How to measure the strength of the US economy

KEY TAKEAWAYS ON HOW THE US ECONOMY WORKS

• GDP, inflation & unemployment provide a great macro-view of the economy

• While the economy may be strong it does not mean it is working for everyone

• The U.S. economy and the U.S. stock market are different things but are related

The economy in the United States is a complex system influenced by countless factors at various levels. To assess its health and performance, economists and policymakers rely on a range of indicators at the macro, micro, and individual levels. Due it's complexity it is not hard to understand why so many groups and individuals have such different views today's economic strength.

LOOKING AT THE BIG ECONOMIC PICTURE

Macro-level economic measurement focuses on the overall performance of a country’s economy. This level considers broad indicators that reflect the economic health and growth of the entire nation. GDP is the most widely used measure of a country’s economic performance. It represents the total value of all goods and services produced over a specific time period within a country. GDP growth rates are used to assess economic strength, expansion or contraction. A rising GDP indicates a growing economy, while a declining GDP may signal a recession.

GETTING A CLOSER LOOK AT THE US ECONOMY

Micro-level economic measurement focuses on individual industries, firms, or sectors within the economy. It examines how these entities perform, contribute to the economy, and interact with each other.  For example in the automotive industry, companies like Toyota and Ford monitor their market share, productivity, and revenue growth to assess their performance relative to competitors.

THE ECONOMY FROM AN INDIVIDUAL'S POINT OF VIEW (POV)

Economic strength at the individual level examines the financial health and economic activity of households and individuals. It focuses on factors that directly impact personal financial stability and quality of life. For example the U.S. Census Bureau tracks household income levels, and the Federal Reserve reports on consumer spending trends. Financial institutions often analyze debt-to-income ratios when assessing creditworthiness.

As of the writing of this blog in September 2024 many individuals feel pessimistic about the economy, despite positive indicators on a national or global level. Let's take a deeper look into what maybe driving that perception and/or reality.

Personal Financial Situations

Even if the economy is growing, many individuals may not see a corresponding increase in their income. Wage growth, especially when adjusted for inflation, has been sluggish in many economies. If people feel that their paychecks aren’t keeping up with the rising cost of living, they may perceive the economy as weak. Even in times of low unemployment, if people feel their jobs are insecure or that they could easily be replaced, this can lead to a negative perception of the economy. The rise of gig work and automation has contributed to these concerns.

Inflation and Cost of Living

If inflation is high or certain essential goods (like food, housing, or healthcare) become more expensive, people might feel economically squeezed. Even if the economy is technically growing, if people’s purchasing power is diminishing, they may feel the economy is in bad shape. Official inflation statistics may not fully capture the cost increases in areas that matter most to individuals, like housing, education, and healthcare. This discrepancy can lead to a feeling that their personal economy is worse than what official figures suggest.

Wealth and Income Inequality

Economic growth might be concentrated among the wealthiest individuals or specific sectors, leaving large portions of the population feeling left out. When wealth inequality increases, even in a growing economy, many people may feel they are not benefiting from that growth. As wealth becomes concentrated in fewer hands, the broader population may feel that their economic prospects are not improving, leading to a perception of a weak economy.

Psychological and Sociopolitical Factors

The media can significantly shape perceptions of the economy. Negative headlines, even if not reflective of the broader economic situation, can lead people to feel that the economy is in trouble. People’s perceptions of the economy can also be influenced by their political beliefs. Those who oppose the current government might be more inclined to view the economy negatively, regardless of the actual economic indicators.

Economic Indicators vs. Personal Experience

Economic indicators like GDP, stock market performance, and unemployment rates provide a macroeconomic view but don’t necessarily reflect individual experiences. If someone is struggling with personal debt, underemployment, or increased living costs, they may view the economy as bad, even if overall statistics suggest otherwise.

THE ECONOMY & THE STOCK MARKET ARE TWO DIFFERENT THINGS

While the economy and the stock market are related, they are distinct entities with different functions and indicators. The economy is a comprehensive system that includes all aspects of production and consumption, while the stock market specifically reflects the value of publicly traded companies. People often conflate the two because the stock market can both influence and be influenced by economic conditions, but it’s essential to recognize that a strong stock market does not always mean a strong economy—and vice versa. For instance, a rise in GDP or positive job reports can boost investor confidence, driving stock prices up .

Stock Market as a Forward-Looking Indicator

The stock market often reflects investor expectations about future economic conditions. For example, if investors expect economic growth, they may buy stocks in anticipation of higher corporate profits, leading to a rise in stock market indices even before economic data shows improvement. However, this can also lead to discrepancies, where the stock market rises due to investor optimism even when the economy is struggling.

Public Perception and Media Influence

The media often reports stock market performance as a proxy for the economy’s health, which can reinforce the perception that the two are synonymous. This is especially common during times of economic uncertainty, where stock market volatility is closely watched by the public. This can lead to a situation where a booming stock market gives the impression of a strong economy, even if underlying economic indicators like unemployment or wage growth tell a different story.

Wealth Effect

When stock prices rise, investors feel wealthier, which can lead to increased consumer spending, potentially boosting the economy. This “wealth effect” creates a feedback loop where the stock market influences economic activity, and vice versa .

ECONOMIC STRENGTH & ELECTORAL OUTCOMES IN AMERICA

The state of the US economy is a critical factor in our elections. Voters often judge political leaders based on economic performance, making issues like employment, inflation, and GDP growth central to campaign strategies. A strong economy can bolster an incumbent’s chances of re-election, as voters tend to credit sitting governments for economic prosperity. Conversely, economic downturns or recessions can lead to political backlash, with voters holding leaders accountable for poor economic conditions.

HOW CAN ECONOMIC STRENGTH BE MEASURED IN THE US

The overall health of the US economy is assessed through a combination of these KPIs. While no single indicator can provide a complete picture, together they offer a comprehensive view of the strength of the economy in the United States.

Sources: 1. Bureau of Economic Analysis (BEA) - GDP and Economic Data 2. Bureau of Labor Statistics (BLS) - Unemployment Rate 3. Federal Reserve - Inflation and Interest Rates 4. U.S. Census Bureau - Household Income 5. International Monetary Fund (IMF) - World Economic Outlook 6. Investopedia. “How Do I Measure the Health of the Stock Market?” Investopedia 7. The Balance. “Understanding Stock Market Indicators.” The Balance 8. Nasdaq. “Key Market Indicators to Watch.” Nasdaq