by Gary Alexander

October 6, 2020

“Though not one in 1,000 recognize it, it is business, not consumers, that is the heart of the economy. When businesses produce profitably, they create income-paying jobs and then consumers spend.”

– Lawrence Kudlow, Director of the President’s National Economic Council, speaking on CNBC

The name of this column is “Growth Mail,” so I am proud to be associated with the genesis of a powerful new measure of growth, “Gross Output” or “GO” (a great acronym, by the way). Last Wednesday, September 30 was a big day. For the first time, the Bureau of Economic Analysis (BEA) released the “top line” Gross Output at the same time it published the “bottom line” GDP, and there was great reason for a double celebration, because GO revealed that the U.S. economy is much more resilient than it may seem.

It has taken 30 years, but Dr. ’s economic magnum opus has finally born major fruit. I was present at the creation in 1990, when I was staff editor of his newsletter when he published his economic text, “The Structure of Production,” which outlined the need for a refinement of Gross Domestic Product (GDP) calculations to take into account the stages of production, from mining and manufacturing to end sales and consumption. For too long, GDP has proclaimed “the consumer is 70% of the economy” when Skousen proved in great detail that this is not the case. GDP ignores those earlier stages of production.

GDP is a one-dimensional statistic, showing final output only. It’s the door out of which all output leaves the store and goes “home” to the consumer. “GO” is three-dimensional, showing the entire guts of the total economy, without shame for the dirty work required to get all of those goods to market. In the most recent quarter annualized GDP was $20 trillion, while “GO” is more than twice that, $42 trillion per year.

Adjusted Growth Output vs GDP -Quarterly Change 2007-2020

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Analyzing GO and GDP together teaches us a lot. GDP is final output only, while GO measures total spending at all stages of the supply chain, which is like an advance indicator of the direction of growth – like the producer price index gives us an advance indication of consumer prices. In past recessions, GO declined much faster than GDP, so it gave us an early view of the depth of the recession. During the 2008 financial crisis, for instance, fourth-quarter GO fell 6.6%, or three times the 2% drop in 4Q GDP.

Looking at 2020, we see a more positive comparison. In both the first and second quarters, GO fell less than GDP. In the second quarter, real GO declined 8.4% while real GDP decreased by 9% (in quarterly, non-annualized terms). It didn’t collapse three times faster than GDP as it did in 2008. That tells us that businesses are expecting a recovery, a re-opening, and are planning accordingly. As Jerry Bowyer, CEO of Bowyer Research, told Skousen: “The lockdown was focused on sectors which were skewed towards final stage consumption, such as retail, entertainment and travel,” so the shutdown was “skewed towards GDP” (not GO), so the economy could be “more resilient in bouncing back than many anticipated.”

Businesses – Not Consumers – Drive the Economy

If “GO” can gain traction, maybe we can begin to realize that, contrary to what the media says, consumer spending alone does not drive the economy, and it certainly does not represent two-thirds of the economy.

Q2 2020 Data

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Using GO as a better, 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, according to Say’s law: The creation of a product creates its own demand…and a lot more.

 

GO is also a leading indicator of what GDP will do in the next quarter and beyond. 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.” Whenever GO is growing faster than GDP, as it did in most of 2018, it’s a positive sign that the economy is still robust and growing. However, GO grew at a slower pace than GDP in the last nine months of 2019, so the economy was decelerating going into 2020.

 

GO will not replace GDP. They are complementary, like “sales” and “earnings” are top-line and bottom-line measurements of a corporation’s health. GO is the top-line measure and GDP is bottom-line. To complete the picture, Skousen has developed a business-to-business index that measures B2B spending.

US Business Spending B2B

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

“B2B spending is in fact a pretty good indicator of where the economy is headed, since it measures spending in the entire supply chain,” said Skousen. Skousen champions GO as a more comprehensive measure of economic activity since “GDP leaves out the supply chain and B2B transactions in the production of intermediate inputs. That’s a big part of the economy, bigger than GDP itself.”

Dr. Mark Skousen explaining the value of Gross Output (source: www.grossoutput.com)

 

 

Bottom line, GO says the economy can recover fast if regulators will allow the economy to open up.

 

Looking forward, “GO” is a powerful new tool for anticipating recoveries or recessions on the horizon.

 

For more information, the 2015 updated edition of “The Structure of Production” is available from Amazon, or you can view a helpful 3-minute video tutorial on Gross Output from Steve Forbes here.

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
Commodities Seem to Be Rolling Over

Sector Spotlight by Jason Bodner
We’re Fascinated with Big Money – Except When it Comes to Stocks

View Full Archive
Read Past Issues Here

About The Author

Gary Alexander
SENIOR EDITOR

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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