Due to its sheer size and complexity, the economy can be a challenge for most people to understand. Throw in the accusations from various presidential candidates, and things can get downright confusing. Joe Biden is helping the economy—just look at how many jobs have been created under his presidency. Biden has been a disaster for the economy because inflation has been so high. And look at the interest rates.
With one factor going up and another going down, what’s most important to focus one when determining the country’s economic health? What are the main factors that determine the level of our economy?
Gross Domestic Product
The gross domestic product, or GDP, is a major factor. It is the measure of all goods and services produced in the country. Obviously, that’s a big number and difficult to measure. It’s also an important one. You’ve probably heard economists predict the odds of a recession. The GDP is the thing that recedes in a recession. If the GDP fails to grow, or shrinks, for an extended period of time, that is the definition of an economic recession.
The Department of Commerce reports the GDP on a quarterly basis, and that report can have an impact on everything from the stock market to interest rates as various companies and organizations react to the latest economic news. Even a slowing of the growth of GDP —it’s still increasing, but not as fast as it used to— can have a negative impact.
The report also breaks down the components of the GDP. How much does consumer spending contribute to GDP? How much does government spending do? Investment?
Jobs
Every month, the Department of Labor produces a report on the nation’s employment status. It shows how many jobs were created in the previous month (broken down into private companies, government jobs, and some industry-specific jobs figures).
It also reports the unemployment rate. Obviously, the pandemic had a major impact on jobs, as people were sheltering in place for extended periods, meaning they couldn’t go to work. So we’ve seen bigger than usual drops (during the shutdown) and spikes (after the economy opened back up) in this figure in recent years.
In general, job creation and low unemployment are good, but they can be too good. We want people working and the GDP growing, but if it grows too fast, it can lead to…
Inflation
Prices always seem to be going up. That’s been true throughout the economic history of our country. It’s why you’ll hear old-timers gripe about what the price of milk used to be. Presumably, as prices of everything creep up, so do salaries and hourly pay rates.
Economists want there to be some low-level inflation because it is a sign that the economy continues to grow. And, as we saw earlier, when the economy isn’t growing, it means there’s a recession. The problem occurs when prices rise faster than pay. That means that people can buy less than they used to be able to.
If the economy grows too fast, then we get out-of-control inflation. This occurred right after the pandemic, when we went from virtually no economic activity to people once again spending freely. Everything happened too quickly, and we saw the impact at the cash register.
The Housing Market
Another measure of the level of health of the economy is the housing market. This is measured in home sales, as well as home starts —meaning starting construction of new homes.
The monthly housing sales report includes the number of sales, as well as information about the prices houses are selling for. The housing starts report is based on building permits applied for and is broken down by region.
Other Factors
As we said earlier, consumer spending is a component of GDP. It is also an important factor on its own. If people are spending money, it is a sign that average people have confidence in the economy.
Consumer Confidence is also a separate measurement, which takes several factors into account to try to gauge how we all think the country is doing, economy-wise. Interest rates aren’t a factor in the same way the others we’ve mentioned are. They are important—they help encourage consumers to spend or save and can be used to speed up or slow growth. But unlike the other factors, which are a measure of the economy’s activity, interest rates are something that the Fed adjusts to try to change the economy.
If you think of it like a car, the factors are the speedometer. Interest rates are the gas pedal and brake.
