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Davis Journal

Key Indicators Point to a Mixed Economy

Feb 28, 2022 01:40PM ● By Anna Pro

Is the economy thriving or struggling? The answer will vary widely, depending on who you ask. In the mind of the average American, the U.S. economy is not doing well. Consumer sentiment hit a 10-year low in February, down a stunning 19.7% from February 2021, as measured by the University of Michigan Index of Consumer Sentiment.

However, other economic data paint a different picture. While inflation and the labor shortage continue to cause serious pain points for consumers and the economy, key indicators point to a strong economy. Much like how a physician considers various physical markers to determine a person’s overall health, economists look at some of the following indicators to assess how the economy is doing:

Economic Growth. The broadest measure of our economy, gross domestic product, shows that economic growth is robust. GDP, the sum of all goods and services produced in the economy, grew by 7% in the fourth quarter of 2021 to a value of $24 trillion. This is far above pre-pandemic levels and nearly back to the long-term trendline, had the pandemic never happened and it had continued its historic growth pattern.

Job Creation. At both the state and national levels, the labor market continues to grow and add back jobs lost during the pandemic. Utah continues to outpace the rest of the nation in job creation as one of only four states that has added jobs during the pandemic.

Unemployment. The national unemployment rate is now around 4%, down from a pandemic high of 15%. Meanwhile, Utah’s unemployment rate of 1.9% is at its lowest in state history and is the second lowest in the nation, just behind Nebraska. The downside of this low unemployment is that labor shortages are even more dramatic in our state.

Labor Force Participation. The U.S. labor force participation rate — an estimate of the economy’s active workforce — ticked up to 62.2% at the beginning of this year. While still below the pre-pandemic rate of around 63%, the labor force participation rate is trending in the right direction as more people return to work. 

Wage Growth. As a result of the tight labor market, wage growth continues to accelerate and is around 6%. While wages are growing much faster than the annual average of 2.7% over the past 15 years, wage growth is not keeping up with soaring price increases.

Inflation. The inflation rate is the highest the nation’s seen since the 1980s. In the Mountain West, consumer prices are growing even faster, surging 9% on an annual basis in January, compared to 7.5% nationally. Analysts are estimating that this price growth will peak in the next few months, but continued pressure from supply chain disruptions and international turmoil threatens to keep inflation higher for a longer period of time. 

Interest Rates. The Federal Reserve has kept interest rates low to help stimulate the economy through the pandemic. Now in response to continued inflation, markets expect the Federal Reserve will increase rates as much as 2% over the next year. While this may be unwelcome news for potential homebuyers and loan applicants, the Fed must act aggressively to bring down price increases.

The disconnect between economic data and consumer perceptions of the economy is actually consistent with a strong economy. The struggle today is not that the economy is not growing enough, instead, it is a sign of an economy growing so strongly that it is now overheating. Just like a pot of water on a stove, the economy is boiling over. The challenge for the Fed is to figure out how to turn down the heat without cooling the economy too much.