“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, winner of the 2004 Nobel Prize in Economics
My Gross Output (GO) statistic came out today and it tells a very different story than GDP. While GDP continues to grow, GO hardly grew at all. Indeed, it is warning that a recession is coming our way.
Today, the federal government (the Bureau of Economic Analysis or BEA) also released fourth-quarter data which suggest that the Fed’s aggressive tight-money policy is working — price inflation is coming down. However, the report also suggests that we are headed into a recession in 2023.
While real gross domestic product (GDP) grew 2.6% in the fourth quarter, gross output (GO) — which measures spending at all stages of production — grew only by 1% or less. And business (B2B) spending actually declined 5% in real terms in the fourth quarter. (See the chart below.)
My studies show that whenever GO grows at a slower pace than GDP, it suggests a slowdown or recession is in the future.
Right now, the GO model is sending out warning signals: A Recession is Ahead!
The Fed’s anti-inflation policy has already engineered a bear market on Wall Street, and last month, we saw serious banking crisis. A recession is just around the corner in 2023.
But there is a silver lining in the BEA release. The GO price deflator shows price inflation in the supply chain almost coming to an end in the fourth-quarter. It was increasing at double-digit-percentage rates a year ago, but now it’s down to 0.5% in the fourth quarter of 2022.
What Every Investor Needs to Know About GO
Since writing “The Structure of Production” in 1990, I’ve urged economists to measure spending at all stages of production, including the all-important supply chain, rather than just gross domestic product (GDP), which measures final output only. (Copies of my book are available on Kindle for $16.50 or paperback for $28 on Amazon.)
In my mind, leaving out the supply chain is a major sin of omission. It’s larger than GDP itself!
Just as publicly-traded companies report a “top line” (sales/revenues) and a “bottom line” (profits) every quarter, so too should the economics profession report a top line and bottom line in national income accounting.
In April 2014, the enlightened staff at the BEA, led by Steven Landefeld, came to the same conclusion and began publishing GO, along with GDP, every quarter. The economics profession had finally caught up with the accounting and finance departments.
As Nobel-Prize-winning economist William Nordhaus, along with Harvard economist Dale Jorgensen and BEA director Steven Landefeld, wrote in their book “A New Architecture for 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.”
What Does GO Tell Us?
What can GO tell us that GDP can’t? Here is a list:
- Gross output (GO) is the new government statistic that measures total spending in the economy at all stages of production. Unlike GDP, it includes the value of the supply chain, which is larger than GDP itself.
- GO is the missing piece in the macroeconomic puzzle. I like the way Steve Forbes puts it: “GDP is the x-ray of the economy; GO is the CAT scan.” I also suggest that GO is the “top line” in national income accounting; GDP is the bottom line. GO and GDP are complementary, but tell different stories.
- GO and GDP don’t always move in the same direction. During downturns, GO tends to fall much more and recover much more quickly. In 2022, real GDP declined for two quarters, suggesting a recession, while real GO kept rising (indicating no recession). However, real GO is growing at a slower pace and may turn negative in 2023.
- It shows that business spending is far bigger than consumer spending in the economy. Under the GDP model, consumer spending is the biggest sector and drives the economy. Under the GO model, business is the catalyst and driving factor of the economy. The GO model is more consistent with leading economic indicators and economic growth theory in the United States, as well as the supply side of the economy: saving, capital investment, entrepreneurship, innovation, etc.
- GO, especially the supply chain, is proving to be a good leading indicator of what GDP will do in the next quarter. Private economist David Ranson, CEO of HCWE, Inc., uses it for effectively forecasting the next quarter’s GDP.
Investors on the GO
GO and the structure of economy is also useful to investors. The yield curve, a measure of the structure of interest rates, helps predict recessions and bear markets on Wall Street. It also shows why mining and energy stocks are more volatile than retail and utility stocks. I use this time-structural approach all the time in my investment newsletter. Several private investors use GO to forecast the markets and the economy, including David Ranson and Jerry Bowyer.
How to Learn More About GO
I’ve written extensively on the value of GO, including three articles in the Wall Street Journal as well as in Forbes magazine.
Several years ago, I was invited to give the Schumpeter Lecture on GO in Stockholm, Sweden. You can read it here: www.grossoutput.com.
Slowly but surely, GO is being integrated into the economics textbooks, such as McConnell Brue Flynn’s popular textbook, as well as my own “Economic Logic” (a sixth ed. is forthcoming).
