The following six facts give an idea of how the US economy is doing. Economists refer to them as leading economic indicators because they measure the initial influence on growth.
Keep reading to learn how the US economy is doing.
Employment and Unemployment
The economy added 750,000 jobs in February 2022 (revised from an initial estimate of 678,000) and 431,000 in March, well above economists’ expectations.
In its monthly employment report, the Bureau of Labor Statistics surveys how many business workers are added to their payroll. It does not include farm laborers because agriculture is seasonal.
Companies tend to only add workers when they have enough demand to keep them busy.
Manufacturing employment is an important indicator. When manufacturers start laying off workers, there’s a chance the economy is heading into a recession. In April 2020, the economy lost 1.3 million jobs in the manufacturing industry. Manufacturing has continued to find work since then but remains below pre-pandemic levels by April 2022.
The unemployment rate in March 2022 was 3.6%, which is 0.4 percentage point lower than January. Unemployment is a lagging indicator, which is great for confirming trends. Companies usually wait until the recession is going well before laying off workers. It also takes time to reduce the unemployment rate, even after hundreds of thousands of new jobs are created.
Gross Domestic Product (GDP)
The gross domestic product (GDP) growth rate was 3.3% for the fourth quarter of 2021. This growth continued the recovery from the second-quarter 2020 rate of -31.2%, the worst contraction in US history, as of April 2022. Prior to that, the quarterly contraction the deepest was a 10.0% decline in the first quarter of 1958.
Economists use GDP, among other indicators, to measure the health of the economy. GDP is the dollar value of everything produced in the past year. The GDP growth rate compares the latest quarter with the previous quarter.
If the economy is healthy, then GDP growth will be between 2% and 3%. If the economy grows by more than 3%, then it could overheat. If it’s below 2%, then it’s in danger of contraction. If it’s below 0%, then it’s probably in a recession.
Durable goods increased by 2.5% in the fourth quarter of 2021 after increasing by 50.0% and 11.6% in the first and second quarters, respectively, and decreasing by 24.6% in the third quarter.
To be considered a durable item, an item must last at least three years. Consumer durables may include electronics, cars, furniture, home appliances, books, jewelry, and more. These types of purchases are often expensive, so people put off buying them until they need them. As a result, they are good indicators of economic health because consumers only buy them when they feel confident about the future.
The targeted fed funds rate range is between 0.75% and 1% in May 2022.
In a healthy economy, the target range for the fed funds rate remains at a level that complements the 2% average inflation rate over the long term. This corresponds to lower interest rates for businesses and consumers.
During the Covid-19 pandemic, the Federal Reserve has maintained a low interest rate range to boost lending, boost growth, and boost employment and inflation. But at a meeting of the Federal Open Market Committee (FOMC) on March 15-16, 2022, the Fed announced it would raise interest rates for the first time since 2018, to combat rising inflation. The target range increased by 0.25% (25 basis points) from a low of 0% to 0.25%.
The target range for the federal funds rate is important because it guides most other interest rates. The second most important level is the yield on the 10-year Treasury note. It guides fixed-rate loans such as 15-year mortgages.
Interest rates control how expensive it is for businesses and consumers to borrow. When interest rates are low, borrowing costs are lower, so you can buy a bigger house, 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 are unable to make enough profit on their loans. Consumers know that interest rates will remain low, so they are not in a rush to borrow. When that happens, it creates a liquidity trap. The solution to this trap is to raise interest rates so people take out loans now to avoid higher interest rates in the future.
The inflation rate, as measured by the Consumer Price Index (CPI), was 8.3% year-on-year in April 2022, down from 8.5% in March 2022. Inflation is a measure of the rate at which prices are rising. When inflation is low, it means demand is too weak to push prices up. When inflation is high, it means you will pay more for the same goods and services as you paid for the last month or year.
April’s inflation rate, as measured by the PCE Price Index, was 6.3% year-on-year. The core inflation rate ignores volatile food and gas prices, and the year-over-year rate eliminates the impact of seasonal variations.
For that reason, the Federal Reserve monitors the PCE core inflation rate. The April rate was higher than the Fed’s annual inflation target of 2%.
It is this low inflation rate coupled with the start of the pandemic that has allowed the Fed to lower its target rate range to near zero at the Federal Open Market Committee (FOMC) meeting on March 15, 2020. The Fed has been raising interest rates since March 2022 to lower inflation.
A healthy 2% inflation rate as consumers expect prices to rise. That makes them more likely to buy now rather than wait. Increased demand spurs economic growth. The Fed uses the inflation rate when deciding whether to adjust the fed funds rate range.
The stock market can be a reflection of the company’s profitability. It also tells you what investors think the economy will do. Stock markets recovered surprisingly after the pandemic, with the S&P 500 continuing to hit new highs between October 2020 and December 2021.
On November 8, 2021, the Dow hit a record high when it closed at 36,432.22. It hit another high on January 4, 2022, when it closed at 36,799.65. The Nasdaq Composite and S&P 500 also rose throughout 2021, before dropping to a correction in January 2022.
In early 2022, all three indexes started to fall, although they were still above their January 2021 levels. In March, as the global economy was affected by Russia’s invasion of Ukraine, the market slumped further before regaining momentum.
The three most important US stock market indexes are the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite.
This is a healthy sign when the market is setting higher highs for an extended period of time. Sometimes the stock market is traded sideways. That could mean it’s digesting a long series of gains. However, the market may enter a correction when the price drops 10% from its high. It is a crash if it drops badly in a day or in a few days. A drop of 20% or more from a recent high indicates a bear market, which could be accompanied by a recession.
Frequently Asked Questions (FAQ)
What type of economy does the US have?
While the US has many advantages of a market economy, it is actually a mixed economy, as the government has an important role in regulating and overseeing it.
When is the US economy worst?
Despite periods of severe economic downturn in the US, the Great Depression of the 1920s is still the worst economic period in US history.
Which country has the largest economy?
Using GDP as a measure, the US has the largest economy, followed by China and Japan.