Economic "CAT Scan" Looking More Normal And Still Bullish

Posted: Aug 09, 2021 10:00 AM
Economic "CAT Scan" Looking More Normal And Still Bullish

Source: AP Photo/Richard Drew

GDP (Gross Domestic Product) is widely cited in discussion about the economy. In fact, it is often, falsely, asserted that GDP is the measure of the output of the economy. As defined by Investopedia:

“Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.”

The truth is that GDP is heavily focused on the final stage of the economic cycle, consumer and government purchases. As such, it's better at capturing consumption than production. Gross Output (GO), on the other hand, is intended to capture not just the final stages of the economy but also the prior steps of production as goods and services move through the supply chain. According to Wikipedia:

“[Gross Output] is the measure of total economic activity in the production of new goods and services in an accounting period. It is a much broader measure of the economy than gross domestic product (GDP), which is limited mainly to final output (finished goods and services). As of first-quarter 2019, the Bureau of Economic Analysis estimated gross output in the United States to be $37.2 trillion, compared to $21.1 trillion for GDP.”

For this reason, Forbes Editor-in-Chief Steve Forbes describes GO as being like a CAT scan looking at the economy in three dimensions, rather than GDP which is more like a two-dimensional X-ray.

“A more comprehensive and enlightening picture is GO, gross output, or as it is called in Britain, total output. It’s the difference between an X-ray and a cat scan. GDP is the value of all finished products and services produced within a country’s borders. […] By contrast, GO includes the steps that go into producing those products and services.”

(Source:  Steve Forbes, We’re Using The Wrong Measure (GDP) To Gauge The Economy’s Real Health: Mark Skousen,, September 2019) 

Let's take a look at the quarterly growth rate of Gross Output in comparison with the quarterly growth rate in GDP from 2009 to the most recent data available, first quarter of 2021.

(Source: U.S. Bureau of Economic Analysis, as of 6/30/2021 or most recently available)

What we see is that in general, GO is more volatile than GDP. Consumers tend to be a force for stability in the economy. As Professor Vernon Smith, 2002 Nobelist in Economics, recently said, the consumer is like a "flywheel" which keeps the economy going. This is in keeping with Smith’s fellow Nobelist, Milton Friedman, and his Permanent Income Hypothesis which suggests that consumer spending moves more in line with people's long term income prospects instead of in response to short-term slow-downs and various government attempts at stimulus.

According to Investopedia:

“The permanent income hypothesis is a theory of consumer spending stating that people will spend money at a level consistent with their expected long-term average income. The level of expected long-term income then becomes thought of as the level of “permanent” income that can be safely spent. A worker will save only if their current income is higher than the anticipated level of permanent income, in order to guard against future declines in income.”

Business activity, on the other hand, tends to be more active, responding to changing conditions with agility. So, the whole economy measurement, GO, tends to hit lower troughs and higher peaks than the consumer-centered measurement, GDP.

But that pattern was broken during the shutdown. See the circled portions on the chart above: GDP troughed lower than GO in spring 2020 and peaked higher in the recovery. This is probably because the restrictions on retail spending were stricter than restrictions on production. More padlocks on the malls than on the mines.

However, the circle over the most recent time period shows a return to the normal pattern: GO grew faster than GDP in the first quarter of 2021. GO tends to be a leading indicator of GDP: First comes production, then comes consumption. If you build it, they will come… and buy it. And that is exactly what happened. GDP in the second quarter grew at an impressive 6.5%.

What drove that impressive growth spike? Consumer spending.

According to the data analytics firm, Statista,

"Personal consumption, by far the largest component of the GDP, was stronger than expected, increasing by 11.4 percent compared to the preceding quarter at an annualized rate, despite the fact that service spending remained lackluster. Government spending and investment also saw a significant increase but its impact on overall GDP growth is significantly smaller than that of consumer spending."

(Source: Consumer Spending Drives U.S. GDP Growth in Q1 2021,, June 2021)

So, the economy is clearly in recovery which is showing up in the latest "CAT scan" of the whole economy and in the X-ray of the spending side of things.

But is this macro-economic recovery also a financial recovery? Is it showing up in real profits, not just in government statistics?

We'll look at that next time.