How Is the US Economy Doing?
Six Facts That Tell You How the Economy Is Really Doing
There are six facts that tell you how the U.S. economy is doing. Economists call them leading economic indicators because they measure the early influencers on growth. In June 2020, they reported that the economy had entered a recession. The jobs report was worse than during the 2008 recession.
The COVID-19 coronavirus pandemic had impacted the economy. To prevent its spread, the Centers for Disease Control and Prevention encouraged people to stay at home. Many governments shut down schools, businesses, and large public gatherings. As a result, the economy fell into a downturn.
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In the monthly jobs report, the Bureau of Labor Statistics surveys how many workers businesses added to their payroll. It doesn't count farmworkers because farming is seasonal.
Companies will only add workers when they have enough demand to keep them busy. A healthy economy will create 150,000 jobs on average.
Manufacturing jobs are an especially important indicator. According to the National Association of Manufacturers, the 12.75 million Americans who work in manufacturing earn an average of $84,832 a year, including benefits. When manufacturers start laying them off, it means the economy will be heading into a recession. For example, manufacturers hired fewer workers starting in October 2006 when compared to the prior year. In March, the economy lost 18,000 manufacturing jobs.
The unemployment rate in June was a staggering 11.1%. In April, it was 14.7%. Both are higher than at any time since the Great Depression.
Unemployment is a lagging indicator. Companies usually wait until a recession is well underway before laying off workers. It also takes a while to reduce the unemployment rate, even after hundreds of thousands of new jobs are being created.
The economy is measured by gross domestic product. That's the dollar value of everything produced in the last year. The most important indicator is GDP growth, which compares this quarter with the last.
If the economy is healthy, then GDP growth will be between 2%-3%. If the economy grows more than 3%, then it could be overheating. When it's below 2%, then it's in danger of contraction. If it's below zero, then it's in a recession.
The stock market tells you what investors think the economy will do. It also reflects corporate earnings and profitability. Businesses can manipulate earnings to make them look better. But in the long run, stock prices reflect demand and the health of the economy.
Sometimes the stock market trades sideways. That could mean it's digesting a long string of gains. It's not a concern.
The market enters a correction when prices fall 10% from their high.
It's a healthy sign if the market had been setting higher highs for a long time. There's no reason to worry if other economic indicators are robust.
If the stock market drops 10% in a day, that's a crash. Such a severe downturn could cause a recession. A drop of 20% from recent high signals a bear market. That usually accompanies a recession.
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Durable goods are machinery, equipment, and raw materials that businesses use in their operations. Think of steam shovels, tanks, and airplanes. In fact, commercial planes are the largest component of durable goods.
To be considered a durable good, the equipment must last at least three years. They are expensive, so businesses put off buying them until they really need them. As a result, they are a great indicator of economic health. Businesses only buy them when they feel confident about the future.
Interest rates control how expensive it is to borrow for both businesses and consumers. When interest rates are low, you're can borrow more cheaply and buy a bigger house, a nicer car, and more furniture. Businesses will borrow more to expand their companies, buy equipment, and hire more workers. The opposite happens if interest rates rise.
But interest rates can be too low. When that happens, it creates a liquidity trap. Interest rates are too low for banks to profit from their loans. The cure is rising interest rates. Then people take out loans now to avoid higher rates in the future.
The most important rate is the fed funds rate because it guides most other interest rates. The current fed funds rate targeted range is between 0.0% and 0.25%.
A healthy fed funds rate is 2.0% or greater.
The second-most important rate is the yield on the 10-year Treasury note. It guides fixed-rate loans like 15-year mortgages.
The Federal Reserve monitors the core inflation rate because it leaves out volatile food and gas prices. It also prefers the year over year inflation rate because it removes the impact of seasonal variations.
The Fed's inflation gauge is the PCE Price Index. It said the March 2020 core inflation rate was 1.7%. That low rate allowed the Fed to fight the coronavirus pandemic by lowering rates to zero at its March 15, 2020, FOMC meeting.
The Fed sets a target rate of 2% year-over-year for the core rate.
That level of inflation is healthy because then consumers expect prices to rise. That makes them more likely to buy now, rather than wait. The increased demand spurs economic growth. The Fed uses the inflation rate when deciding whether to raise the fed funds rate.