State_of_the_Economy

State of the Economy Economic indicators show that the US economy is recovering from a very serious decline (recession). The strength and durability of the recovery is still in question as there are conflicting signals from several key indicators. GDP, as shown in the first chart from the Department of Commerce, has been rising since the middle of 2009. However, the GDP increase has been helped by significant government spending and economic stimulus leading many experts to question the strength of the economic recovery. The Chicago Federal Reserve Bank publishes the National Activity Index (CFNAI) which, though not well known by the public, has one of the best track records in measuring the economy. The latest CFNAI is shown in the second chart. The chart shows that economic activity has improved but has not yet reached the level that signals a strong recovery. The chart indicates that the current economy is in a sort of “no man’s land” between recession and recovery. The economic weakness is confirmed by total employment levels as shown in the third chart. Employment as a percent of the working age population is a better measure of employment than the well know “official” unemployment rate. The official unemployment rate does not count discourage job people who have left the job market. The employment percentage chart shows that the percent of people working has fallen significantly and is still declining. Also, chart four shows that new unemployment claims have stopped falling over the last month indicating businesses are still laying off workers. This employment weakness is confirmed in the fifth chart which shows both total hours worked and personal income excluding government payments. Total hours worked has stopped declining but is not yet improving. And consumer income net of government stimulus and payments is flat as well. These two economic indicators normally increase at the same time that GDP increases. But that is not happening in this recovery which means the recovery is very weak. The sixth slide shows total bank lending is still in decline. Banks are not lending and consumers and businesses are not borrowing. This is a very unusual situation at this stage of an economic recovery. Normally, a recovery is dependent upon increased borrowing. But consumers are paying down debt which is limiting their consumption spending and limiting true GDP growth. The seventh slide shows that deflation, not inflation, is the biggest threat to the economy. The Cleveland Fed publishes a core inflation measure which removes a lot of the noise in the inflation measure. The “trimmed mean” inflation rate has been plummeting over the last two years and means that the US could face a deflationary economy much like Japan has had. The final chart shows a relatively new measure published by a group of physicists who formed the Consumer Metric Institute and who attempt to measure and forecast the economy using real time daily transaction data. This measure is forecasting a decline in GDP beginning in the second quarter. The chart shows that the CMI’s growth index has a very good forecasting record. It is saying what charts two through seven are saying – the economy has not really recovered and is potentially headed for decline.