A new macroeconomic statistic is being deployed today to complement GDP (Gross Domestic Product), the number we use to measure economic growth. Why pay attention to gross output? Because GDP presents many problems and is often an inaccurate measure of actual economic productivity (see previous post: Phony Statistics). For example, if you pay someone to dig a hole and then pay them to fill it back in, GDP goes up by both payments, but obviously the economy has not grown at all, money has just been shifted from your pocket to the hole digger’s. Gross output gives a better indication of real economic change and is more responsive to the business cycle.
GDP is a useful measure of a country’s standard of living and economic growth. But its focus on final output omits intermediate production and as a result creates much mischief in our understanding of how the economy works.
In particular, it has led to the misguided Keynesian notion that consumer and government spending drive the economy rather than saving, business investment, technology and entrepreneurship. GDP data at the end of 2013 put consumer spending first in importance (68% of GDP), followed by government expenditures (18%), and business investment third (16%). Net exports (-2%) makes up the difference.
Thus journalists and many economic analysts report that “consumer spending drives the economy.” And they focus on retail spending or consumer confidence as the critical factors in driving the economy and stock market. There is an underlying anti-saving mentality in this analysis, as evidenced by statements frequently made during debates on tax cuts or tax rebates that if consumers save their tax refund instead of spending it, it will do no good for the economy. Presidents including George W. Bush and Barack Obama have echoed this sentiment when they encouraged consumers to spend rather than save and invest their tax refunds.
Although consumer spending accounts for about 70% of GDP, if you use gross output as a broader measure of total sales or spending, it represents less than 40% 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. They make up more than 50% of economic activity. The 2012 data are gross output $28,693 billion, and GDP $16,420 billion.
The critical importance of business activity is clear when you look at employment statistics and leading economic indicators. Employees in the consumer side of the economy (retail outlets and leisure businesses) account for about 20% of the labor force, and another 15% work for various levels of government. Yet the vast majority of employees, 65%, work in mining, manufacturing and the service industries.