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 July 2019, they report that the economy is doing well. It has steady growth, low unemployment, and little inflation. That's called the Goldilocks economy because it's neither too hot nor too cold.

164,000 Jobs Added In July 2019 = Strong

frictional unemployment
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In the Non-farm Payroll Report, the Bureau of Labor Statistics surveys how many workers businesses added to their payroll each month. It doesn't count farm workers because farming is seasonal. A healthy economy will create 150,000 jobs on average. Companies will only add workers when they have enough demand to keep them busy.

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 $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.

The unemployment rate is also reported. It's a lagging indicator and so isn't as useful a statistic. 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. 

In Second Quarter 2019, GDP Growth Was 2.1% = Ideal

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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 it's above 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.

Durable Goods Orders Rose 2% in July 2019 = Good

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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.

YOY Core Inflation Was 1.6% = Below Target

Gas prices are mostly affected by oil prices
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Inflation measures rising prices. The current inflation rate as measured by the Consumer Price Index is 2.1%.

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 also says inflation is increasing. That normally means the Fed would be more likely to raise rates at the next FOMC meeting. But the Committee is worried about slowing growth. It lowered rates by .25% at its July 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.

In August 2018, Stock Market Came Out of a Six-Month Correction = Healthy

Dow Closes at New High
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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.  

Here are the three most important stock market indices:

Sometimes the stock market trades sideways. That could mean it is digesting a long string of gains. It's not always 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. 

When Interest Rates Remain Stable = Healthy

interest only loans allow this couple to buy their first house
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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. A healthy fed funds rate is 2.0% or greater. The current fed funds rate is 2.25%.

The second-most important rate is the yield on the 10-year Treasury note. It guides fixed-rate loans like 15-year mortgages.