by Gary Alexander

February 13, 2024

Gross Domestic Product (GDP) rose by a healthy 3.13% (in real terms) in 2023, but a couple of more comprehensive measures call this number into question. First, a more comprehensive statistic, Gross Output (GO), which measures growth in all levels of the economy, has been down over the last year, even though it is up in the most recent measurable quarter – the third quarter of 2023. In the previous three quarters, however, “GO” was down by $1 trillion (fourth-quarter GO will be released in late March).

B2B Spending Chart 1

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

After declining over three consecutive quarters (October 1, 2022, to June 30, 2023), this business-oriented growth index finally turned around and expanded by 3.3% in 2023’s third quarter, an indication that the business-to-business (B2B) sector, which is much larger than the retail sector, anticipates expanding in 2024, perhaps due to expectations of Fed interest rate cuts and Presidential promises in an election year.

This is good news, since Gross Output tends to be a leading indicator. Whenever GO grows faster than GDP, the economy tends to expand in the next few quarters. Even though this hasn’t happened yet – GDP is still growing faster than GO in the most recent quarter – the turnaround in the third quarter is dramatic enough that it should carry through to the fourth quarter, when the official GDP only advanced by 3.3%.

A second measure of GDP growth which shows slower growth in 2023 is based on the textbook definition of GDP, which is based on its three major components, stemming from the textbook formula of GDP:

GDP = C+I+G, where C = consumer demand, I = investment by business and G = government spending, with the total adjusted by the balance of trade (exports minus imports).

Measured this way, there’s an obvious rattlesnake in the room, in terms of government spending, which adds no productivity to net national output. As it turns out, last year’s GDP gained 3.13% but the government sector rose 4.40%, vs. 2.75% for consumer demand and 2.08% for business investment.

This puts private GDP on the order of 2.4%, not 3.1%, and not only is government spending the fastest growing component of GDP growth, but it has a multiplier effect. Money spent by the government is also often counted as consumer demand. A welfare check is spent at a store or in rent. A federal health benefit becomes hospital income or a doctor’s fee. A defense contract becomes an industrial company’s earnings.

Now, let’s look at a preview of coming attractions, in terms of our election choices this fall and beyond.

Europe is “Way Ahead of America” in Levels of Government Spending

A look at Europe gives us a preview of where the U.S. may be headed with our present political choices.

The Organization of Economic Cooperation and Development (OECD) is composed of 38 developed economies, of which, 27 are in Europe, and those nations have the 18 highest tax rates in the OECD:

OECD Data Table 1

The U.S. tax rate comes next in the countdown, at 44.9% (#19 of 38), but that rate is creeping higher. The U.S. is above Japan’s 44% and far ahead of semi-socialist Israel (37%) and once socialist Chile (34%).

Partly due to such high tax rates, Europe is far better at balancing their national budgets than the U.S. is. According to the latest edition of The Economist (February 3-9, 2024), America’s 2023 budget deficit was 6.3% of its GDP (over $2 trillion), while the Euro region was barely half that level, at 3.3%., with budget surpluses in Norway and Denmark, and 2% deficits in Germany, Greece, Austria and the Netherlands.

Part of the reason for high U.S. deficits is a wave of spendthrift bills since COVID Emergency Spending began four years ago next month. The first $2.6 trillion of benefits in March-April 2020 were necessary, as we forced people out of work in a temporary lock-down against a pandemic whose limits and damage were not yet fully known or visible, but then the powers of government control went too far overboard.

Congress added $900 billion more in stimulus spending in December 2020 during the lame-duck Trump-Biden transition, and then another $2 trillion of inflationary stimulus in an already-booming February 2021 economy in President Biden’s first full month in office. In the end, over half of the $5.5 trillion in stimulus spending came after the emergency was contained and so was not truly “emergency” spending.

The Federal Reserve’s Balance sheet matched that increase, surging from $4 trillion before COVID to $9 trillion in short order. Some trimming has taken that down to $8 trillion, but that’s still historically huge.

FRED Chart

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

European nations (and, by extension, their voters) have long supported this massive levels of government spending, despite relatively small commitments to defense spending, mostly due to the power of the U.S. military backing Europe up in crisis situations. Almost all of their government programs are devoted to social spending from transfer payments, and lately their all-in Green New Deals and open-border immigration, but many Europeans have shown resistance to green restrictions and open borders.

In America, voters will soon choose the European path or American Constitutional path, in November.

NATO Pie Chart 1

NATO Pie Chart 1 Text

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

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

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
Bull Markets Climb a Wall of Worry

Income Mail by Bryan Perry
Key Market Takeaways in a Record-Setting Week

Growth Mail by Gary Alexander
Rapid U.S. GDP Growth is Disputed by Two Other Measures

Global Mail by Ivan Martchev
The Tape is Getting a Little Stretched

Sector Spotlight by Jason Bodner
Buy, Sell, … or Do Nothing?

View Full Archive
Read Past Issues Here

About The Author

Gary Alexander

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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