What Exactly Is the US Economy?

Fast Facts, Key Measurements, and Major Influences

supermarket cashier in medical protective mask working at supermarket
••• Pixfly / Getty Images
Table of Contents
Table of Contents

The United States of America is a union of 50 states in North America. It is one of the world's largest economies and operates as a free market economy in consumer goods and business services.

But even in those areas, the government imposes regulations to protect the good of all. It operates as a command economy in defense, some retirement benefits, medical care, and other areas.

Fast Facts About the US Economy

There are a few key components of the U.S. economy. These different economic indicators help us understand how the U.S. economy is doing.

  • Gross domestic product (GDP): $22.7 trillion (annualized nominal rate for the second quarter (Q2), 2021)
  • GDP growth rate: 6.7% (annualized rate for Q2 2021)
  • Real GDP per capita: $58,478 (Q2 2021)
  • Gross national income: $21.7 trillion (2019)
  • Unemployment rate: 5.2% for August 2021
  • Minimum wage: $7.25 per hour 
  • Currency: United States Dollar
  • Euro-to-dollar conversion: Average of $1.195 as of October 1, 2021
  • Core inflation rate: 4.0% year-over-year core rate for August 2021

US Economic Measurements and What They Mean

Gross domestic product is the measurement used to quantify everything produced in the U.S. It is used in three other measurements to help economists gauge the country's production:

  • Nominal GDP: This is an annualized figure showing a country's production level using current prices without compensating for inflation.
  • Real GDP: This does the same but removes the effects of inflation. Economists use it to compare GDP over time.
  • GDP growth rate: This ratio uses real GDP to calculate the growth rate compared to the previous quarter or year.

There are four components of GDP:

  • Consumer spending: This component equals about 69% of the total amount.
  • Business investment: This component includes manufacturing, real estate construction, and intellectual properties.
  • Government spending: This includes federal, state, and local expenditures.
  • Net exports: This includes exports that add to the nation's productivity; and imports, which subtract from it.

Major Influences on the US Economy

The U.S. budget is total federal income and spending. The government receives most of its revenue from income taxes. Most of its spending goes toward three large expenses: Social Security benefits, military spending, and Medicare.

When spending is higher than revenue, there is a budget deficit. The federal government has had a deficit every year since 1970 in all but four years (1998-2001). Each year's deficit gets added to the debt.

The U.S. also runs a trade deficit, which means it imports more than it exports.

Public Debt to GDP

The U.S. debt is more than $28 trillion. That's more than the country's entire economic output. The statistic that describes this is the debt-to-GDP ratio, which was 125.45% at the end of the second quarter of 2021. 

The U.S. ratio was below 77% until the 2008 financial crisis, and it is expected to decrease to 103% by the end of 2021. After that, it should slowly increase to 106% through 2031.

It's theorized that when debt-to-GDP is more than 77%, a developed country enters a zone where an increase of one percentage point of debt decreases annual average real growth by .017 points. If a country stays below 77% debt-to-GDP, a one percentage point increase in debt increases annual average real growth.

Durable Goods Orders

Durable goods orders report on the number of items ordered that last longer than a year. The bulk of this is defense and commercial aircraft since they are so expensive. It also includes automobiles.

A critical measurement in the durable goods category is capital goods. That's the machinery and equipment businesses need every day. They only order these items when they are sure the economy is improving.

The Federal Reserve

The Federal Reserve System is the nation's central bank. There are many tools it can use to change its stance on monetary policy. Currently, it focuses on the federal funds rate (FFR), interest rates, and open market operations:

  • FFR: The Fed sets a target range for the federal funds rate, the upper and lower bounds of which are interest on reserve balances (IORB) and overnight reverse repurchase (ON RRP) agreements.
  • Interest rates: Banks charge each other interest for loans made overnight—these rates are between the FFR target range. These interest rates influence the short-term interest rates the banks charge other businesses and consumers.
  • Open market operations: The Fed can buy and sell securities in the open market to influence long-term rates.

These tools allow the Fed to adjust interest rates and money supply without dictating how banks should conduct business.

The Fed exercises expansionary monetary policy by decreasing the target range for the federal funds rate (FFR). This speeds up growth and reduces unemployment by reducing the cost of borrowing money. If the economy grows too fast and increases inflation, the Fed will use a contractionary monetary policy. It will raise the FFR target range to slow lending and spending, which slows demand.

The Federal Reserve's administered rates (the federal funds rate target range) influence businesses and consumers' spending to keep the growth rate and inflation at healthy levels.

The Fed has three other functions. First, it supervises and regulates many of the nation’s banks. Second, it maintains financial market stability and works hard to prevent crises. Third, it provides banking services to other banks, the U.S. government, and foreign banks.

Commodities Market

The commodities market has had an important, but sometimes erratic, influence on the U.S. economy. It is the market where food, metals, and oil are traded. Technical forces (e.g., supply and demand) can have a pronounced impact on commodities prices.

As a result, all of these goods may exhibit a high degree of price volatility from time to time. This may be further compounded by fluctuations in foreign exchange prices, which impact imports and exports.