While the stock market and other asset markets have at least been partly driven by easy money policies at the Federal Government and Federal Reserve, I would like to think economic growth still matters. I monitor several variables to provide me with insight into the broader health of the economy. I am not an economist and am not making forecasts. I’m simply trying to keep a finger on the pulse of the economy since inflection points in economic growth can have dastardly effects on asset prices.
Since two-thirds of the US economy is still driven by the consumer, retail sales are always a good place to start. If consumer spending is healthy, then chances are the economy is doing okay.
While retail sales have come off their peak, they are still strongly positive suggesting a seemingly healthy economy.
The next indicator I monitor is growth in Industrial Production, which captures the manufacturing component of our economy. Yes, the US economy has become less and less of a manufacturing economy, but this indicator still provides valuable context regarding the broader health of the economy.
Growth in industrial production still remains quite strong, again suggesting a relatively healthy economy.
Employment growth is often considered a lagging indicator but it can still provide valuable information. If jobs are being lost then people presumably have less money to spend. If jobs are growing, people presumably have more money to spend.
Job growth is healthy as well. While there are details that may lead to the conclusion the job market isn’t as healthy as the growth figures would suggest, the trend is moving in the right direction.
Housing is an important part of the US economy. People need places to live and construction of new housing contributes to economic growth and also reflects improving individual economic situations for Americans.
Admittedly, this is a very volatile data set but it’s looking pretty healthy right now. Given the housing shortage, it’s hard to believe housing starts won’t be healthy for the next year or two.
Real Personal Income
In conjunction with having a job, having money is another requisite for people to be able to spend. If that money source is growing that’s even better.
As a reminder, “real” means adjusted for inflation. Unfortunately, this indicator is not looking as healthy as the other indicators we’ve looked at thus far. It’s only one out of several indicators but is an important one because it reflects individuals’ purchasing power and ability to spend money.
While there are other indicators I monitor, these have historically been among the most relevant in identifying slowdowns in economic growth. With the exception of real personal income, they all appear to support an ongoing economic expansion. I’m not in the business of pinpointing and calling recessions, but it’s important to understand the underlying economic trends and where the risks to growth may lie as that can impact important investment and retirement account distribution decisions.
The most apparent risk to growth we haven’t discussed is the increase in COVID cases. We still don’t know a lot about the Delta variant but it appears to be problematic. Anecdotally, my wife told me last night that hotels in major metro areas are experiencing cancellations on par with February and March 2020 as people become increasingly concerned about the health risks presented by the virus. I’m not sure the economy will be shut down but if enough people are concerned they will curtail their economic activity which will negatively impact growth. We may already be seeing this priced into the market with the recent drop in bond yields. Time will tell.