Six Facts That Tell You How the Economy Is Really Doing

There are six facts that tell you how the economy is doing. Economists call them leading economic indicators because they measure the early influencers on growth. Right now they report that the economy is doing well. It has steady growth, low unemployment and little inflation. That's called the Goldilocks economy because it's neither too hot nor too cold.

• 01

   164,000 Jobs Added = Strong

  

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  In the Non-farm Payroll Report, the Bureau of Labor Statistics surveys how many workers businesses added to their payroll each month. They don't count farm workers, because farming is so seasonal. A healthy economy will create 150,000 jobs on average. Companies will only add workers when they have enough demand to keep them busy.

  Manufacturing jobs are an especially important indicator. The 12.5 million Americans who work in manufacturing earn $81,289 (including benefits) on average. When manufacturers start laying them off, it really means the economy will be heading into a downslide. Manufacturers hired fewer workers starting in October 2006 when compared to the prior year.

  The unemployment rate is also reported, but that's actually a lagging indicator and so isn't as useful a statistic. Companies usually wait until a recession is well underway before laying off workers. It also takes awhile to reduce the unemployment number, even after hundreds of thousands of new jobs are being created. 

• 02

   GDP Growth Is 2.3 Percent = Healthy

  

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  The economy is measured by gross domestic product. That's the dollar value of everything produced in the last year. The most important indicator is GDP growth, which compares this quarter with the last. If the economy is healthy, then GDP growth will be between 2-3 percent. If it's above 3 percent, then it could be overheating. When it's below 2 percent, then it's in danger of contraction. If it's below zero, then it's in a recession.

• 03

   Durable Goods Orders Rose 2.6 Percent = Healthy

  

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  Durable goods are machinery, equipment and raw materials that businesses use in their operations. Think of steam shovels, tanks and airplanes. In fact, commercial planes are the largest component of durable goods.

  To be considered a durable good, the equipment must last at least three years. They are expensive, so businesses put off buying them until they really need them. As a result, they are a great indicator of economic health. Businesses only buy them when they feel confident about the future.

• 04

   Year Over Year Core Inflation Is 1.8 Percent = Below Target

  

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  Inflation measures rising prices. The Federal Reserve monitors the core inflation rate because it leaves out volatile food and gas prices. It also prefers the year over year inflation rate because it removes the impact of seasonal variations. 

  The Fed sets a target rate of 2 percent year-over-year for the core rate. That level of inflation is healthy because then 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 raise the fed funds rate.

  The Fed's inflation gauge is the PCE Price Index. It also says inflation is increasing. That means the Fed is more likely to raise rates at the next FOMC meeting.

• 05

   Stock Market in a Temporary Correction = Healthy

  

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  The stock market tells you what investors think the economy will do. It also reflects corporate earnings and profitability. Although businesses can manipulate earnings to make them look better, in the long run they reflect demand and the health of the economy.  

  Here are the three most important stock market indices:

  • Dow Jones 
  • S&P 500
  • NASDAQ

  Sometime the stock market trades sideways. That could mean it is digesting a long string of gains. It's not always a concern.

  The market enters a correction when prices fall 10 percent from their high. It's a healthy sign if the market had been setting higher highs for a long time. There's no reason to worry if other economic indicators are robust. 

• 06

   Interest Rates Are Rising = Healthy

  

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  Interest rates control how expensive it is to borrow for both businesses and consumers.  When interest rates are low,  you're can borrow more cheaply and buy a bigger house, nicer car and more furniture. Business will borrow more to expand their companies, buy equipment and hire more workers. The opposite happens if interest rates rise.

  But interest rates can be too low. When that happens, it creates a liquidity trap. Interest rates are too low for banks to profit from their loans. The cure is rising interest rates. Then people take out loans now to avoid higher rates in the future.  

  The most important rate is the fed funds rate because it guides most other interest rates. A healthy fed funds rate is 2.0 percent. Find out the current fed funds rate.

  The second-most important rate is the yield on the 10-year Treasury note. It guides fixed-rate loans like 15-year mortgages.