Gross Output and Gross Domestic Product Show State of Economy

Posted: Dec 07, 2014 12:01 AM

“For forecasting, the new measure [Gross Output] may be more helpful than the GDP measure, because it provides information of goods in process.”

– David Colander (Middlebury College)

Gross Output (GO), a broader measure of U.S. economic activity published by the Bureau of Economic Analysis, advanced to nearly $30.9 trillion in the second quarter of 2014, a 4.8% jump in real terms (annualized).

Gross Output is a measure of sales or receipts of all industries throughout the production process, including business-to-business transactions.

GO advanced slightly faster than Gross Domestic Product (GDP), which measures the value of final goods and services only. GDP rose 4.6% in real terms to $17,328.2 billion in the second quarter.

The GO data demonstrates that the economy recovered sharply from the slowdown in the first quarter. I first introduced Gross Output as a macroeconomic tool in my work “The Structure of Production” (New York University Press, 1990). Now, the Bureau of Economic Analysis publishes GO on a quarterly basis in its “GDP by Industry” data.

Gross Output and GDP are complementary aspects of the economy, but GO does a better job of measuring total economic activity and demonstrates that business spending is booming and is more significant than consumer spending. By using GO data, we see that consumer spending is actually less than 40% of economic activity, not the 70% figure that is reported by the media.

My studies show that during downturns, GO tends to fall faster than GDP, while during expansions, GO rises faster than GDP. In addition, GDP leaves out a big part of the economy, business-to-business transactions in the production of intermediate inputs. According to my calculations, business intermediate expenditures (IE) jumped an annualized rate of 20% to $21.4 trillion in the second quarter. That’s good news for the economy and the stock market.

Economics Journal Publishes First Academic Article on GO

I am happy to announce that the first professional economics journal has published an article on Gross Output.

I consider the publishing of a quarterly GO the greatest triumph in supply-side Austrian macroeconomics since Freidrich Hayek won the Nobel Prize 40 years ago.

The commentary is by the respected economist David Colander (Middlebury College), who, despite the headline, is largely positive about GO. Read his article and my response.

Austrian economists now are seeking to measure GO (or my own broader Gross Domestic Expenditures) in other countries, such as the United Kingdom and Argentina.