New Economic Measure Could Shed More Light On Real Economy

Beefs and Beliefs

Gross Output measures activity of business in economy and helps predict recession..

Published on: December 5, 2013
 

The older I get and the more I learn, the more I distrust "official" statistics, most of all those put out by governments, which these days are clearly the mouthpieces of the powerful and spectacularly wealthy.

Moreover, anyone who reads my blogs regularly knows I'm very concerned about the real and sub-lethargic state of the US economy and the effects it is having on beef demand and consumption.

You'll find an interesting article on beef demand in the web exclusives section this week, incidentally.

I'll add to that some new information on economic analysis, unfortunately another government measurement, but perhaps one which will balance some inaccuracies.

It is called Gross Output and it should help complete the inaccurate picture painted by Gross Domestic Product. The federal government will begin reporting GO in April of next year along with quarterly GDP.

For more than 20 years, economist Mark Skousen has been calling for the use of gross output data in addition to GDP to give a more complete view of the economy.

Skousen's views are well covered in an article he wrote for the December issue of Forbes.

It's well worth a read but I'll summarize a few of Skousen's points here.

He says, "While GDP is a good measure of national economic performance, it has a major flaw: In limiting itself to final output, GDP largely ignores or downplays the ... supply chain and intermediate stages of production needed to produce all those finished goods and services. This narrow focus of GDP has created much mischief in the media, government policy, and boardroom decision-making. For example, journalists are constantly overemphasizing consumer and government spending as the driving force behind the economy, rather than saving, business investment, and technological advances."

Skousen says because consumer spending represents 70% or more of GDP, followed by 20% by government, the media "naively" assumes any slowdown in retail sales or government stimulus is automatically bad for the economy.

Because it focuses only on final output, GDP underestimates the money spent and economic activity generated at earlier stages in the production process and that ignores the huge impact manufacturers, shippers and designers contribute to overall growth or decline.

Skousen says his own research says consumer spending really only accounts for 40% of total yearly sales rather than the 70% reportedd by GDP.

He says spending by businesses is substantially bigger, representing more than 50% of economic activity. This is more consistent with economic growth theory, which emphasizes productive saving and investment in technology on the producer side as the drivers of economic growth.

Skousen adds, "GO is total spending, GDP is final spending."

He says GO grows faster than GDP during economic recoveries and falls faster than GDP during recessions.

In part, that's because during a recession businesses draw down from their inventories to get products to market rather than creating new productive processes, Skousen explains.

GO is growing faster than GDP now, he says, but if GO starts to drop faster than GDP, we can bet we're in for a recession.