“This truly is a major development. Not only is your GO becoming accepted, but you have truly changed the perspective on measurement. It is a paradigm shift, something that happens very rarely.” — Daniele Struppa, Chapman University
“Best article ever on Gross Output.” — George Gilder
“It is brilliant. Write more.” — Newt Gingrich
A Major Breakthrough in Measuring the Economy
On Tuesday, April 24, the Wall Street Journal published my opinion editorial, “If GDP Lags, Watch the Economy GO,” about how the supply chain grew much faster than GDP in the fourth quarter of 2017, suggesting that the economy is picking up steam.
You can read the article here.
Gross output (GO) measures spending at all stages of production. Unlike gross domestic product (GDP), it includes the value of the supply chain. It rose 4.6% in the fourth quarter, much faster than 2.9% for GDP. The Bureau of Economic Analysis, which measures GO and GDP every quarter, may underestimate GO growth, since the federal agency does not include all spending at the wholesale and retail trade level. When you include those, adjusted GO grew 5.6% in real terms. And business-to-business (B2B) spending increased a real 9%!
GO also has predictive power. It suggests that the first-quarter estimate of GDP will be much higher than the consensus number of 2%. We will find out on Friday.
GO: Comparison to Amazon
The response has been largely positive to my article. In addition to the comments above, here’s an interesting perspective from a New York bond trader: “Making the Opinion page of the Wall Street Journal is an awesome accomplishment… Really, congratulations! The article is very well written and argues the point well. It is funny to me, the GO measurement seems so clear that it needs little defending. As is always the case, the private sector figured it out well before the government… ask the world’s richest man, Jeff Bezos, how good of an indicator profits (GDP) are vs. revenues (GO)! He figured out long ago there is no need to worry about profits as long as you can grow revenue (and Wall Street is willing to keep writing checks along the way)… and every tech initial public offering (IPO)… who needs profits? Investors nowadays seem to be happy to measure success only by revenue. But, as you pointed out, the increase in revenue, if consistent, will usually manifest itself in profit (Amazon chose instead to keep plowing it back into growth) and when they eventually choose to “harvest” they became unstoppable. This is the new Economic Model!”
Another analyst responded: “I get the Amazon metaphor, but I wonder if it explains it adequately. It might be better to use a less specific simile, after an explanation of what GO is, and how it relates to GDP. Then you can illustrate it by saying, It is rather like the relationship between a corporation’s operating costs and its return to shareholders: a lot goes on in any business before its owners get any benefit.”
A commercial property developer wrote, “Congratulations, Mark! Your long and cogent arguments I first encountered years ago in your seminal The Structure of Production, building originally on Hayek’s brilliant insights, have been immensely successful. We are now witnessing some truly beneficial progress in the study of economics.”
He compared GDP to the final score in baseball game and GO to the box score, which includes how the game was played and how the final score was achieved. You need to know both to understand what happened, and what the future is for each team and player. Good comparison.
For more information on GO, go to www.grossoutput.com.
Mark Skousen is the editor-in-chief of the monthly investment newsletter “Forecasts & Strategies,” now in its 37th year. He is the producer of FreedomFest, “the world’s largest gathering of free minds,” which meets in Las Vegas in July. For information go to www.freedomfest.com or call 1-855-850-3733.