How To Tell If the US Economy Is Actually Improving
The U.S. economy was approaching $22 trillion when the pandemic hit in 2020. The virus sent the country’s gross domestic product (GDP) cratering below $19.5 trillion for the first time since 2017. But starting in the second quarter of the pandemic’s first year, the massive American economy — the biggest and most complex in world history — reversed course and started climbing skyward again. Fast-forward to the fourth quarter of 2021 and America’s GDP is just shy of $24 trillion.
GDP, however, is just one of the key economic indicators that give economists and laypeople alike an idea of whether or not things are moving in the right direction. If you’re curious about the country’s recovery in the wake of the pandemic, these are the economic indicators to watch.
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The Importance of the US GDP
Gross domestic product (GDP) is the yardstick that measures economic growth. Perhaps the most important of all the economic indicators, GDP represents the combined market value of all finished goods and services produced within a specific geographic region — in this case, the United States — in a certain period of time. GDP serves as an economy’s report card. When the GDP is growing, businesses and employees alike generally do better. When it’s stagnant or receding, the economy is contracting and headed toward a recession.
In 2021 as the effects of the pandemic subsided, America’s GDP grew by 6.9%, blowing past the 5.5% consensus estimate, according to CNBC.
The Unemployment Rate Matters
Like the GDP, the unemployment rate is one of the most important lagging economic indicators. It represents the percentage of the labor force that is not currently employed, although the definition of “labor force” is controversial.
Despite the millions of workers who left their jobs during the Great Resignation of 2021, the unemployment rate fell by 2.5 percentage points in 2021, according to FactCheck.org, from 6.4% at the start of last year to 3.9% in January 2022. The economy added 6.2 million jobs during that time.
The Consumer Price Index Helps Measure the Rate of Inflation
The consumer price index (CPI) tallies the average change over time of specific “baskets” of consumer goods. Economists use it to measure the rate of inflation. Runaway inflation is always bad, but some inflation can be a sign of an economy on the mend. When businesses expand and hire more workers, unemployment falls, more people have more money and consumer confidence rises. Consumers then spend more money and buy more things, which sends demand — and prices — up.
Last year’s economy, however, was defined by inflation that was sending prices up too far too quickly. In January, the bad news continued, according to Yahoo Finance, as inflation rose at an annual rate of 7.5%, a 40-year high.
The Stock Market Can Be Misleading, but Can Mean a Lot
The S&P 500 delivered roaring gains approaching 27% in 2021, but the benchmark index has stumbled into 2022, suffering losses over 7% year-to-date. Tech stocks have endured an especially brutal sell-off.
The stock market is a leading economic indicator that reflects on overall economic activity, how investors feel about the economy and the profitability of corporations. A bull market can be misleading, but generally, the stock market enjoys sustained periods of growth when businesses are profitable, when unemployment is low, when GDP is up, when consumers are confident and spending money and when the economy is strong.
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This article is part of GOBankingRates’ ‘Economy Explained’ series to help readers navigate the complexities of our financial system.