Now that we know it’s a better ‘scan’ of the economy, let’s use it to take a look at the patient right now to see his current economic health.
First, let’s look at three numbers in relation to one another: GDP, GO, and a metric we created which takes all economic output and then strips out government and consumer spending, leaving behind an estimate of production.
(Green line: Gross Output; orange line: Business Output; blue line: GDP)
We see here that GDP is relatively stable. That’s the problem; a lack of variation amounts to a lack of signal. Something has to change in order to signal change. Note that the orange line, the production estimate, is even more volatile. That reflects the idea that business is more agile than consumers. Production and supply-chain managers’ jobs are to anticipate shifts in the economy. Consumers tend to spend according to their class and perception of long term earning, which is why stimulus checks never work. Production managers who over-produce are saddled with excess inventory — dead money, a good way to get fired.
You notice that in other recessions, GO and Production tended to precede the recession and to exceed the drop in GDP.
But this recession is different: In both the first and second quarter of 2020, GO went down less than GDP. In other words, the dynamics of this recession skewed away from production effects (compared to history) and towards consumption effects. Doesn’t this make perfect sense? Essentially, large swaths of consumption were verboten.
Now, let’s take that green line from the previous chart, the one which shows the difference between GO and GDP, and compare that to a wide survey of manufacturing managers, the PMI.
We see largely what we would expect to see: This production metric tended to go down in anticipation of the pandemic in the last quarter of 2019. It went down significantly during the first quarter, as did the survey of production managers. In other words, production tended to track with real time surveys of managers, which is not much of a surprise, except that it does tend to vindicate the production metric.
We also see the second quarter tracking. Production collapsed as production manager perception of optimism collapsed as well. One can see that manager optimism has been rising substantially in the last couple of months, including the period after the second quarter for which we do not yet have official GDP or GO data. If the pattern holds, we have a reason for optimism. Our first intentional recession (at least since WWII rationing) is ending quickly because consumption was intentionally paused, but production capacity remained intact.
Jerry Bowyer is a Forbes contributor, contributing editor of AffluentInvestor.com, and Senior Fellow in Business Economics at The Center for Cultural Leadership.
Jerry has compiled an impressive record as a leading thinker in finance and economics. He worked as an auditor and a tax consultant with Arthur Anderson, as Vice President of the Beechwood Company which is the family office associated with Federated Investors, and has consulted in various privatization efforts for Allegheny County, Pennsylvania. He founded the influential economic think tank, the Allegheny Institute, and has lectured extensively at universities, businesses and civic groups.
Jerry has been a member of three investment committees, among which is Benchmark Financial, Pittsburgh’s largest financial services firm. Jerry had been a regular commentator on Fox Business News and Fox News. He was formerly a CNBC Contributor, has guest-hosted “The Kudlow Report”, and has written for CNBC.com, National Review Online, and The Wall Street Journal, as well as many other publications. He is the author of The Bush Boom and more recently The Free Market Capitalist’s Survival Guide, published by HarperCollins. Jerry is the President of Bowyer Research.
Jerry consulted extensively with the Bush White House on matters pertaining to the recent economic crisis. He has been quoted in the New York Times, The Wall Street Journal, Forbes Magazine, The International Herald Tribune and various local newspapers. He has been a contributing editor of National Review Online, The New York Sun and Townhall Magazine. Jerry has hosted daily radio and TV programs and was one of the founding members of WQED’s On-Q Friday Roundtable. He has guest-hosted the Bill Bennett radio program as well as radio programs in Chicago, Dallas and Los Angeles.
Jerry is the former host of WorldView, a nationally syndicated Sunday-morning political talk show created on the model of Meet The Press. On WorldView, Jerry interviewed distinguished guests including the Vice President, Treasury Secretary, HUD Secretary, former Secretary of Sate Condoleezza Rice, former Presidential Advisor Carl Rove, former Attorney General Edwin Meese and publisher Steve Forbes.
Jerry has taught social ethics at Ottawa Theological Hall, public policy at Saint Vincent’s College, and guest lectured at Carnegie Mellon’s graduate Heinz School of Public Policy. In 1997 Jerry gave the commencement address at his alma mater, Robert Morris University. He was the youngest speaker in the history of the school, and the school received more requests for transcripts of Jerry’s speech than at any other time in its 120-year history.
Jerry lives in Pennsylvania with his wife, Susan, and the youngest three of their seven children.