Washington policymakers recently gained access to new tools to aid them in measuring U.S. economic growth that they would be well advised to use.
Possibly the biggest change is that the Bureau of Economic Analysis (BEA) last month began the quarterly release of Gross Output (GO), an economic measure to track total output that should serve as a compliment to the traditional Gross Domestic Product (GDP) that focuses on final output. The key advantage of the GO measure is that it provides a better reflection of the overall state of the economy, including business spending, than GDP offers by itself.
As a measure of total production, GO was valued at more than $30 trillion at the end of 2013 to nearly double the size of GDP. A longtime champion of using GO is Mark Skousen, PhD, a free-market economist who first advocated the expanded use of the statistic in his 1990 book, “The Structure of Production,” which he described as an underground bible for supply-side economics and Austrian macroeconomics.
The first quarterly use by the U.S. Department of Commerce’s BEA occurred on April 25, when the U.S. government revealed that fourth-quarter 2013 GO grew at a rate of only 1.1 percent, smaller than GDP’s rate of 2.6 percent. The discrepancy shows the value of including the GO statistic among the economic measures released by the federal government to indicate economic growth rather than relying on just one of them. Before last month, the BEA only released GO statistics annually and two or three years late, Dr. Skousen wrote in an April 22 op-ed published by The Wall Street Journal.
Historically, GO has deviated from GDP at key times during the history of the U.S. economy. In 2008-2009, for example, nominal GO fell by 8 percent, before recovering faster than GDP during the rebound, Dr. Skousen discovered.
The use of a second measure of economic production that is more comprehensive than GDP alone should be adopted by lawmakers, policymakers and forecasters alike to gain an enhanced understanding of what is happening with the U.S. economy at a particular time.
“GO is a huge step forward for the world,” wrote Steve Forbes, chairman and editor-in-chief of Forbes Media and a former U.S. Republican presidential candidate, in the April 14 issue of Forbes magazine.
“GO counts all the intermediate steps in the making of products and services,” Forbes wrote. “The results are stunning: Consumption is 40% of the economy, not 70%; government outlays are down to 9%; and business spending soars to 50%.”
In contrast, GDP data at the end of 2013 put consumer spending first in importance by accounting for 68 percent, following by government expenditures contributing 18 percent and business investment chipping in 16 percent, with net exports responsible for subtracting 2 percent, Dr. Skousen explained to show how the two measures differ.
Steve Landefeld, who retired as director of the U.S. Bureau of Economic Analysis on May 2, described GO as “powerful new set of tools of analysis.” His tenure in the job included a number of advances in expanding the data provided for economic analysis.
Also, for the first time on April 25, the BEA released GDP information for 22 industry sectors on a quarterly basis. These new statistics are aimed at filling an important gap in U.S. federal economic statistics by providing timely information on how individual industries contributed to U.S. economic growth in a given quarter. The data also lets businesses assess how their industries are faring, compared to others. Policymakers, businesses and people in the academic world will be able to use the statistics to identify economic turning points to aid in understanding a given sector’s performance.
U.S. Secretary of Commerce Penny Pritzker said, “American businesses will now have access on a quarterly basis to more comprehensive statistics about the impact of different industries on our economy. Enabling industries in all sectors to better measure their contributions to GDP and helping businesses understand and identify emerging trends more quickly make this new data an important tool for policy makers at the local, state and national level.”
The quarterly GDP statistics for the 22 industries supplements other quarterly and monthly indicators of performance, such as employment, sales and shipments, profits and prices, while offering a more complete analysis of business cycles and the reasons behind U.S. economic growth.
It is unusual when well-meaning people from a variety of political leanings all agree on the same policy changes. At least in the instance of including GO in the quarterly economic measures among the expanded data released by the BEA, that rare eureka moment has been achieved in Washington.
Dr. Skousen is the organizer of FreedomFest, an annual conference each July in Las Vegas that is aimed at Libertarians and other freedom-loving people. Forbes, a former Republican presidential candidate in 1996 and 2000, and Secretary Pritzker, a political appointee of Democrat President Barack Obama, show that the BEA has earned praise from business-oriented opinion leaders of each major political party.
When an idea takes root in Washington that wins support from people of varying political views, it is worth paying attention. The president, members of Congress, Federal Reserve officials and other Washington decision makers should make full use of the expanded information. Let’s hope they take advantage of the improved economic data in deciding which direction to take the country in the future.