The Real Economic Outlook Behind Bernanke's Numbers

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Following Federal Reserve Chairman Ben Bernanke's testimony to Congress on Wednesday, the bulls and bears of Wall Street went wild. But look past the market movements and more statistics than you can shake a stick at, and you'll see that the chairman managed to sum up the state of our economy with three important macroeconomic indicators.

Here are the key numbers you need to watch.

1. GDP growth rate
Gross domestic product is the leanest, meanest indicator of economic health. It crams consumption, government spending, investment, and net exports into one number.

In his testimony, Bernanke cited GDP as evidence for the economy's "moderate pace" of growth. For the first quarter of 2013, real GDP clocked in at an annual rate of 2.5 percent, an impressive increase over 2012's 1.75 percent rate.

But as Congressman Kevin Brady (R-Texas, chairman of the Joint Economic Committee) noted in his opening remarks: "We're experiencing the worst economic recovery since WWII. The growth gap between this recovery and an average post-war recovery is large and growing."

Brady alluded to a "new normal" where long-term growth rates ooze along, and he pointed to GDP growth rate estimates as evidence of this trend. GDP might be up 2.5 percent, but the Congressional Budget Office recently reduced its estimates from 3.2 percent to 2.2 percent. From that perspective, our economic outlook is falling fast.

2. Employment
GDP provides us with the big picture, but employment gives investors an inside look into how Mr. and Mrs. Jones are managing. In the labor market, messages are mixed.

Both Bernanke and committee members were quick to point to a drop in the unemployment rate as a beacon of hope. In the last year, the unemployment rate has dropped more than half a percent to 7.5 percent for April 2013 -- a substantial improvement. "In all, payroll employment has now expanded by about 6 million jobs since its low point, and the unemployment rate has fallen 2.5 percentage points since its peak," Chairman Bernanke noted.

But a closer inspection sheds some light in several dark corners. Unemployment rates are well above long-run levels, Americans are remaining unemployed for longer, and a substantial portion of our "willing to work" population has abandoned the job hunt altogether.

GDP growth rates might rise or fall from quarter to quarter, but a jobless "Joe Six Pack" can have devastating long-term effects on an economy. We've heard the message from across the pond, where France's 10.6 percent unemployment rate and Spain's 27.2 percent could leave these countries struggling for years to come.

America's economy is no different.

3. Inflation
Finally, some good news (well, sort of...and just for now). A trillion-dollar increase in GDP or a $1,000 bonus don't mean a thing if our money has less value, and the Federal Reserve seems to be making good on its inflationary mandate.

Over the past year, consumer price inflation is up just 1 percent, keeping prices affordable for cash-strapped customers. With fiscal 2012's worrisome 2.25 percent increase behind us, things might be looking up. Bernanke estimates that "over the next few years," rates will run at or below the 2 percent sweet spot to maximize employment while keeping costs steady.

But Bernanke's books aren't as balanced as one might hope. Although overall inflation eased up 1 percent, a 4.3 percent annual decline in energy prices was the main pull to inflation's push. Excluding more volatile food and energy prices, inflation is up 1.7 percent over the last 12 months -- dangerously close to the edge of the sweet spot.

And although Bernanke remains bullish on inflation control, Congressman Brady warned the chairman that the Fed's excess reserves "could become the fuel for future inflation when economic growth accelerates, unless the Fed acts swiftly to contract its balance sheet."

Scared yet?
Our economy is on the mend, but how fast and how effectively it's recovering is up for debate. GDP, employment, and inflation control are all improving, but a closer inspection reveals the fragile roots of our recent recovery.

Moving forward, investors will need to keep a close eye on these indicators and their underlying meaning. Macro-based market movements are no replacement for fundamental analysis, but these numbers will keep you well informed as the U.S. economy (hopefully) continues to inch upward.

You can follow Motley Fool contributor Justin Loiseau on Twitter @TMFJLo.

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The Real Economic Outlook Behind Bernanke's Numbers
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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