Thursday, May 26, 2016

How New Economic Data Forecasts Recession, But Not Bear Market

My gross output (GO) statistic for the fourth quarter was released April 21 by the federal government. Here’s what it showed:
U.S. economic activity continued to slow dramatically in fourth-quarter 2015, threatening recession. As a whole, the growth rate of the economy was anemic, almost flat, for 2015. This is why the Fed has aggressively been pumping new money into the system. The money supply has been growing at 7-9% rate in the past few months to stimulate the economy. The Fed’s easy-money policy has resulted in higher stock and gold prices.



Gross output (GO), the new measure of U.S. economic activity published by the Bureau of Economic Analysis (BEA), showed that spending throughout the economy declined slightly in the fourth quarter of 2015. And my Skousen B2B Index — a measure of business spending throughout the supply chain — now has fallen two quarters in a row. Both data points suggest a mild business recession as we entered 2016.
Based on data released today by the BEA and adjusted to include all sales throughout the production process, nominal GO fell 0.6% in the fourth quarter of 2015, compared to the 2.3% growth rate of the third quarter. Adjusted GO was $39.0 trillion in the fourth quarter, more than double Gross Domestic Product (GDP) of $18.2 trillion. Nominal GDP actually rose 2.3% in the fourth quarter. When GO declines relative to GDP, it’s usually a sign of recession.

Deflationary pressure on prices continued in the fourth quarter. So in real terms, the adjusted GO growth rate rose slightly, by 0.8%.
GO and GDP are complementary statistics in national income accounting. GO is an attempt to measure the “make” economy; i.e., total economic activity at all stages of production, similar to the “top line” (revenues/sales) of an accounting statement. In April 2014, the BEA began to measure GO on a quarterly basis along with GDP.
In turn, GDP is an attempt to measure the “use” economy, i.e., the value of finished goods and services ready to be used by consumers, business and government. GDP is similar to the “bottom line” (gross profit) of an accounting statement, which determines the “value added” or the value of final use.

GO and GDP are complementary aspects of the economy, but GO does a better job of measuring total economic activity and the business cycle, and demonstrates that business spending is more significant than consumer spending. By using GO data, we see that consumer spending is actually only about a third of economic activity, not two-thirds, which is often reported by the media. As the chart above demonstrates, business spending is in fact almost twice the size of consumer spending in the U.S. economy.

No comments:

Post a Comment