in nominal terms to end the first quarter of 2024 and is now just shy of $60 trillion. 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.
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 a 1.3% expansion on the last quarter of 2023, nominal B2B spending grew again in Q1 2024. The 2.8% first-quarter growth pushed business spending to exceed $34 trillion for the first time. At the same time, consumer spending expanded 4.9% to $19.1 trillion. However, the higher-than-normal inflation reduced consumer spending growth to just 2.1% in real terms. Inflation impact was even more damaging to business spending as the 2.8% growth in nominal terms became a 0.3% contraction 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 second-quarter 2024 GDP on July 25, 2024. The full release of Q2 Gross Output data, as well as the third estimate of GDP are scheduled for September 26, 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
Just like in the previous period, only five of the economy’s 22 sectors experienced a pullback in Q1 2024. However – again same as the previous period – three of those sectors are in the very early stages of production, which can be good early indicators of which direction other sectors further down the supply chain might be headed in subsequent periods.
The Agriculture sector (-1.2%) and the Mining sector (-6.1%) contracted for the second consecutive quarter in real terms. The Utilities segment reversed a 5.7% decline from the previous period and expanded 1.0% in real terms for the first quarter. While these three sectors account for only 3.7% of the overall economy, they are all early-stage sectors, which can signal how the later stages and the overall economy might shift over the subsequent few periods.
Slightly down from its double-digit growth in Q3 and Q4 2023, the Construction sector, which accounts for 4.4% of the economy on its own, still managed a healthy 7.3% real-term expansion in the first quarter of 2024.
One of the reasons for caution about the economic growth could be that Manufacturing, the second-largest sector with a 14% share of the overall economy, was flat in the first quarter, after expanding less than 1% in the last quarter of 2023. Furthermore, Nondurable goods expanded 4% while Durable goods contracted 3.7%. This is generally a good indicator of potential economic headwinds over the near term. The Wholesale sector expanded just 0.2% and the Retail sector growth 2.5%. This discrepancy in growth rates further serves to support the notion that businesses are more cautious about the economic growth that consumers are.
The largest segment that accounts for nearly a fifth of the overall economy – Finance, insurance, real estate, rental, and leasing – was the main driver of economic growth by surging 4.7% in Q1. Professional and business services, and Educational services, health care, and social assistance – which account combined for more than a fifth of the overall economy – expanded 1.1% and 6.4%, respectively.
Government spending growth rate fell for the third consecutive quarter. Overall government expenditures in real terms increased just 1.7% in Q1. However, the pattern of state and local government expenditures increasing while federal government spending shrunk continued for the second consecutive quarter. While federal government spending contracted 0.7% in real terms, State and local governments grew nearly 2.8%.
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
Mark Skousen, “Slow GO May Mean a Recession Soon” Wall Street Journal, April 4, 2024: https://www.wsj.com/articles/slow-go-may-mean-a-recession-soon-us-economy-real-gross-output-65c4f1fd?mod=commentary_article_pos3
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
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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