by Gary Alexander

March 30, 2021

Gross Domestic Product (GDP) statistics for the previous quarter come in three stages, all coming near the end of the three months after the end of the quarter. The first (preliminary) estimate is usually a wild guess that is amended greatly at the end of the second month. The third – which came out last Thursday, March 25 – is the most authoritative. More importantly, it is also accompanied by a much larger and more comprehensive measure of total spending in the economy, Gross Output (GO), which includes the supply chain as well as final demand. The data for 4Q’20 revealed that GO grew significantly faster than the GDP at the end of 2020, which is an advance sign of potentially strong economic growth in 2021.

First, here is the final accounting for real GDP for 2020. The good news is that we’re back to Goldilocks growth after a way-too-cold second quarter (-31.4%, annualized from the previous quarter) and a torrid third quarter (+33.4%). The fourth quarter was “just right,” at +4.3%, up from February’s 4.1% estimate.

 REAL GDP Percent Change from Preceding Quarter

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

The much-better news is that real Gross Output grew 6.7%, or more than half-again faster than real GDP. Both GO and GDP have now exceeded their pre-pandemic values and are near their highest levels ever.

So how do they differ? A common description of GDP is that “the consumer controls 70% of GDP,” and that is its basic flaw. GDP tends to ignore the earlier stages of production, like mining and manufacturing, or business to business. These earlier stages of production are generally more volatile during an economic disruption, so GO would commonly decline significantly more than GDP in a deep recession like 2008. In the fourth quarter of 2008, for instance, GO declined more than 26% while GDP fell by less than 8%.

The good news from 2020 is that business spending outpaced consumer spending during the second-half last year. This is an encouraging indication that the government-induced 2020 recession was short and sharp but the underlying business fundamentals remained significantly stronger than the bears feared, so perhaps all these multiple and massive bailouts represent overkill – or an attempt to gain political control.

The Origin of Gross Output and Its Importance

Dr. Mark Skousen first introduced Gross Output as a macroeconomic tool in his book, The Structure of Production (New York University Press, 1990). At the time, I was working with him on his various financial publications. A third edition was published in late 2015 and is now available in paperback.

I’ve worked off and on with Dr. Skousen for over 40 years, since we were both Consulting Editors to Personal Finance newsletter in 1980. On the lighter side, we staged two productions of selections from the musical 1776 at investment seminars in New Orleans in 1986 and Freedom Fest in 2010, with Mark playing Ben Franklin and me as John Adams. I have also helped moderate panels at his 13 Freedom Fests. The 2020 meeting was canceled due to COVID, but this year’s July meeting will be held in South Dakota.

Mark Skousen and the "Freedom Fest Players" Image

Commenting on last Thursday’s GDP/GO release, Skousen said, “B2B spending is a pretty good indicator of where the economy is headed since it measures spending in the entire supply chain.” Regarding 2020, he explained, “after declining 5.4% and 44% in the first and second quarters, respectively, business activity expanded at an annualized rate of 39% and 12% in real terms in last two quarters of last year.”

Comparing consumers and business growth last quarter is dramatic. In the fourth quarter of 2020, B2B activity expanded at an annualized rate of 12%, reaching $23.25 trillion, while consumer spending remained flat at $13 trillion, showing no net growth. As the chart (below) shows, the economy measured by Gross Output is already back to its all-time peak. In nominal dollars, B2B activity expanded by more than 14% to $26.6 trillion while consumer spending grew less than 4% (annual rate) to $14.5 trillion.US Spending Skousen B2B Index

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

Overall, 17 of 22 industry groups contributed to the expansion of Growth Output in the fourth quarter of 2020. After declining in the first three quarters, the mining sector expanded nearly 10% in the fourth quarter (in real terms). Mining represents a small part of the economy, but since it is one of the earliest stages of production, it as an early indicator of what the other sectors might do in subsequent quarters.

The larger Manufacturing sector grew 5.7% last quarter after spiking over 40% in the third quarter. The two manufacturing sub-segments with the highest growth rate in the fourth quarter were Computer and electronic products at +18% and the Fabricated metal products sub-segment with a 16.2% growth rate.

More importantly, durable goods manufacturing expanded by a 10% annual rate versus only 1% for nondurable goods. That tells us that lower-cost consumer spending may be lagging, while big-ticket items are selling better, and most businesses are confident about the longer-term outlook for the economy.

The largest segment of the economy – finance, insurance, real estate, rental, and leasing, accounting for about one-fifth of GO – grew by nearly 5%, and the finance and insurance sub-segment expanded 7.6%.

The Construction sector delivered a stronger growth of nearly 12% as home construction and renovation enjoyed a big renaissance. The transportation and warehousing sector advanced even faster at 17.4% in real terms, due to online ordering and delivery. The transit and ground passenger transportation sub-segment nearly doubled compared to the third quarter, Air transportation grew more than 60%, while rail transportation increased 27.4%, water transportation volume improved 23% and trucking expanded 5.2%.

After going through all these industries, the consumer begins to fade into the background. As Skousen says, “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 significant 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.”

Note: In 2014, the Bureau of Economic Analysis (BEA) at the U.S. Commerce Department decided to publish GO on a quarterly basis in its monthly GDP data.  The BEA will release its next preliminary GDP report for first-quarter 2021 on April 29, 2021 and the full release of Gross Output on June 24, 2021.   For more information on the details of this relatively new statistical yardstick, go to www.grossoutput.com.

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

Please see important disclosures below.

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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