I’ve given lectures at major universities on the topic, including Columbia Business School, the University of Virginia and Chapman University (where my presentation earned me a presidential fellowship and now the Doti-Spogli Endowed Chair).
Two months ago, Finn Kydland, who won the Nobel Prize for Economics in 2004, invited me to give a presentation at his Macro Workshop at the University of California at Santa Barbar. (See his quote at the beginning of this article.) I also gave a lecture before a large economics class taught by Professor Lanny Ebenstein, which was well received. One student is doing a paper on GO.
GO Takes on the Skeptics: ‘The Economics of Life Made Simple’
It’s a triumph!
Skeptic magazine is published by Michael Shermer, a science author and libertarian who speaks every year at FreedomFest. It is a slick magazine with a broad audience (50,000-plus circulation). He invited me to give an overview of the U.S. and global economy, and the basics of Adam Smith’s economics. My article made the cover of the current (March) issue. It contains several important charts, including the economic freedom index.
Here are the questions I seek to answer:
- What is the secret to the success of the capitalist nations, which have grown by leaps and bounds in the past 200 years?
- What drives the economy — consumer spending, business investment or government stimulus?
- Why are young people so attracted to democratic socialism, and is there a better alternative?
- Should valuable goods and services like college education, medical services and transportation be made available to the public for “free”?
- What is money, what is it based on without a gold standard and can cryptocurrencies ever replace it?
- Are booms and busts and periods of inflation and recession (like we’re experiencing today) inevitable?
- Do economists offer any solution to the global warming threat?
The article has a glossary, and it shows how I integrate gross output (GO) into economic analysis.
I even mention the possibility of a “monetary crisis” in 2023 — the one we are facing right now with the banking crisis.
To read my “Economics of Life Made Simple,” go to www.skeptic.com. It’s published four times a year. The price is $30, and it is available in print or online. You can also pick up a copy at any local Barnes & Noble bookstore.
LAST CALL: ‘Super Early Bird’ Discount on FreedomFest Ends Tomorrow, March 31!
You can save $150 over the retail price — but the discount ends on Friday, March 31 — tomorrow!
New Speakers at FreedomFest
I’m happy to announce that Enes Kanter Freedom, former NBA great for the Boston Celtics, will speak at FreedomFest, scheduled for July 12-15, in Memphis, Tennessee. He’s a major critic of the NBA’s and Lebron James’ failures to criticize China for human rights violations. His talk should not be missed!
Image courtesy of Erik Drost.
Other exciting new speakers include Michael Oher, whose story was the focus of the movie “The Blind Side”, Winston Marshall, formerly of Mumford & Sons, Nadine Strossen of the ACLU and Doug Stanhope, our headlining libertarian comedian. We will have over 200 speakers this July… plus more than 180 exhibitors and freedom organizations. See the current list at www.freedomfest.com.
Special Note: We also have a high-profile CELEBRITY speaker but cannot reveal his name until May. You will definitely want to be at FreedomFest this year to hear him! Sign up now before the early bird discount ends.
Global Financial Summit Addresses the New Monetary Crisis
We have a great lineup of experts who will help you navigate the latest monetary crisis, including Jeremy Siegel, Burt Malkiel, Louis Navellier, Alexander Green, Addison Wiggins, Steve Forbes, George Gilder, Steve Moore, Art Laffer, John Fund and David Bahnsen. Plus, our own editors Jim Woods, Bryan Perry, Roger Michalski and Paul Dykewicz will also be there.
Special Discount Ends Tomorrow!
We’re expecting over 2,000 attendees at our big show this July. Our early bird discount ends tomorrow. We’ve arranged another $50 off the early-bird rate for my subscribers. All in all, you save $150 off the retail price. Use the code EAGLE50 and register at www.freedomfest.com, or call Hayley at 1-855-850-3733, ext. 201.
See you in Memphis in July!
Good investing, AEIOU,
You Blew It!
Our Cultural Decline After the Pandemic Hit
Many of us believe that our culture is in decline in terms of crime, honesty, community involvement, language, religion and having children.
Recently, a survey by the Wall Street Journal and a nonpartisan research organization at the University of Chicago has confirmed it.
In the data, we can see how imported trends have turned sharply negative in the past couple of years.
Since the pandemic of 2020, the percentage of Americans who rated the importance of these values as follows: patriotism is down down from 60% to 39%; religion is down from 45% to 39%; having children is down from 42% to 30% and community involvement is down from 60% to 23%. The only exception was making money, whose value went up from 40% to 45%. For the full report, go here.
All of this has occurred after the COVID-19 virus hit America. It is not a good sign!