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A More Nuanced Measure of Growth

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Last week, those clever economists at the Bureau of Economic Analysis (BEA), the same bunch that brings us the quarterly report on GDP -- albeit always with adjustments to come later -- announced they will henceforward include a quarterly report on gross output for 22 industry sectors which up until now was issued once a year.

This initiative will be of special interest to those of us who track manufacturing because it attempts to gauge that part of the economy that actually makes things -- the total sales from the production of raw materials through intermediate producers to final wholesale and retail trade. The GDP by contrast measures the consumption part of the economy -- the total value of all finished goods and services used by consumers, businesses and governments.

Gross output -- stay with me here -- is principally a measure of an industry's sales or receipts which can include sales to final users in the economy (GDP) or sales to other industries (called intermediate inputs). Gross output can also be measured as the sum of an industry's value added plus intermediate inputs. Taken together, gross output, intermediate inputs and value added by industry provide a comprehensive and consistent picture of each industry's performance in the economy. The BEA data say that manufacturing accounted for 21 percent of GDP growth in 2013 though it accounts for only 12.5 percent of gross GDP -- confirming manufacturing's outsize role in our economy.

The GDP last year reached $17 trillion. The gross output was almost double that, more than $30 trillion, and the data suggest it offers a better insight into what is actually going on in our economy. During the depths of the Great Recession nominal GDP declined only about 2 percent while nominal gross output tanked, wrote Mark Skousen in the April 23 Wall Street Journal, falling sharply by 8 percent. Based on what we know now, that would suggest the latter datum was a more telling economic indicator than GDP.

Skousen pointed out that consumer spending accounts for 70 percent of GDP, but "if you use gross output as a broader measure of total sales or spending, it represents less than 40 percent of the economy. The reality is that business outlays -- adding capital investment and all business spending in intermediate stages of the supply chain -- are substantially larger than consumer spending in the economy."

I will go out on a limb here and predict that this new emphasis on gross output will greatly strengthen the utility of the quarterly GDP report because it is a much more reliable indicator of what is happening in the real world. In fact, I believe its real impact will be subtle and gain in importance as time passes. With its focus on production rather than consumption it will convey the vital message that it is the production of goods and services that best determines our economic vitality, not their consumption.

This has been the core of my message throughout most of my professional life and I see this initiative by the BEA as a confirmation of that view.

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Jerry Jasinowski was President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. You may quote from this with attribution. Let me know if you would like to speak with Jerry. April 2014