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YOU DECIDE: How can you track the economy?

January 22, 2010

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu


Dr. Mike Walden
Media representatives:For a black-and-white or color copy of this photo, call 919.513.3127 or e-mail dave_caldwell@ncsu.edu.

Economists think the economy is finally turning for the better. Some have even stated the recession is already over - perhaps for as long as six months.

But as one of them, I'll be the first to admit that economists can be wrong. Therefore, it's important for individuals to try to track the economy themselves. However, with so much economic information out there, where should a person start and what should he or she look at?

Let me see if I can help. Here's a list of four key economic statistics that paint a good picture of where the economy is headed. They're also statistics the media regularly reports - so they can't be missed if you watch for them.

Gross Domestic Product: Translated from "economese," this is the value of everything produced in the economy in a given time period. The effects of inflation and typical seasonal adjustments are taken out, and the key number is the percentage change. A negative percentage change means economic production is shrinking and is an indicator of a recession. Conversely, a percentage change above zero means the economy is expanding. However, a percentage change above 2 percent is usually needed for the economy to have enough steam to generate new jobs.

After falling for a year, Gross Domestic Product increased in the third quarter (July, August and September) by over 2 percent, and it's also expected to have increased in the final three months of 2009. This is a big reason some economists have already declared the recession over.

Unemployment Rate and Employment: The unemployment rate is the headline number followed by most people. Yet economists have long recognized a major problem with the typically quoted unemployment rate; it simply doesn't capture everyone who is unemployed. People who have lost their job and have stopped actively looking for work are not counted in the commonly quoted unemployment rate. Also, individuals who are working part-time because they can't find full-time work aren't included in the standard rate.

To be fair, the government does release alternative unemployment rates that do include the two groups cited above. But these rates usually aren't in the headlines. So the better way to gauge the condition of the job market is simply to see if the number of jobs is increasing or decreasing. However, even here there can be some confusion because there are two job surveys done each month: one tracking jobs at existing businesses and the other questioning people at home about whether they are working. Furthermore, the two surveys don't always give the same answer; one may show jobs increasing, while the other indicates jobs are declining.

What's a person to do? Watch the results from both job surveys, and if both say the same thing (jobs up or jobs down) then that's a good indication of what is happening in the job market. Put secondary importance on the unemployment rate. Indeed, the headline unemployment rate can rise even when jobs are increasing due to unemployed folks resuming their active search for jobs.

Wealth: Four times a year the Federal Reserve releases information on household wealth; that is, the difference between what we own and what we owe. You can view wealth as stored value, and tracking wealth is important for two reasons. First, our spending responds to changes in wealth. Studies show that every dollar increase in a household's wealth results in a 5 to 6 cent increase in spending. A big part of consumer spending in the early and mid 2000s was fueled by increases in the wealth in our homes (a.k.a. home equity).

Likewise, the $11 trillion reduction in wealth we've suffered since the beginning of the recession has caused many consumers to retreat in their spending. The good news is that our wealth has increased, although we've not fully recovered, since last summer.

A second reason wealth is important is because it's linked to confidence. Rising wealth makes us more confident about the future and more willing to make long-lasting commitments and purchases.

Stock Market: My last favorite indicator is the stock market. Daily changes in the stock market can be viewed as a vote on the future of the economy, where investors are using money, rather than ballots, to cast their votes. The stock market uniquely combines an assessment of where the economy is now with a prediction of where the economy is going in the future. On any given day, movements in the stock market represent the collective wisdom of millions of investors who have put their money on the line. This is more powerful than any public opinion poll or economist's forecast.

So here are four key economic indicators - the change in Gross Domestic Product, the change in jobs, the change in household wealth and the change in the stock market - that together give us a good sense of the direction of the economy. Tracking them on a monthly or quarterly basis will help you decide if the economic skies are becoming cloudy or sunny.

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ncsu.edu/waldenradio/

Posted by Dave at January 22, 2010 08:25 AM