The odds are 2008 will be an interesting year for the U.S. economy. That is “interesting” as in “hang onto your hat!”
There is plenty of bad news about falling house prices, increasing mortgage defaults, lower consumer confidence and soaring food and energy prices. There is also lots of talk about recession. But as we watch to see how the year unfolds, some economic indicators are more telling than others.
First, recognize there are two different aspects of the economy. One is the “real economy,” what people do every day, what goods and services they produce that can meet society’s needs and how much of such things they consume. The “money economy” includes stock prices, housing prices, prices of goods and services, flows of money in and out of the country and interest rates.
The real economy and the money economy are related. But people don’t eat bonds and don’t clothe themselves with foreign currency reserves or live in the national debt. So, in most cases, pay more attention to indicators of the real economy than to purely money ones.
Output: Gross domestic product measures the dollar value of all final goods and services the economy produces. “Final” means in the form they are used. We count a loaf of bread but not also the wheat flour and the raw wheat. We count a new car but do not add on the steel and the iron ore and glass and plastic that went into it.
Tabulated quarterly by the Department of Commerce, GDP measures what is produced, not how well off people are. But in general, when output is rising, households are better off than when it is falling. More people have jobs, businesses are more profitable and people can spend more to meet their needs and wants. Moreover, many other statistics, including personal income, are derived from GDP.
GDP continued to grow strongly in the third quarter, but most economists think that was a fluke and expect growth in output to slow. Watch for it turning negative. A decrease in output for two consecutive quarters is the official threshold for a recession. Output declines greater than an annual rate of 2-3 percent persisting more than two quarters indicates a recession is severe.
For more information, go to www.bea.gov/national/
Employment: How many people are working – and what proportion are not – is the second important measure of how the real economy is doing. The Department of Labor surveys 50,000 households each month. In addition, it surveys the 300,000 largest “establishments” that employ people. This includes for-profit businesses but also government and nonprofits.
Every month, from these surveys, the Bureau of Labor Statistics calculates the unemployment rate or percentage of the labor force that does not have jobs and the total number of people who do have jobs. Their efforts are combined with those of state and local governments.
So far, unemployment is a little higher in many areas, but not nearly as bad as it would be if the economy was in recession. Look for stagnant employment growth or even declines in the total number of jobs filled. With a growing population, either will push up unemployment rates. If unemployment moves rapidly above 6 percent at national or state levels, the recession is significant.
More on labor market indicators is at: www.bls.gov/bls/employment.htm
Prices: The BLS also tabulates information in its Consumer Price Index by checking prices of thousands of goods across the nation. In the CPI, these items are weighted, so that gasoline makes up 4.3 percent of consumer spending, women’s footwear 0.359 percent and lettuce 0.062 percent. “Core” inflation, with volatile food and energy prices factored out, has risen in recent months. Including those categories makes things even worse. If either the general or “core” price indexes continue to increase, even slightly, month after month, the task of the Federal Reserve will become more difficult. It will face incipient “stagflation” and will have to choose between holding the line on prices or stimulating a slowing economy.
Interest rates. In the “money economy,” interest rates are key-especially relationships between different interest rates. Usually, long-term interest rates are higher than short-term ones.
But a change in this pattern, so that short-term rates are higher than those for bonds maturing further out, often precedes a recession.
In January, the three-month T-bill rate was 5.07 percent to the 10-year Treasury note of 4.68 percent, warning of recession. Now the three-month T-bill is 3.33 percent, and the 10-year Treasury note is 4.23 percent, reflecting beliefs that the Fed will continue to depress short-term rates substantially.
The Fed can keep short-term rates low. Look out, however, if long-term rates start to rise substantially. This would reflect concern that rising inflation may make longer-term lending riskier. Again, the Fed would be in a bind between stimulating a recessionary economy and controlling inflation.
There are many more economic indicators, far too many to describe in one column. Gary Clayton and Martin Gerhard Giesbrecht’s slim book, A Guide to Everyday Economic Statistics, is a comprehensive, understandable reference for anyone wanting to know more.
But no one can predict for certain whether we will enter a recession or how long or severe it might be.
So, what should one do? As my mother used to say, “Hope for the best and expect the worst.” Follow the above indicators if you wish. Read news of Fed actions. Wish each other a prosperous New Year. And then hold onto your hat.
© 2007 Edward Lotterman
Chanarambie Consulting, Inc.