Gross Output IV

Sorry, this blog has been sitting on the shelf for far too long.  In my previous blog on Gross Output, I fully disaggregated business-to-business (B2B) expenditures versus consumer expenditures.  The chart in that blog showed that B2B expenditures made-up 53.5 percent of Gross Output while consumer expenditures made-up a much lower 38 percent.

In addition to being larger than consumer expenditures, B2B transactions are also more volatile and thus more important when it comes to understanding the ups-and-downs of the business cycle.  As shown in the chart below, B2B expenditures in both of the last two recessions (1991 and 2001) went negative in a big way.  The growth rate for consumer expenditures, on the hand, fell but did not go negative.  In fact,the growth rate for consumer expenditures has not gone negative over the entire 1988 to 2008 time-period . . . things that make you go hhhhmmmmm.

Overall, this initial look at the Gross Output data strongly suggests that B2B expenditures are the most important indicator of economic activity.  This nugget fits an important part of Austrian Business Cycle Theory in which “malinvestment” is an important player.  Put simply, malinvestment represent all of those business plans which crash-and-burn.  When the incidence of malinvestment increases, as it did during the two recent credit-induced manias, then the economy as whole follows it down the rabbit hole.

I think this will be the last blog of this series for awhile for several reasons.  First, the Gross Output data, to the best of my knowledge, is only updated once a year and that doesn’t occur again until the spring of 2011.  Second, I need to dig deeper into the data to see what other types of nuggets may be lying around.  Hopefully, I’ll have more on this important topic in the near future . . .

The percent change in the components of gross output for the years 1988 to 2008

Gross Output III

So, to contest the notion the the “economy is two-thirds consumption,” all of the Business-to-Business (B2B) transactions must be separated from both Gross Output and Gross Domestic Product (GDP).  For Gross Output, B2B transactions consists of all Intermediate Inputs that I’ve discussed previously.

However, GDP contains one element of B2B and that is for the final sale of a good or service and it is known technically as “gross fixed investment”–a final sale would be to the end-user such as a 747 being purchased by American Airlines.  So total “B2B expenditures” are the sum of Intermediate Inputs and Gross Fixed Investment.

At the end of the day, the chart below shows the results of this redefinition.  B2B expenditures make up 53.5 percent of all economic activity as defined by Gross Output.  Personal consumption, on the other hand, falls to 38 percent and “all other” accounts for the remaining 8.4 percent (government expenditures and international trade).

Breakdown of Gross Ouput by Major Component for 2008