Economic indicators help determine the health of the economy.
The following six facts give a snapshot of how the U.S. economy is doing. Economists call them leading economic indicators because they measure the early influencers of growth.
- The unemployment rate has remained low during 2022. The unemployment rate was 3.7% in August 2022. That number was a slight uptick from the 3.5% seen in July, which equaled the pre-pandemic rate and is low by historical standards.
- Real gross domestic product (GDP), often touted as a measure of the overall economy, fell for the second consecutive quarter in Q2 2022, dropping 0.6% in the second quarter and 1.6% in the first quarter of 2022.
- Orders for durable goods like machinery and equipment decreased by 0.1% in the second quarter of 2022, while nondurable goods (pharmaceuticals, food, and lodging) fell by 3.7%.
- In September 2022, The Federal Reserve Open Markets Committee increased interest rates by 0.75 percentage points again, with a target range of 3% to 3.25%.
- The Consumer Price Index increased by 0.1% from July to August 2022. Over the last twelve months, prices on all items increased by 8.3%.
- The stock market overall sustained growth during the previous year, but in January 2022 the S&P 500 and Nasdaq dipped significantly, and both indexes were low and erratic into March before regaining ground in April. In June the S&P 500 dipped into a bear market, 20% below its recent peak. By September, the index had gained back some of that ground but was still well below its peak.
Keep reading to learn how the U.S. economy is doing.
Jobs and Unemployment
The economy added 315,000 jobs in August 2022 employers continued to hire steadily.
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.
Note: Companies tend to only add workers when they have enough demand to keep them busy.
Manufacturing jobs are an essential indicator. When manufacturers start laying off workers, it’s possible the economy is heading into a recession. In April 2020, the economy lost 1.3 million jobs in the manufacturing industry. Manufacturing steadily gained jobs since then and has risen slightly above its pre-pandemic levels as of August 2022.
The unemployment rate was 3.7% in August 2022, slightly above the 3.5% seen before the pandemic. Overall, there were 6 million unemployed people. Job seekers have had the upper hand in recent months because there are nearly two available jobs for every unemployed person.
Unemployment is a lagging indicator, which is good for confirming trends. 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 created.
Gross Domestic Product (GDP)
The gross domestic product (GDP) fell by 0.6% in the second quarter of 2022. This is the second consecutive decrease in GDP; in Q1 2022, GDP fell by 1.6%, causing many to speculate whether the U.S. is entering a recession. While concerning, these decreases are far below the shock to the economy caused by the initial outbreak of COVID-19. GDP fell by 31.2% in Q2 2020, the worst contraction in U.S. history. Before then, the deepest quarterly contraction was a 10.0% drop in the first quarter of 1958.
Although consecutive drops in GDP is a common marker of a recession, technically only the National Bureau of Economic Research (NBER) can define when the U.S. is truly experiencing a recession.
Economists use GDP, among other indicators, to measure economic health. GDP is the dollar value of everything produced in the last year. The GDP growth rate compares the most recent quarter with the quarter preceding it.
Note: If the economy is healthy, then GDP growth will be between 2% and 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 0%, then it may be in a recession.
Durable goods decreased by 0.1% in the second quarter of the year, after increasing by 5.9% in the first quarter.
To be considered a durable good, an item must last at least three years. Consumer durable goods might include electronics, automobiles, furniture, household 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 a great indicator of economic health because consumers only buy them when they feel confident about the future.
The fed funds rate targeted range was between 2.25% and 2.5% as of July 2022.
In a healthy economy, the fed funds rate target range stays at a level that complements an average inflation rate of 2% in the long term. This corresponds to lower interest rates for businesses and consumers.
During the Covid-19 pandemic, the Federal Reserve kept the target rate range low to encourage lending, boost growth, and increase employment and inflation. But in the Federal Open Market Committee (FOMC) meeting on March 16, 2022, the Fed announced it would be raising interest rates for the first time since 2018, in order to combat rising inflation. The target range was increased by 0.25 percentage points (25 basis points) from its lowest range of 0% to 0.25%. The central bank followed this up with a 0.5 percentage point hike in May, and larger-than-usual rate hikes of 0.75 percentage points in June, July, and September.
Note: The federal funds rate target range is important because it guides most other interest rates. The second most important rate is the yield on the 10-year Treasury note. It guides fixed-rate loans like 15-year mortgages.
Interest rates control how expensive it is for businesses and consumers to borrow. When interest rates are low, it costs less to borrow, so you can 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.
There are times when interest rates are too low, such as when banks can’t make enough profit from their loans. Consumers know interest rates will remain low, so they aren’t in a hurry to borrow. When that happens, it creates a liquidity trap. The fix for the trap is to raise interest rates so that people take out loans now to avoid higher rates in the future.
The inflation rate, as measured by the Consumer Price Index (CPI), was 8.3% year over year in August 2022. Inflation is a measurement of the rate at which prices increase. When inflation is low, it means demand is too weak to push up prices. When inflation is high, it means you’ll pay more for the same goods and services that you paid for last month or year.
The July inflation rate, as measured by the PCE Price Index, was 6.3% year over year.
The core inflation rate excludes food and gas prices, which are volatile, and the year-over-year rate removes the impact of seasonal variations. For those reasons, the Federal Reserve monitors the PCE core inflation rate. The July rate was 4.6% — higher than the Fed’s target annual inflation rate of 2%.
Important: A low inflation rate accompanied by the start of the pandemic is what allowed the Fed to lower its target rate range to near zero at its March 15, 2020, Federal Open Market Committee (FOMC) meeting. The Fed has been increasing interest rates since March 2022 in order to bring down inflation.
A 2% inflation rate is healthy because 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 adjust the fed funds rate range.
The stock market can be a reflection of corporate profitability. It also tells you what investors think the economy will do. The stock market recovered surprisingly well after the pandemic, with the S&P 500 continuously hitting new highs between October 2020 and December 2021.
On Nov. 8, 2021, the Dow hit a record high when it closed at 36,432.22. It hit another high on Jan. 4, 2022, when it closed at 36,799.65. The Nasdaq Composite and S&P 500 were also climbing throughout 2021, before dipping into a correction in January 2022.
In early 2022, all three indexes started to drop, though they were still above where they were in January 2021. In March, as the global economy was affected by Russia’s invasion of Ukraine, the market dipped further before regaining momentum. In June, rising inflation and expectations of a sharp Fed response pushed the S&P 500 into the bear market territory, a 20% loss of its most recent peak. By September, the indexes had regained some lost ground, but not up to their former heights.
Note: The three most important U.S. stock market indices are the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite.
It’s a healthy sign when the market sets higher highs for a long time. Sometimes the stock market trades sideways. That could mean it’s digesting a long string of gains. However, the market can enter a correction when prices fall 10% from their high. It’s a crash if it drops severely in a day or across a few days. A drop of 20% or more from the recent high signals a bear market, which can be accompanied by a recession.
Frequently Asked Questions (FAQs)
What kind of economy does the U.S. have?
While the U.S. has many hallmarks of a market economy, it’s actually a mixed economy, because the government has an important role in regulating and overseeing it.
When was the U.S. economy the worst?
Even though there have been times of severe economic downturn in the U.S., the Great Depression of the 1920s was still the worst economic time in U.S. history.
Which country has the largest economy?
Using GDP as a measure, the U.S. has the largest economy, followed by China and Japan.