With the recent decline in the US stock market, I decided to do some research to figure out the health of the US Economy. Using the 4 indicators that I mention below, we can gauge how well the US Economy is doing. Fundamentally, the US Economy looks pretty solid and individuals shouldn’t panic. Let’s see what these 4 indicators tell us.
Non Farm Payroll (NFP)
Non Farm Payroll, released by the Bureau of Labor Statistics (BLS), measures change in the number of individuals employed in the prior month i.e. non farm employment change. BLS reported that the unemployment rate declined to 3.7% in September 2018, and the total NFP employment increased by 134,000. The news release stated that job gains occurred in professional and business services, healthcare, and transportation and warehousing.
As you can see from the graphs above (taken from BLS website), the unemployment rate has been on a decline for the past couple years, and jobs have been added every month since September 2016. This data clearly shows that the US Economy is expanding, and jobs are being added to fuel that growth. NFP is a lagging indicator, which helps us confirm a pattern that is occuring.
Gross Domestic Production (GDP)
GDP is the measure of a country’s total monetary value of all final goods and services. The real (i.e. adjusted for inflation) GDP increased at an annual rate of 3.5% in the third quarter of 2018 (July-September). The increase in real GDP reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, state and local government spending, federal government spending, and nonresidential fixed investment. The graph below shows the change in GDP every quarter since Q4 2014.
The US GDP over the past 10 years (below) shows that ever since the 2008 market crash, the US Economy has been expanding. GDP is a coincident indicator, which means that the report occurs at approximately the same time as the conditions it signifies.
Retail Sales
Retail sales measures the monthly change in the total value of sales at a retail level. Usually when looking at the retail sales data, you want to exclude the auto sales because the price of automobiles is high, which tends to make the changes volatile. Looking at the graph below, you can see that there was a positive percent change in the total spending (black bar). This implies that consumers are willing to spend their money. Spending equates to economic growth. Retail sales is a lagging indicator, which helps us confirm an already existing pattern.
US Government Bond Yields
Bond Yield is the amount of return an investor realizes on a bond. The Federal Reserve is bullish on the US Economy, which implies that the Federal Reserve is likely to increase the interest rates. As interest rates increase, bond yields increase consequently. A rising bond yield is good for an economy because it attracts foreign investors. More importantly, rising interest rates and bond yields are bullish for stocks, and bearish for bond prices. Don’t forget that bond yields and bond prices are inversely related. As bond yields increase and bond prices drop, traders are likely to invest in stocks. The Federal Reserve would not be increasing interest rates if they saw weakness in the economy. In conclusion, increasing interest rates and bond yields indicate that the US Economy is strong. Bond yields are a good leading indicator of the stock market because bond traders speculate trends in the economy.
After looking at the 4 indicators above, we can see that the US Economy is healthy. How do you think the US Economy is doing? Do you agree with these indicators? Let me know what you think.
Hope you learned a little and found this blog post helpful. We talked about Non Farm Payroll, Gross Domestic Production, Retail Sales, and Bond Yields. We looked at the difference between leading, lagging, and coincident indicators and what each one indicates. Hope you were able to gauge the health of US Economy after reading this blog post. As always, you can sign up for our mailing list here. Like us on our Facebook page here. Thank you!
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