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.

1.4 Million Jobs Gained in August After Losing 20.8 Million in April 2020: Hopeful

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 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.

The economy has been battered by the COVID-19 pandemic.

Manufacturing jobs are an especially important indicator. According to the Bureau of Labor Statistics and National Association of Manufacturers, respectively, there are 12.132 million U.S. workers in the manufacturing sector and they earn an average of $87,185 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 2020, the economy lost 18,000 manufacturing jobs.

The unemployment rate in August was 8.4%. In April, it was 14.7% as consumers sheltered in place to avoid the pandemic.

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. 

YOY Core Inflation Was 1.7%: Below 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 was 1.7% in August 2020.

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 May 2020 core inflation rate was 1.0%. The low rate of inflation allows 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% over time 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 Second Quarter 2020, the Economy Contracted 31.7%: Recession

GDP
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 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.

Stock Market Is Rebounding: Strong

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. 

The three most important U.S. stock market indices are the Dow Jones Industrial Average, the S&P 500 and the NASDAQ.

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% or more from the recent high signals a bear market. That usually accompanies a recession.

Durable Goods Orders Rose 11.2% in July: Still Recovering

Boeing-DC-10-jet.jpg
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 Fall: Weak

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. 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. 

Article Sources

  1. U.S. Bureau of Labor Statistics. "Employment Situation Summary Table B: Establishment Data, Seasonally Adjusted." Accessed Sept. 11, 2020.

  2. National Association of Manufacturers. "Facts About Manufacturing: The Top 18 Facts You Need to Know." Accessed Sept. 11, 2020.

  3. U.S. Bureau of Labor Statistics. "Industries at a Glance, Manufacturing: NAICS 31-33." Accessed Sept. 11, 2020.

  4. U.S. Bureau of Labor Statistics. "Employment Situation Summary Table A." Accessed Sept. 11, 2020.

  5. U.S. Bureau of Labor Statistics. "Unemployment rate rises to record high 14.7 percent in April 2020." Accessed Sept. 11, 2020.

  6. U.S. Bureau of Labor Statistics. "Consumer Price Index Summary." Accessed Sept. 11, 2020.

  7. U.S. Bureau of Economic Analysis. "Personal Consumption Expenditures Price Index, Excluding Food and Energy." Accessed Sept. 11, 2020.

  8. U.S. Bureau of Economic Analysis. "Personal Income and Outlays." Accessed Sept. 11, 2020.

  9. Board of Governors of the Federal Reserve System. "Federal Reserve issues FOMC statement." Accessed Sept. 11, 2020.

  10. Board of Governors of the Federal Reserve System. "Federal Open Market Committee announces approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy." Accessed Sept. 11, 2020.

  11. Investor.gov. "Bear Market." Accessed Sept. 11, 2020.