What Exactly Is the US Economy?

Fast Facts, Key Measurements, and Major Influences

The US Federal Reserve HQ in Washington DCThe Federal Reserve (informally as the Fed) is the central banking system of the United States.
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The United States of America is a union of 50 states in North America. It is one of the world's largest economies and is considered a mixed economy. That means it 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, in some retirement benefits, in some medical care, and in many other areas. The U.S. Constitution created and protects America's mixed economy.

Fast Facts About the U.S. 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.

U.S. Economy Measurements and What They Mean

GDP is the nation's gross domestic product. That measures everything produced in the U.S., whether it's by U.S. citizens and companies or non-citizens. There are three critical measurements of GDP. Nominal GDP is the primary measurement. It gives an annualized figure. It says how much would be produced for the year if the economy kept going at the same rate. Real GDP does the same but removes the effects of inflation. Economists use it to compare GDP over time. The GDP growth rate uses real GDP to calculate the growth rate compared to the previous quarter or year.

There are four components of GDP. Consumer spending is about 70% of the total. Business investment includes manufacturing, real estate construction, and intellectual properties. Government spending includes federal, state, and local expenditures. The fourth component is net exports, which includes exports that add to the nation's economy, and imports, which subtract from it.

The U.S. has a trade deficit, which means it imports more than it exports. Its biggest export is also its most significant import, and that's oil.

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. debt is more than $26 trillion. That's more than the country's entire economic output. The statistic that describes this is the debt-to-GDP ratio. When it's more than 77%, the country enters a dangerous tipping zone. The U.S. ratio was below 77% until the 2008 financial crisis, and it is expected to grow over the next several years.

Durable goods orders report on how much is ordered of items 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 within durable goods is capital goods. That's the machinery and equipment businesses need every day. They only order those expensive items when they are sure the economy is getting better.

Major Influences on the U.S. Economy

The Federal Reserve System is the nation's central bank. It controls the U.S. money supply. It does that by changing interest rates with the fed funds rate. It also adjusts the money banks have available to lend with open market operations. It adjusts the money supply to manage inflation and the unemployment rate.

It's called expansionary monetary policy when it adds to the money supply. It does that when it lowers interest rates or adds credit to banks to lend. That speeds up growth and reduces unemployment. If the economy grows too fast and creates inflation, the Fed will use contractionary monetary policy. It raises interest rates or removes credit from banks' balance sheets. That lowers the money supply and slows growth.

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

The commodities market has an unmeasured and unregulated influence on the U.S economy. That's because it's where food, metals, and oil are traded. Commodities traders change the price of these things you buy every day. The foreign exchange markets have a similarly critical impact. Those traders change the value of the U.S. dollar and foreign currencies. That affects the price of imports and exports.

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