Every quarter the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA) releases gross domestic product (GDP) statistics. Its latest release indicates that GDP grew at 2.0%, suggesting a slowdown in the economy but no recession.
But the BEA also now produces a broader measure of the economy called Gross Output (GO), a measure that I have advocated for years in my book, The Structure of Production (now in its third edition).
GO tends to be more sensitive to the business cycle and more volatile than GDP. During the financial crisis of 2008-09, GO fell much faster than GDP. Afterwards, GO recovered more quickly than GDP. (See chart below.) Still, it wasn’t until late 2013 that GO fully recovered from its peak in 2007.
The latest GO figures released today suggest that the economic recovery is losing steam and may end up in a mild recession in 2016. Real adjusted GO grew only 2.5% in the third quarter, compared with 4.6% in the second quarter.
Moreover, business-to-business (B2B) activity actually fell 0.1% in real terms in the third quarter, suggesting that a recession may be coming down the road in 2016.
The fact that the stock market has sold off so fast in January is also a leading indicator that the U.S. economy is struggling.
However, I do not see any evidence yet that there will be a steep recession or a return to the Great Recession of 2008-09.
More about GO and GDP
GO and GDP are complementary national income accounting statistics. Gross output 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 an accounting statement. In April 2014, the BEA began to measure GO on a quarterly basis along with GDP.
Gross domestic product 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 similar to the “bottom line” (earnings) of an accounting statement, which determines the “value added” or the value of final use.
Real Business Spending (B2B) Suffers Slight Decline
We also have created a new B2B index based on GO data. It measures all the business spending in the supply chain and new private capital investment. B2B activity rose only 0.2% in nominal terms in the third quarter, down from 1% growth in the second quarter, and actually fell in real terms by 0.1%. According to the Skousen B2B Index, business spending rose to $22.83 trillion in nominal terms from $22.78 trillion in the second quarter. Meanwhile, consumer spending rose 1.1% (0.8% in real term) in Q3.
I have championed Gross Output as a more comprehensive measure of economic activity than GDP. A key reason is that GDP leaves out the supply chain and business-to-business transactions in the production of intermediate inputs. That’s a big part of the economy. 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.
I first introduced Gross Output as a macroeconomic tool in my 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.
The BEA’s decision in 2014 to publish GO on a quarterly basis in its “GDP by Industry” data is a major advance in national income accounting. GO is the first output statistic to be published on a quarterly basis since GDP was invented in the 1940s. With GO and GDP provided 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.”
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 substantial than consumer spending. By using GO data, we see that consumer spending is actually only about a third of economic activity, not the 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 U.S. economy.
I want to offer personal thanks to Ned Piplovic for providing technical data for this report.
For More Information
New: Mark Skousen, “Linking Austrian Economics to Keynesian Economics,” Journal of Private Enterprise, Winter 2015. The article is online here.
You Blew It! Larry Summers Thinks Lower Energy Prices Are a Zero-Sum Game
I attended an interesting financial/economic conference on Jan. 20 at Chapman University, where I am a Presidential Fellow, hosted by National City Bank. The keynote speaker was Larry Summers, former Secretary of the Treasury under President Obama, former president of Harvard University and an economist.
His pessimistic remarks about the global and U.S. economies were in sharp contrast to the Citibank officials who were upbeat about the California economy, real estate and the stock market.
Summers is a “permabear” who believes in the stagnation thesis. He recently wrote in the Washington Post that the “Fed needs to prepare for the worst,” based on the sharp sell-off in stocks in January. Stocks are a leading indicator, but not the only leading indicator. Certainly employment numbers have been positive lately.
Not even good economic news, such as sharply lower energy prices, is viewed positively by Summers. “Lower oil prices is a zero sum game,” he contended. “It helps consumers, but hurts producers.” Say again? Sure, oil & gas companies are hurting because of the collapse in oil prices, but I can think of a lot of companies that benefit from lower energy prices — airlines, the manufacturers of cars and trucks and the transportation industry in general. Most economists recognize that lower energy costs are a net gain for the economy.
Special Announcement: Subscribers to the Skousen CAFÉ should be happy to know that for the first time in two years, I am hosting the Global Financial Summit, a special private investment seminar, in the Bahamas. The focus will be on “High Income & Fast Money Investing” — combining my two most successful trading services!
My “All Star High Income & Fast Money” experts for this exclusive private meeting will include Alex Green, investment director of the Oxford Club, and editor of three trading services (Momentum Alert, Insider Trader and True Value Alert). Alex is rated the #5 best investor according to Hulbert Financial Digest. I’ve also confirmed Martin Truax, vice president at Raymond James, whose “income & growth” portfolio has more than tripled during the past 10 years. He and his partner Ron Miller also have developed a highly successful trading system using “red” and “green” signals to determine when to get in and out of markets (they flashed “sell” in May and now are flashing “buy” — good calls!)
Our keynote speaker will be Steve Moore, the chief economist for the Heritage Foundation and the #1 columnist for the Wall Street Journal, who will speak on “Money & Politics 2016: The Inside Story for Private Investors.”
The dates are March 16-19, 2016, at the five-star Atlantis Resort on Paradise Island, Nassau, Bahamas. This is during high “Spring Break” season, so I urge you to make your flight reservations now.
I soon will be announcing more top experts in portfolio management, tax and estate planning and foreign investing. But I want to encourage you to sign up now. The price is only $695 per person/$995 per couple. And hotel rates at the five-star Atlantis Resort are only $209 per night. We are limiting this private meeting to 200 attendees only. To sign up, call Karen or Jennifer at 855-850-3733 ext 202, email firstname.lastname@example.org or go to gfs.freedomfest.com.
Private ‘Wednesday Meeting’ at FreedomFest!
We’re getting a huge response to this year’s big FreedomFest show in Las Vegas, with more than 100 new attendees signing up every week. Every time I mention to people that George Foreman is our keynote speaker, they get excited. And libertarians are thrilled that Judge Andrew Napolitano will be addressing us. Now I have more good news: Grover Norquist, president of Americans for Tax Reform and the person CNN calls “the most powerful man in Washington,” will be holding his famous “Wednesday Meeting” at FreedomFest on Wednesday afternoon, July 13, 2016, at Planet Hollywood. The Wednesday Meeting is a private, by-invitation-only meeting of the nation’s most influential activists. I’ve attended several, and believe me, you will want to be there to see what is said and heard.
This meeting will fill up quickly (the room holds only 400 people), so I urge you to reserve your spot now by registering today at http://freedomfest.com/register-now/. Or call toll-free: 1-855-850-3733.
Rates Will Rise Next Month: Here’s How to Save
Special announcement: Due to rising costs, we are raising our prices for FreedomFest for the first time in 10 years. But we are still offering the same price for our “early bird” discount — only $395 per person/$595 per couple. Call toll-free 1-855-850-FREE (3733) or go to http://freedomfest.com/register-now/.
Note: Good news! Due to strong demand, we have extended our early bird discount to Jan. 31, but it must end at this time. Please sign up now to take advantage.
Join me at The MoneyShow in Orlando, March 2-5!
Receive free admission to the MoneyShow in Orlando, Florida, as a guest of Eagle Financial Publications and me. The show’s new venue is at Disney’s Contemporary Resort near the company’s famous theme parks. I especially encourage you to attend the presentations of my colleagues Bryan Perry and Nicholas Vardy, among more than 150 other speakers who will address a range of income and growth investments. Register today.
In case you missed it, I encourage you to read my Skousen CAFÉ from last week about the bad tax plan being promoted by two small government Republicans. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.
Good investing, AEIOU,