Broadest Based Economic Metric Doing Better Than GDP

Posted by Jerry Bowyer on 8/13/20 9:00 AM

I've talked a lot about using the broadest measure of economic output available in order to understand what the major drivers of the economy are. There are clear benefits in breaking down the economy into individual pieces in order to understand how it fits together, but to see what drives this enormous system called the U.S. economy, one has to zoom out using the widest angle lens to get some idea just how large things are.

Gross Output and GDP(Source: Federal Reserve Bank of St. Louis, as of Q1 2020)

The above shows Gross Output (GO), a metric discovered by the noted economist Dr. Mark Skousen, which makes up for a serious deficiency in GDP -- namely that GDP ignores most of the economy, focusing almost exclusively on the last phase or two. The image shows the two numbers for as far back as data is available, adjusted to be in the same units so the reader can see how they compare in terms of orders of magnitude. As of the data available at the moment, GO is almost twice as big as GDP.

Since businesses operate at every phase of the economy, then investors should account for the broader measure, not just the consumption at the end. According to the Bureau of Economic Analysis, GDP contracted by 5% in the first quarter, which is the latest data available.

“Accommodation and food services; finance and insurance; and health care and social assistance industries were the leading contributors to the 5.0 percent (annual rate) decrease in gross domestic product (GDP) in the first quarter of 2020, according to the Bureau of Economic Analysis…”

(Source: U.S. Bureau of Economic Analysis)

Which items drove that downward pull? The BEA has the details:

  • For accommodation and food services, real value added—a measure of an industry's contribution to GDP—decreased 26.8 percent in the first quarter, primarily reflecting a decrease in food services and drinking places…
  • Arts, entertainment, and recreation decreased 34.7 percent in the first quarter, primarily reflecting a decrease in performing arts, spectator sports, museums, and related activities.”

Here's the picture which is worth a thousand words:

value added by selected industries

(Source: U.S. Bureau of Economic Analysis) 

But what happens when we zoom out and look at the broader measure, Gross Output? We see a smaller contraction:

“Real gross output—principally a measure of an industry's sales or receipts, which includes sales to final users in the economy (GDP) and sales to other industries (intermediate inputs)—decreased 4.0 percent in the first quarter. “

(Source: U.S. Bureau of Economic Analysis)  

Here's the picture which is worth almost twice as much as a thousand words:

gross output by industry

 (Source: U.S. Bureau of Economic Analysis) 

What we see is that 'private goods' barely contracted at all. That's likely because GO includes the steps in production beforehand. So if people stop buying things at the store, GDP plunges, but that doesn't mean businesses stop growing, weaving, building, filming, or cooking the things that eventually will get put on the shelves. The supply chain doesn't shut down unless business believes that there is a permanent or long-term shut-down on the consumer.

GO shows us that business is still in business. Slowing down to be sure, but not acting as though we're never going shopping again. That's the advantage of not focusing exclusively on GDP, with its bias towards consumption and against production. GO shows us that the true contraction was a little less serious than generally believed.

Topics: Economics

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