“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 19, 2024):
Today the federal government (BEA) released 3rd quarter gross output (GO), the top-line that measures spending at all stages of production. Real GO rose 3.1%, a substantial improvement from previous quarters, and equal to real GDP for the third quarter. This is good news. Assuming the fourth quarter GO is positive, it looks like the US avoided a recession in 2024. Business (B2B) spending also rose 2.9%.
After increasing an average 1.2% over the preceding three quarters, the Adjusted GO (GO*)[1] – which measures spending at all stages of production – delivered a significant bump and rose 3.0% in real terms for the third quarter of 2024. For the third consecutive period the Adjusted GO growth trailed GO growth rates published by the BEA, but the gap has narrowed significantly. This is indicating that the business spending is increasing comparing to previous few periods, and signals that fears of recession from earlier in the year are dissipating quickly. It is important to keep in mind that these are third-quarter results – before we knew the results of the presidential election. With the new pro-business administration set to take office next month, and already courting heads of mayor domestic and international businesses to set growth strategies, we might see a brisk increase in business investment spending as early as the last quarter of 2024 – for which the data will be released in March 2025.
The continuously increasing growth rate of BEA’s GO numbers indicates that the economy should most likely avoid a recession and that it might be set for a strong positive growth in the next year, barring any unforeseen, black swan-type events. The one piece of the puzzle still needed for absolute confirmation of the strong economic growth to come is that the adjusted real GO (GO*) growth rate rises above the GO growth rate. The Adjusted GO has been increasing steadily over the past few quarters and its growth rate might be back above the GO growth rate as early as the fourth quarter, thus confirming the optimistic outlook for an expanding economy in 2025.
Businesses were cautious about spending over the past four periods. However, real-term business spending (B2B) has been ramping up lately. 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 becoming more confident that a faster economic expansion is in the near-term future. The GDP figures – which are dominated by consumer spending – show expansion almost always and overestimate the health of the economy. However, business spending is more sensitive to the ups and down of the economy, which makes it a better indicator of the direction that the economy might take in the near future.
While business spending is probably the most significant indicator, economic outlook hinges on several additional factors. The uncertainty of the U.S. presidential election is now behind us. Whether you see the results of the U.S. presidential election as good, bad or indifferent, at least the uncertainty is over, which makes other factors easier considerations. Domestically, the Federal Reserve cut interest rates yesterday to a 4.25%-4.50% range, but projects only two more quarter-percentage-point cuts in 2025.
Continued concerns of the war in Ukraine are still high on the international stage. However, hopes are that the new administration in the Executive branch might be able to broker some kind of ceasefire, or permanent solution to the conflict. While permanent solution is preferable, even a minor improvement in this conflict would go a long way into easing further trepidations about economic conditions in Europe and Asia, which are easing already on the prospect of the U.S. economic expansion. One concern that could derail U.S. economic growth are president-elect’s threats to implement wide-ranging tariffs on imports from our economic rivals like China, as well as our economic partners like Canada. 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 slowly increasing business spending growth over the past several quarters, could indicate that we might be safe from a recession, and on the way towards a significant economic expansion.
[1] The BEA currently uses a limited measure of total sales of goods and services in the production process. Once products are fabricated and packaged at the manufacturing stage, the BEA’s GO only adds “net” sales at the wholesale and retail level. Its official GO for the third quarter of 2024 is slightly less than $51 trillion. By including gross sales at the wholesale and retail level, the Adjusted GO (GO*) expands to nearly $61 trillion in Q3 2024. Thus, the BEA omits almost $11 trillion in business-to-business (B2B) transactions in its GO statistics. We include them as a legitimate economic activity that should be accounted for in GO, which we call Adjusted GO. See the new introduction to Mark Skousen, The Structure of Production, 3rd ed. (New York University Press, 2015), pp. xv-xvi.
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 Q2 real growth rate of 3.2% is slightly higher than the annualized GDP growth rate of 3.1%. The static view of the nearly identical growth rates does not offer any insights about the direction of the economy. However, the dynamic view of the GO growth rate rising faster than GDP growth rate indicates that the recession fears have subsided and that the outlook on economic growth has shifted to positive going into 2025.
After four quarters of mixed signals regarding the direction of the economy in the near term, economic data for the third quarter indicates a positive shift in the economic growth outlook as we head towards 2025. The fourth-quarter and 2024 full-year GO data is scheduled to be released in late March next year, which will hopefully confirm the uptrend and help in signaling the economy’s path for the rest of 2025.
Just as close as in real terms, third-quarter 2024 nominal growth rates were similarly equal, with GDP expanding 5.0% to exceed $29.4 trillion and GO rising 5.2% to $50.3 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 5.0% in nominal terms at the end of the third quarter 2024 and is now slightly over of $60.7 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 expanding 3.0% and 3.6% in the previous two periods, nominal B2B delivered a 4.9% increase in Q3 2024, which pushed the annualized B2B spending to more than $34.8 trillion. At the same time, consumer spending expanded 5.3% – relatively flat to previous period – and currently stands just short of $20 trillion. In real terms, business spending grew 2.9%, and consumer spending expanded 3.3%
“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 fourth-quarter and 2024 full-year GDP on January 30, 2025. The full release of Q4 Gross Output data, as well as the third estimate of GDP are scheduled for March 27, 2025..
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
Despite the robust expansion of the overall economy, three of the major economic sectors experienced a pullback again in Q3 2024 as they did in the past two periods. Moreover, because these three sectors are in the very early stages of production, they generally are better early indicators of economic direction than later stages of production. However, the contractions were relatively mild compared to past few periods, which is a slightly positive indicator for the rest of the economy going forward.
After declining more than 9% in Q2, the Agriculture sector contracted merely 4.6% in Q3. This marks the fourth consecutive quarter of contraction in real terms for the sector. The Mining sector which posted a small gain in the previous period but contracted more than 6% in Q1, declined just 1.9% in Q3. However, the Utilities segment was the biggest mover, which followed a plummet of more than 25% in Q2 with a contraction of just 2.6% in Q3 2024.
While these three sectors account for less than 4% 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.
The Construction sector was flat to the previous period. As the second-largest sector with a more than 14% share of the overall economy, the Manufacturing sector reversed a contraction of 2% in the previous period and expanded 1.5% in Q3. Furthermore, this expansion was driven by a 3.5% growth in nondurable goods, which is an even better positive sign for the extended economic outlook.
While the Wholesale trade grew nearly 6% and the Retail expanded 12.3%, the Transportation and Warehousing sector advanced 4.4%, Additionally, the Information sector increased 7.9%.
The largest segment that accounts for nearly a fifth of the overall economy – Finance, insurance, real estate, rental, and leasing – expanded 0.4%, which is in line with last period’s performance.
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 fourth of the overall economy – expanded 3.3% and 6.1%, and 0.7% respectively.
After declining for three consecutive quarters, the government spending growth rate reversed direction last period, and has again done so this period. Overall government spending followed a 2.7% expansion from the last period with a 3.6% increase in Q3 2024. The main driver behind this increase was the 7.1% increase in Federal government spending, which was just 1.3% in the previous quarter. Alternatively, State and local governments grew a slightly little slower rate, and followed a 3.1% expansion from Q2 with a 2.1% increase in Q3 2024.
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
This just in: My paper, “GO Beyond GDP,” which explains what GO is all about, has been ranked the #1 most downloaded paper by the Social Science Research Network (SSRN). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5002052
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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