Gross Output II

In my previous blog on Gross Output, I discussed how GDP is not the final word when it comes to measuring the economy.  This might be nothing more than an academic point if there wasn’t more to the story.  I believe there is.

The chart below shows the annual percent change in Gross Output, Intermediate Inputs and GDP (in 2008 dollars).  The most important feature to note is that Intermediate Inputs are the most volatile of the three.  They reach the highest highs and lowest lows.  So it seems to better understand the severity and duration of downturns, we also need to better understand what’s going on with intermediate inputs.

Also, note what seems to be happening most recently in 2008.  Unlike the previous two recessions in 1991 and 2001, GDP is falling and Intermediate Inputs are rising.  It’s too early to say what this may be about, it could simply be a data issue that will be revised away.  Or it could be a sign of the unique nature of this recession where consumers were able to retrench faster than, say, home builders.  Time will tell.

Unfortunately, if Intermediate Inputs are more important to determining the business cycle than GDP, we won’t know it until after the fact because this data series from the Bureau of Economic Analysis is not published with nearly the same frequency as GDP.  Not all of it is BEA’s fault, the amount of extra data that must be collected must be astounding.

More to come . . .

Annual Percent Change of Gross Output, Intermediate Inputs and GDP

Gross Output I

Whenever I hear someone say the “economy is two-thirds consumption” I just cringe.  It betrays a fundamental misunderstanding of America’s statistical system–the assumption that our economic data is objective.  The reality is that “all data is theory-laden.”

Put simply, who do you think were staffing federal statistical agencies back in the 1930s when many of the statistics we commonly use today began?  Keynesians or  Austrians?  If Keynesians is the right answer, and it is, then it makes sense that the statistics they would create would be most useful in a Keynesian theoretical framework.  Stating that Gross Domestic Product (GDP) is driven by consumption is a tautology.

The reason this view of the consumer-led economy is misleading is that GDP only includes the final sales of goods and services to consumers and businesses. But all intermediate business-to-business (B2B) expenditures are ignored in the measurement of GDP.

For instance, if American Airlines purchases a Boeing 747, the sale would be included in GDP because American is the final end-user of the 747. By contrast, Boeing’s purchase of aluminum from Alcoa would not be included in GDP since the aluminum is an “intermediate input” into the production of the 747. Using GDP as the sole measure of economic activity leads to the strange conclusion that Alcoa is somehow less important to the economy that Boeing.

Fortunately, the Bureau of Economic Analysis (BEA) does track a broader measure of economic activity known as Gross Output (GO). GO not only measures the final sale of goods and services but also measures intermediate B2B expenditures.  As shown in the chart, in 2008, America’s GO was valued at $26.5 trillion—compared to the much lower GDP value of $14.4 trillion.  The difference is B2B expenditures of $12.1 trillion.

Overall, gross output would seem to be fertile ground for Austrians looking for a better alternative to the loaded GDP data.  However, to date, I have only found one Austrian economist, Mark Skousen, who has latched onto its importance–see this article he wrote in The Freeman.  One reason why he would be interested in Gross Output is because he is the author of the excellent book on Austrian capital theory titled “The Structure of Production.”

There is too much about Gross Output to put into one post, so like my previous blog on the private sector, this to will become a regular series here at Wealth Alchemy . . . stay tuned for more analysis and updates using the most recent data.

Components of Gross Output for Years 1987 to 2008