You Nailed It! Chicago Economist Gets It: Bull Market on Wall Street Driven by Entrepreneurs, not Consumers

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Posted: Dec 05, 2019 2:02 PM

The news is out: U.S. shoppers went on a buying frenzy over the Thanksgiving weekend. Online purchases hit a record high, up 14% from last year, and even retail store sales rose 4.2%.

The Wall Street Journal immediately reported that consumers are keeping the economy alive. “U.S. shoppers have been the economy’s driving force over the past two quarters as business investment declined.”

But wait! The media bemoaned the fact that holiday buying season is short this year due to Thanksgiving coming a week late.

Fortunately, some financial economists know better. One is Brian Wesbury, chief economist at First Trust Chicago, who wrote earlier this week a great column, “Don’t Worry about the U.S. Consumer.”

Wesbury uses my gross output (GO) statistic to discuss the holiday robust sales and to refute the myth that consumer spending drives the economy. It’s a beautifully written article on how business is a far more important catalyst for economic growth than consumer spending (Say’s Law).

As he states, “it’s important not to let all the media attention on consumer spending distort the view of the way the economy really works. People can’t consume something until it’s been produced.

“Yes, according to conventional statistics consumer spending is 68% of gross domestic product (GDP). But GDP doesn’t count all economic activity; it uses the sales value of all [finished] goods and services (consumption and investment) to estimate production.

“By contrast, economy-wide ‘gross output’ includes not only business-to-consumer sales and investment but also what is not included in GDP, which is intermediate business-to-business sales, as well. Consumer spending is only 38% of economy-wide gross output. In other words, consumer spending is a much smaller part of total economic activity than GDP suggests.

“That’s why, as much as we like to see solid numbers on consumer spending, we see this as an effect, not a cause, of our bounty. The primary cause is the innovation and risk-taking of entrepreneurs. Which is why, if you want to know when the next recession is going to start, you need to pay careful attention to the environment for innovation and risk-taking, not how much people are spending.”

You can read it here:

https://www.ftportfolios.com/Commentary/EconomicResearch/2019/12/2/dont-worry-about-the-us-consumer

As Steve Forbes wrote me, “Your disciples are growing. Go GO!”

I should add that the latest second-quarter GO data show that the economy is recovering. To see my latest press release, go to https://www.grossoutput.com/2019/10/29/u-s-enjoys-a-modest-recovery-no-recession-in-sight/.

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