“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, September 26, 2024):
The federal government (BEA) released today the figures for the second-quarter 2024 gross output (GO) – the top line in national income accounting. After increasing 1.4% in Q4 2023 and rising just 1.0% in the first quarter of 2024, the Adjusted GO (GO*)[1] – which measures spending at all stages of production – delivered lethargic growth of just 1.2% in real terms for the second quarter of 2024. Using BEA’s net figure, real GO grew 1.8%, much higher than the Adjusted Gross Output (GO*), indicating that the spending in the supply chain is lagging and which might spell troubles for the economy in the near future. This is the second consecutive period in which the Adjusted GO growth trailed GO growth rates published by the BEA.
While the BEA’s GO numbers indicate a slightly positive outlook about economic growth over the next few quarters, the lethargic growth of the adjusted real GO suggests that the economy is struggling and might turn negative as a result of any disruption. With the Boeing workers already on strike, and two more labor strikes looming – auto workers and east coast port workers – the danger of an economic downturn is substantial.
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. While business (B2B) spending increased 3.6% in the second quarter – higher than Q1 growth of 2.8% – it still was significantly lower than the 5.6% consumer spending growth in nominal terms. On an annualized basis in real terms, business spending expanded only 1%, but consumer spending grew 2.7%, which is nearly 30% higher than in the previous quarter.
In nominal terms, the BEA’s GO advanced 4.5% to exceed $50 trillion for the first time. This growth rate exceeds historical averages, which generally indicates a healthy economy a hints at a potential growth ahead. However, the GO growth lagging behind the GDP growth of 5.6% in Q2 and the lackluster performance of the adjusted GO, indicate that outlook for near-term economic growth is uncertain as we head towards the end of 2024.
Real-term business spending (B2B) growth was relatively flat for the third consecutive quarter. This is a continuing 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 still cautious about the near future, and that the economy is far from ready for a brisk expansion. While Q2 GDP paints a rosy picture on the surface, an economic slowdown is not out of the question as we close 2024 and transition into 2025.
In addition to lackluster business spending, economic outlook hinges on several additional factors. Domestically, concerns about the outcome of the 2024 presidential election, expectations of Federal Reserve’s actions regarding interest rates that might exacerbate inflation loom over the economy. Internationally, continued impact of the war in Ukraine, economic conditions in Europe and Asia, as well as continued competition with China for global economic and military supremacy are just some of the issues that will impact economic future in the near term.
The Federal Reserve cut the interest rate 50 basis points at its meeting this month. If we exclude emergency rates cuts during the Covid pandemic in 2020, the last time the Fed cut the federal funds rate 50 basis points or more was during the global financial crisis of 2008. With the economy showing no clear signs of rapid growth, the Fed indicated that it might cut the interest rates another 50 basis points over its two remaining meetings in 2024. The slow growth of the Adjusted GO confirms the Fed’s worries about the US economy and its reasoning to cut the interest rates.
Interest rate cuts demonstrate the Fed’s belief that business borrowing is bellow expected levels and that economic growth needs support from easier access to money. While easy money policies do help economic expansion in the short term, those policies inevitably result in higher inflation over the longer term.
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 slower than GDP, it suggests economic decline over the next few quarters, and vice versa. Currently, the BEA’s real GO’s second quarter real growth rate of 1.8% is lower than the annualized GDP growth rate of 3.0%, which is usually a sign of an upcoming economic contraction. This indication is further emphasized by the real Adjusted Gross Output (GO*) growth rate of just 1.2% lagging behind both GDP and GO growth, which can mean a stagnating economy.
After three quarters of mixed signals regarding the direction of the economy in the near term, economic data for the second quarter did not offer any more clarity regarding the likely direction of the economy in late 2024 or early 2025. The third-quarter 2024 GO data is scheduled to be released in late December, which will be too late for forecasting economic direction in 2024, but might help in signaling the economy’s path in early 2025.
In nominal terms, second-quarter 2024 GDP expanded 5.6% to exceed $29 trillion for the first time. The BEA’s GO grew 4.5% to cross above the $50 trillion mark – another first. 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 3.9% in nominal terms at the end of the second quarter 2024 and is now just shy of $61 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 3.0% expansion in the previous quarter, nominal B2B spending grew again in Q2 2024. The 3.6% second-quarter growth pushed business spending to $34.5 trillion. At the same time, consumer spending expanded 5.4% to $19.7 trillion. However, the higher-than-normal inflation reduced consumer spending growth to just 2.7% in real terms. Inflation impact was even more evident in business spending as the 3.6% growth in nominal terms became a growth of just 1.0% in real terms. This low growth in real terms only reversed the contraction form the two previous periods and brought the real B2B spending back to Q3 2023 level.
“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 third-quarter 2024 GDP on October 30, 2024. The full release of Q2 Gross Output data, as well as the third estimate of GDP are scheduled for December 19, 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
Three of the major economic sectors experienced a pullback again in Q2 2024 as they did in the previous period. Moreover these three sectors are in the very early stages of production, which generally are better early indicators of economic direction than later stages of production.
After declining 1.2% in Q1, the Agriculture sector contracted an additional 9.1% in the second quarter. This marks the third consecutive quarter of contraction in real terms for the sector. The Mining sector reversed a contraction from Q1 (-6.1%) and expanded slightly at 1.7% in the second quarter. However, the Utilities segment – which experienced a slight growth of 1% in Q1 after a 5.7% decline in the last period of 2023 – delivered a largest decline of any sector this period and shrunk more than 25% in Q2 2024.
While these three sectors account for only 3.9% 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.
One bright point in the earlier stages of production was the Construction sector (4.4% share of the economy), which followed up a healthy 7.3% real-term growth in the first quarter of 2024 with an even stronger expansion of 15% in the second quarter.
However, the main reason for concerns about economic growth is the Manufacturing sector. After expanding less than 1% in the last quarter of 2023, and then delivering no growth in the first quarter of 2024, the second-largest sector with a 14.5% share of the overall economy, contracted nearly 2% in Q2 2024. The contraction affected both Durable goods (-1.1%) and Nondurable goods (-2.6%). The Wholesale sector expanded 3.6% and the Retail sector grew 2.6%.
The largest segment that accounts for nearly a fifth of the overall economy – Finance, insurance, real estate, rental, and leasing – inked only a small expansion of just 0.5% in real terms. While Real estate and rental and leasing subsector expanded 4.4%, the Finance and insurance subsector contracted 5.1%.
Three late-stage sectors – Professional and business services; Educational services, health care, and social assistance; and Arts, entertainment, recreation, accommodation, and food services, which account combined for more than a 23% of the overall economy – expanded 6.0% and 9.8%, and 8.7% respectively.
Prior to Q2 2024, the government spending growth rate declined for three consecutive quarters. However, the growth rate decline come to an end this period. Total overall government spending in real terms expanded 2.7% in the second quarter. After shrinking for two consecutive periods, Federal government spending expanded 1.3% in Q2 2024. However, the bigger concern is the 3.1% spending expansion of State and local governments, which account for 70% of total government spending.
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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