How Is the US Economy Doing?
Economic Indicators That Help Determine the Health of the Economy
The economy was doing well before the COVID-19 pandemic hit in March. It's now experienced the biggest recession since the Great Depression.
The following six facts give a snapshot of how the U.S. economy is doing. Economists call them leading economic indicators because they measure the early influencers on growth.
- Jobs and unemployment are worse than during the 2008 recession.
- The economy contracted a record 31.4% in the second quarter.
- Orders for durable goods like machinery and equipment are weak.
- Interest rates are at record lows as policymakers try to stimulate demand.
- Inflation is dropping, signaling low demand.
- Despite all this, the stock market is strong.
Keep reading to learn how the economy is doing right now.
Jobs and Unemployment
The economy gained 661,000 jobs in September, but that still was not yet enough to restore the 20.5 million jobs lost in April, when the unemployment rate hit 14.7%. It's also less than the 1.5 million jobs gained in August, indicating a recovery that's slowing down.
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.
Manufacturing jobs are an especially important indicator. The sector employs 12.2 million workers and pays an average of $88,406 a year, including benefits.
When manufacturers start laying off workers, it means the economy is heading into a recession. In April 2020, the economy lost 1.3 million jobs in the manufacturing industry. Manufacturing has gained jobs since then, but nowhere near enough to replace the loss.
The unemployment rate in September was 7.9%, better than the August rate of 8.4%. Unemployment is a lagging indicator, which is good for confirming trends. 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.
Gross Domestic Product (GDP)
The most recent gross domestic product (GDP) rate was -31.4% for the second quarter of 2020. It's the worst contraction in U.S. history. Before now, the deepest quarterly contraction was a 10.0% drop in the first quarter of 1958.
The economy is measured by GDP. That's the dollar value of everything produced in the last year. The GDP growth rate compares this quarter with the last.
If the economy is healthy, then GDP growth will be between 2% and 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.
Orders for durable goods rose just 0.4% in August. 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 because businesses only buy them when they feel confident about the future. So if durable goods only rise slightly, it can signal weakness in the economy.
The current fed funds rate targeted range is between 0.0% and 0.25%. In a healthy economy, the fed funds rate is usually 2.0% or greater. The Federal Reserve lowered the rate to encourage lending and boost growth.
The most important rate is the fed funds rate because it guides most other interest rates. The second-most important rate is the yield on the 10-year Treasury note—it guides fixed-rate loans like 15-year mortgages.
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.
There are times when interest rates are too low, such as when banks can't make enough profit from their loans. Consumers know interest rates will remain low, so they aren't in a hurry to borrow. When that happens, it creates a liquidity trap. The cure is raising interest rates so that people take out loans now to avoid higher rates in the future.
The current inflation rate as measured by the Consumer Price Index (CPI) was 0.2% in September 2020. Inflation measures rising prices. When inflation is low that means demand is too weak to push up prices.
The August 2020 core inflation rate as measured by the PCE Price Index was 1.6% year over year. The core inflation rate leaves out volatile food and gas prices and the year over year rate removes the impact of seasonal variations.
For those reasons, the Federal Reserve monitors the PCE core inflation rate. The current rate is lower than the Fed's target inflation rate of 2%.
The low rate of inflation is what allowed the Fed to lower interest rates to zero at its March 15, 2020, Federal Open Market Committee (FOMC) meeting.
A 2% inflation rate 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.
The stock market can be a reflection of corporate profitability. It also tells you what investors think the economy will do. The stock market has recovered surprisingly well after the pandemic, with the S&P 500 hitting new highs in August and September. As of Oct. 13, 2020, the S&P 500 was up 9.39% year to date. One reason is that some stocks, like Google, Facebook, and Amazon, are benefiting from increased shopping and working from home. These stocks are powerful enough to lift the entire market even though most stocks aren't doing well.
The three most important U.S. stock market indices are the Dow Jones Industrial Average, the S&P 500, and the Nasdaq.
It's a healthy sign when the market sets higher highs for a long time. Sometimes the stock market trades sideways. That could mean it's digesting a long string of gains. However, the market can enter a correction when prices fall 10% from their high. It's a crash if it drops severely in a day or across a few days. A drop of 20% or more from the recent high signals a bear market and that usually accompanies a recession.
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