Gross domestic product is a good measure of the economy, but to say it’s the only one would be a gross overstatement. The Bureau of Economic Analysis also reports gross domestic income, industrial value added, and gross industrial output, to name just three alternatives. The variety of indicators “gives users the power to select the stats best suited to their needs,” a bureau spokesman, Thomas Dail, wrote to me last week.
I want to focus on gross industry production because that’s a weird beast. First, it’s much larger than gross domestic product. Last year, when US GDP was about $25.5 trillion, gross production was about $46 trillion (both figures unadjusted for inflation).
Due to intentional double counting, gross production is greater than gross domestic product. Gross Domestic Product is the market value of goods and services produced in the United States. Gross production is the sum of GDP and all inputs belonging to GDP, such as energy, raw materials, semi-finished goods and purchased services. It summarizes the sales of the companies without subtracting the cost of the goods sold.
In other words, gross production includes business-to-business (or B2B) trade that is accounted for in gross domestic product. (See the government FAQ here.)
Example: A company that makes kayaks decides to buy the fittings from another company instead of making them themselves. That would not affect the gross domestic product since the net production of goods and services is not increasing. But it would lead to an increase in gross production since it is a new B2B purchase.
It is at least conceivable that gross production is a leading indicator for the economy. As the economy expands, firms struggling to meet increased demand may turn to other firms for help, which would cause transaction volume (and therefore gross output) to grow even faster than GDP. Conversely, if businesspeople foresee impending troubles, they might back down, moving more work in-house, reducing the volume of B2B transactions, and shrinking gross production. GDP is not affected because the same amount of work is just being done by someone else.
However, the predictive power of gross production is difficult to assess as it only started in 2005 as a quarterly series. Inflation-adjusted gross production peaked in the same quarter as gross domestic product in 2007, as the deep recession of 2007-2009 began. It peaked in 2019 before GDP reached it, but that doesn’t mean much as the 2020 recession was caused by the pandemic that nobody saw coming.
I looked into gross production at the urging of Mark Skousen, an economist at Chapman University in Orange, California, who created an entire website on this measure. Skousen likes to quote Finn Kydland, a Nobel laureate in economics, who has advised other experts in the field to “give serious consideration” to Skousen’s unconventional approach. Skousen also pointed me to the work of David Ranson, president and research director of economic research firm HCWE & Co., who wrote last year that inputs to GDP tend to rise and fall slightly faster than GDP itself.
Skousen has created his own version of Gross Production, which is even larger than the government’s because it features even more deliberate double counting. It counts total sales from wholesalers and retailers, rather than netting the cost of goods sold like the government does. Its gross production figure for the first quarter of this year was more than $58 trillion on an annualized basis.
“Corporate spending is faltering” and “a recession is yet to come,” Skousen wrote in an analysis of first-quarter gross manufacturing data released June 29 along with revised government estimates of GDP
I agree with Skousen’s view that a recession may be near, but I’m not entirely convinced of the value of gross production as an indicator.
Skousen points out that gross output was discussed in a 2006 book, A New Architecture for the US National Accounts, by three prominent economists, Harvard’s Dale Jorgenson, Bureau of Economic Analysis’s Steven Landefeld, and Yale’s William Nordhaus. They wrote: “Gross production is the natural measure of the manufacturing sector, while net production is a suitable measure of wealth.” Both are required in a complete system of accounts.”
I asked Landefeld and Nordhaus for their latest thoughts on gross production. (Jorgenson passed away last year.) I’d say they were lukewarm. Nordhaus wrote in an email that gross output and other components “are helpful for a full account.” But I don’t think gross output should replace a value-added concept like GDP as the central measure of our national accounts.”
Landefeld, who is now retired, told me in a phone interview that he thinks gross production is more useful at the industry level than as a measure of the economy as a whole. Even then, he said, “conceptually, I think value creation in industry is the preferred metric.”
Still, I give Skousen credit for raising awareness of a rather obscure data point. He likes to quote Humphry Davy, a British chemist who died in 1829, who once wrote: “Nothing contributes to the advancement of knowledge like the application of a new instrument.”
Outlook: Joseph Quinlan and Lauren Sanfilippo
According to Joseph Quinlan, chief market strategist in Incorporation applications are “running at almost the same pace as the record pace of 2021,” based on data collected by the Economic Innovation Group over the first six months of this year The Wealth Management division of the Bank of America and Lauren Sanfilippo, a senior market strategist. The application rate is “a good barometer for underlying business confidence,” they wrote in a customer statement on Tuesday. “Right now,” they added, “everything is blinking green.”
quote of the Day
“Money = storable energy (e.g. gasoline)”
— James A. Reiss, “Comparative Thermodynamics in Chemistry and Economics”, chapter in “Economics and Thermodynamics”, edited by P. Burley et al. (1994)
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