Back to the Future: Breakthrough Way to Measure the Economy

Posted: Mar 15, 2014 12:01 AM

"We're finally back to 1934 -- a breakthrough in national accounting."

--Stephen Landefeld, director, Bureau of Economic Analysis (BEA)

On Tuesday, I drove from New York City to Washington, D.C., to attend a special workshop presented by the Bureau of Economic Analysis, the government agency that produces the quarterly gross domestic product (GDP) statistics. This three-hour meeting was all about the new Gross Output data that will be released every quarter starting Friday, April 25.

BEA director Steve Landefeld opened the session explaining why the new Gross Output (GO) offers a "unique perspective" on the production side of the economy, or what they call "the make" economy.

GDP measures the "use" economy -- the value of all finished goods and services produced and sold in the economy in one year. Currently, GDP is approximately $17 trillion.

GO measures the "make" economy -- the value of all stages of production of goods and services -- both finished and unfinished. Currently, GO is approximately $30 trillion, nearly double the U.S. GDP.

Why is GO just as important as GDP? As I explained in the meeting, it's like publicly traded companies reporting both revenues/sales and profits/earnings. Both are vital to understanding how the company is doing.

The same is true in the economy. GDP measures the value of the final goods and services, but you also want to know how much business spent in making these final products and services. GO does that.

I wrote a major article on this subject forForbesmagazine recently. The article is called "Beyond GDP: Get Ready for a New Way to Measure the Economy." I encourage you to read the article.

Triple Play!

In his introductory remarks, Mr. Landefeld referred to Simon Kuznet's first attempt to measure GDP, or "national income," as he called it in his 1934 seminal work, "National Income, 1929-1932," published by National Bureau of Economic Analysis.

He noted that Kuznet referred to the "triple accounting" back then:

--First, a measure of "all commodities produced and all the direct services rendered during the year at their market value" (what we call Gross Output, or GO);

--Second, the net product of the national economy during the year (what we callGross Domestic Product, or GDP); and

--Third, income received by workers, landlords and financial institutions in compensation for their contribution to the national product (what we call Gross Domestic Income, or GDI).

Now, finally starting Friday, April 25, the federal government (BEA) is going to release these three statistics at the same time -- 80 years after Simon Kuznet first suggested it.

In case you missed it, I encourage you to read my e-letter from last week onEagle Daily Investoraboutwhy the number of public companies is shrinking. I also invite you to comment in the space provided below my column atEagle Daily Investor.