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Skousen: Finally We Get GO — and a Better Economic Picture

By    |   Monday, 02 December 2013 04:54 PM EST

For more than 20 years, economist Mark Skousen has been calling for the use of gross output (GO) data in addition to gross domestic product (GDP) data to gain a complete view of the economy.

And now he's getting his wish. Starting in April, the government will release GO statistics along with GDP statistics.

"The biggest reason why GDP is incomplete — not wrong — as a measurement of the economy is that it just measures the final value of goods and services," Skousen, editor of Forecasts & Strategies and a presidential fellow at Chapman University in 2014, told Moneynews.

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"GDP is a good reflection of people's standard of living. You can use per-capita GDP to compare it around the world."

But GDP leaves out much of the economy, Skousen said. GO measures sales at all levels of production, not just the end, allowing it to encompass the entire economy. GO measures the "make" economy, while GDP measures the "use" economy, he said.

GDP "leaves out all the production process," he said. "Goods and services go through a production stage, and gross output measures all the sales and spending that businesses engage in" to produce the product and get it to consumers.

He breaks it into a four-step process: resources, production, distribution, and final output. Add all four stages, and you have GO.

It's no wonder then that annual GO totals $29 trillion-$30 trillion, compared to around $16 trillion or so for GDP.

"GO gives a better sense of total economic activity, because instead of just focusing on final production and consumption, it focuses on all the money businesses have to put up to create products," Skousen said. "They have to hire workers, buy supplies, etc."

Looking at GDP gives the erroneous impression that consumer spending accounts for 70 percent of the economy, government spending for 20 percent and business spending for the rest, Skousen said.

As a result, the media incorrectly reports that consumer or government spending reductions are automatically bad for the economy, he added.

But GO data shows that business spending actually accounts for more than 50 percent of the economy and the consumer for only 40 percent, Skousen said. "It almost flips things over. That's a really important concept. The consumer is the effect, not the cause, of prosperity."

It makes sense that the business sector is bigger when you think that 80 percent of people are employed in the intermediate stages of production — manufacturing, wholesaling, etc. — while only 20 percent of people work in retail, Skousen said.

He sees GO and GDP working together to form a complete picture of the economy. "GO is total spending, GDP is final spending. I'm not suggesting we stop using GDP."

Interestingly enough, GO grows faster than GDP during economic recoveries and falls faster than GDP during recessions. "GO is more sensitive to the business cycle than GDP," Skousen said.

The way it works during a recession is that businesses just draw down from their inventories to get products to market rather than creating new productive processes, Skousen said.

GO is growing much faster than GDP now, he said. But looking forward, "if GO starts to drop faster than GDP, we know we're in for a recession."

Skousen recently wrote a column for Forbes encompassing these ideas.

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Economist Mark Skousen is finally getting his wish: The government next year will begin releasing gross output (GO) data in addition to gross domestic product data. The result will be a clearer picture, he says.
Monday, 02 December 2013 04:54 PM
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