By This Measure, The U.S. Economy Gained 13% Since January

In November, I posted on eight economic indicators that would tell us whether the economy was doing better. Since then, I have been working with a colleague to develop a slightly more detailed way to sum up how the economy is doing. Dubbed the Cohan Economic Index (CEI), the measure has risen 13% -- from 100 to 113 -- since the beginning of January 2009, when Barack Obama took the oath of office.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%%Here's how the CEI works and what the numbers represent. The index consists of 10 indicators of the economy's health or illness. It includes measures of economic activity -- such as consumer and business spending -- and of the source of funds used to stimulate that activity, such as interest rates and the stock market.

Each of the indicators was set at 10 based on its value in January 2009 -- leading to the index's starting value of 100. To calculate the changes in each component, I tracked the indicator from January to the most recent month and adjusted the index up or down accordingly. For example, the stocks indicator was set at 10 in January when the S&P 500 traded at 845. With the S&P 500 ending November at 1,096, I increased the stocks index component by 30% to 13.

So how did the CEI go from 100 to 113? Of the 10 equally weighted CEI components, six improved, three stayed the same and one got worse. Here are the six that got better in descending order of change between January and November 2009:
  • Employment Losses (10 to 20). This index reflects a reduction in the rate at which the employment situation is getting worse.The number of nonfarm payroll jobs lost during the month of November was much smaller than it was in January 2009. 524,000 jobs disappeared in January while a relatively small 11,000 jobs went up in smoke in November. (When the economy starts producing jobs, I'll change this component of the CEI.)
  • Stocks (10 to 13). The S&P 500 rose 30% from 845 at the beginning of January to 1,096 by the end of November.
  • Fed funds rate (10 to 12). This key interest rate fell 20%, from 0.15% at the beginning of January to 0.12% by the end of November.
  • S&P 500 total revenues (10 to 11). The total revenues for the S&P 500 companies rose 9% from $2.001 trillion in January 2009 to $2.113 trillionin October 2009 (the most recent data available), according to an interview with S&P index analyst Howard Silverblatt.
  • Federal Reserve balance sheet (10 to 11). The Federal Reserve expanded its balance sheet (total assets and liabilities) by 9% from $2 trillion in January 2009 to almost $2.2 trillion in November 2009. I consider this positive now because it means that the Fed is providing more liquidity to keep the economy from sliding backwards.
  • Median home price (10 to 11). According to the National Realtors Association, the U.S. median home price rose 5% from $164,800 in January 2009 to $173,100 in October 2009 (the most recent data available) .
The three CEI indicators that remained roughly unchanged were:
  • Capacity utilization (10 to 10). The amount factories produced relative to their potential production remained virtually unchanged -- it was 71.1% in January and 71.3% in November.
  • Personal consumption expenditures (10 to 10). PCE -- a measure of how much consumers spend -- fell 4% from $1,558.5 billion in January 2009 to $1,496.8 billion in October 2009 (the most recent data available).
  • Corporate investment (10 to 10). Gross private domestic investment rose by 3%, from $9.89 billion in January 2009 to almost $10.2 billion in October 2009 (the most recent data available).
And the one indicator that deteriorated during the year was:
  • Bad mortgages (10 to 7). The number of mortgages where value of the principal amount of the mortgage exceeds the market value of the home rose 34%, from 8 million in January 2009 to 10.7 million in September 2009 (the most recent data available)according to the Wall Street Journal.
The 13% improvement in the CEI doesn't feel like much to the average American, but the U.S. economy could have been worse.

Meet Peter at The World Money Show Orlando, February 3-6, 2010 at The Gaylord Palms Resort.
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