'We're in a record economy - the market hit another record...' has become a popular refrain. The problem is, the market is at best, only a small portion of the overall state of the economy and may at times be entirely misleading. Other indicators of the state of the economy include the unemployment rate, the Gross Domestic Product (how much we produce in goods and services), the inflation rate, and wages.
The Market1
The numbers: On Jan 1, 2016, the DOW Jones average was at 17,400. Today it's at 28,800. That's roughly a 40% increase over 4 years. Not bad. Now, what does that mean? In short, it means that investors are valuing businesses 40% higher today (on average) than they were in 2016. It's as much a measure of optimism as anything. Being willing to buy shares in a company for a higher price (which is what causes the market to rise) does not indicate the past performance, or present value, but rather future expectation of performance.
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| Chart 1: Stock market performance: 2018-2021 |
The Unemployment Rate2
The numbers: In January 2016, the unemployment rate was 4.9%. Today, it's at 7.9%. Clearly, this is not good. In fact, it hit a record high in April at 14.9%. The unemployment rate tries to capture the number of people out of work but we've already heard that there are problems with the measurement; it misses people who stopped looking for work, are no longer receiving benefits, and never started (after high school, trade school, or college) because there just aren't the jobs available. This is very troubling and implies that the real number of unemployed is much higher than the unemployment rate shows. To be fair on the record high, the fear brought about by the pandemic was so sudden, that it resulted in a flurry of layoffs/firings in a very short period of time, so the number of people requesting unemployment benefits is compressed in time, which drives the percentage higher.
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| Chart 2: Civilian unemployment rate |
The GDP3
By the numbers: Over time, the GDP tends to rise about 2 - 4% each year, and has maintained that rate perfectly since 2016 - until 2020. In the first quarter, it declined about 5%, and in the second quarter by over 31%. The important thing to recognize about GDP is that it is driven by demand. That is, if people are buying more and asking for more services, hiring and production will increase to meet that demand. It also means there will be enough to meet demand, which keeps prices steady. (Recall supply and demand: increase supply without demand, prices fall; increase demand without supply, prices rise, etc.) This is one of the reasons the GDP is such a popular measure for the economy. The implication here is troubling: fewer people are needed in the labor market because people are buying less.
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| Chart 3: Real GDP change 2016-2020 |
The Inflation Rate4
By the numbers: The inflation rate from 2016-2020 has help somewhat steady:
Year |
Inflation Rate |
2016-2017 |
2.1% |
2017-2018 |
1.9% |
2018-2019 |
2.3% |
2019-2020 |
1.4% |
What does all this mean? First, inflation is not a bad thing when it sits in a narrow band. It should be above 1 - 1.5%, but below 3 - 4%. And for the most part, that's where it's been, which is a good thing. (Side note - if inflation and GDP move up and down together, that is a really good thing, because it implies a "stable" economy.) One cautionary note: We're now at 1.4%. For those of you who lived in the 70s, and remember the "stagflation" (lack of rise in the cost of living), you'll remember that is not a good thing. It means the economy is stalling, and wages can't go up. We're not in a state of stagflation currently, but we do need to keep our eyes on this, as it's trending that way.
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| Chart 3: United States Annual Inflation Rates: 2010-2020 |
Wages5
Are you better off financially today than you were in 2016? Looking at the inflation rate, if your wages are going up less than that rate, you're not doing so well because you can't buy as much. If you're earning more relative to the inflation rate, you're doing better as your earnings can buy more. Looking at the numbers: From 2016 to present, average hourly wages went from 21.31/hr to 24.79/hr.* so we are definitely earning more dollars. The rate of growth (so we can compare to the numbers above) is:
Year |
Wage Growth |
2016 |
2.3% |
2017 |
2.5% |
2018 |
3.4% |
2019 |
3.3% |
2020 |
3.8% |
This is actually not bad; for each year, dollars earned are higher than inflation. That said, there are a few items here that deserve additional attention:
The unemployment rate: Fewer people are making those higher wages so it's not as good as it appears. Additionally, many families are using that extra money to help out friends and family who aren't earning as much.
Reduced taxes account for most of those gains. This drives up the national debt and results in our government paying out more to higher interest on the debt which means less money coming back to us in government-sponsored programs such as infrastructure, defense, etc.
* These are only wages for supervised employees, not small business owners, executives, etc. The numbers for 2020 are provisional.
Conclusion
In summary, the economy is doing better in some places but worse in others. If you don't take anything else away from this, take this: one number does not describe the state of the economy. If anyone tries to argue that perspective, ask yourself what number they picked, and why.
References
1 https://www.macrotrends.net/1358/dow-jones-industrial-average-last-10-years
2 https://www.bls.gov/charts/employment-situation/civilian-unemployment-rate.htm
3 https://www.bea.gov/data/gdp/gross-domestic-product
4 https://www.usinflationcalculator.com/inflation/current-inflation-rates/
5 https://data.bls.gov/cgi-bin/surveymost (Series: CES0500000008)
