Looks Like Business Activity Peaked In The Middle Of Last Year

Posted: Jan 18, 2019 12:38 PM

GDP is at best only half the story. Before the car gets put on the show-room floor or purchased by you (which is the time when GDP starts paying attention to it), it was assembled out of complex components, and those complex components had previously been assembled out of simple components, and before that they were refined raw materials such as steel, aluminum, and glass, and before that, they had been unrefined ores, and before that, they had been part of the innards of mountains. But all of those steps, from the heart of the mountain up to inventory are typically ignored by GDP.

That's a lot to ignore, so my friend Mark Skousen researched and created a broader metric, Gross Output (GO), which he then convinced the federal government to start tracking and reporting along with narrower metrics like GDP.

And here it is (the green line):

We also subtracted out final purchases and government activity leaving behind private business production. That's the orange line. As you can see, the orange line varies quite a bit more. That's because business managers are more responsive to changing conditions than governments or consumers. Government pretty much spends whether the economy is booming or not -- in fact, some government programs spend more when there's less wealth being created.

Consumers also tend to spend based on their perception of their long-term prospects. We have such a credit-based society that spending levels above income are seamlessly financed through credit cards and other forms of borrowing. Many of us don't even know when we're on net borrowing or saving.

But business managers are much more agile, cutting back production at the first sign of trouble, ramping it up at the first sign of opportunity.

That's what they did at the end of 2017. They put a lot of production in the pipeline (where it does not trigger tax liabilities) and then sold it in early 2018, when taxes were newly lowered. Profit was on sale in 2018.

Business ramped things up again in the Spring of 2018, showing its highest increase in GO ever recorded (but don't get too excited, since the Fed has only been recording it since 2014) and the second highest private business production spike so far at roughly 8% and 6% respectively.

So, what about last Fall, the 3rd quarter? We don't know yet. The government has not yet made GO as big a priority as GDP, so it is reported at a greater lag. But given the tendency of this metric to revert to the mean, it seems fairly likely that it will peak in the Fall as GDP appears to have done.

That would be one more sign that the boom phase is over and we're back to a new normal under the Trump economic program which is higher than the previous decade, but still does not live up to long-term US growth trends.

A politically divided country will tend to either argue that the economy is booming… or collapsing. But the data points neither to a boom nor a bust, but rather to medium growth levels in our immediate future.