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 October 2019, they report that the economy is faltering slightly. It has slightly slower growth, low unemployment, and inflation is below target. But it's still almost a Goldilocks economy because it's neither too hot nor too cold.

145,000 Jobs Added In December 2019: Weak

frictional unemployment
The economy needs to add more than 150,000 jobs a month to remain healthy. Photo: Marilyn Angel Wynn/Getty Images

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 3.5%. 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 Third Quarter 2019, GDP Growth Was 2.1% = Good

Retail is a big driver of economic output. Photo: Ariel Skelley/Getty Images

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.

YOY Core Inflation Was 2.3%: At Target

Gas prices are mostly affected by oil prices
Gas prices are mostly affected by oil prices. Photo: Andresr/Getty Images

Inflation measures rising prices. The current inflation rate as measured by the Consumer Price Index is 2.3% in November.

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 November core inflation rate was 1.6%. That's one reason the Fed maintained rates at its December 2019 FOMC meeting. The Committee is also worried about slowing growth. 

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.

Durable Goods Orders Fell 2.0% in November 2019 = Low

Commercial airlines are a big component of durable goods orders. Photo: Paul Chesley/Getty Images

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.

When Interest Rates Remain Stable = Healthy

interest only loans allow this couple to buy their first house
Rising interest rates spur homeownership. Photo: Ariel Skelley/Getty Images

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 a range between 1.5% and 1.75%.

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

Stock Market Is Setting New Records: Healthy

Dow Closes at New High
Traders work on the floor of the New York Stock Exchange (NYSE) at the close of the trading day on June 28, 2016 in New York City. Photo by Spencer Platt/Getty Images

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.