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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41 Comments

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gjgarvey

As long as you remain negative that is all you are going to see. We see life improving and you should too. Quit acting un American. We are fine and we will remain doing fine. You must be a young writer because had you been around the USA as long as most of us old folk have you should know we will end up on our feet once again. Hang in there and quit being so negative.

May 25 2013 at 2:04 PM Report abuse -2 rate up rate down Reply
1 reply to gjgarvey's comment
dajt666

you are stuck in the past. the past is over. and that is over your head.

May 25 2013 at 3:33 PM Report abuse rate up rate down Reply
Iselin007

So tell me is technology going to prevent Bible Prophesy from coming true?

May 25 2013 at 1:46 AM Report abuse +2 rate up rate down Reply
gkurran

To bad we didn't elect someone that knew something about business & money. We'd be a lot better off with a real leader.

May 24 2013 at 10:58 PM Report abuse rate up rate down Reply
1 reply to gkurran's comment
Iselin007

As long as there is little money trickling down there is no reason to care period.

May 25 2013 at 1:50 AM Report abuse +3 rate up rate down Reply
Engelun

I don't give a chit about all the numbers except the cost of things like milk and booze. I made it to retirement and collect my social security. The things that matter now are groceries and booze. Screw the rest.

May 24 2013 at 10:26 PM Report abuse -2 rate up rate down Reply
ectullis

In any event Hussein must go

May 24 2013 at 9:16 PM Report abuse +1 rate up rate down Reply
Iselin007

When you cut hours in such away as to cause an increase in public assistance you push the costs off taxpayers all while cutting payments to things such as SSI!
You increase the work on backs of fewer people you stress them out until they fail then you fire them. Is this the economy the America you want to build?

May 24 2013 at 8:00 PM Report abuse +3 rate up rate down Reply
Iselin007

You heard of TimeSizing the idea that making part time jobs saves people from losing jobs? When they fire full timers and hire 2 part timers you got 2 positions which inflates hiring numbers and lowers the unemployment rate.

May 24 2013 at 7:48 PM Report abuse +2 rate up rate down Reply
Iselin007

The more part time jobs cut from full time jobs the more people will need public assistance.

If the same person has 2 different part time jobs they count 2 people as being employed and instead of counting as 1 full time job they count . Spliting fulltime jobs creates 2 positions so now they count an additional job which lowers the unemployment rate!

May 24 2013 at 7:38 PM Report abuse +2 rate up rate down Reply
paddleman1928

none of our problems have been corrected
debt keeps increasing
labor participation rate is dropping
college grads are taking jobs not requiring college degrees
gov't are behind in pension plan funding
small cities are starting to go bankrupt
new dollars are being printed at a rate sure to create severe inflation
when obamacare hits employers will have to make changes to address added costs

May 24 2013 at 6:58 PM Report abuse +1 rate up rate down Reply
fakeconomics1

The Real commonsense values= Reasonable Tax Rates = 15, 20 and 25% -- No Deductions, No IRS, No Tax filings

Stop Bankers' Fraud and Greed

Stop Greedy Oil from manipulating prices

Real Healthcare reforms - Everybody should be able to buy pharmaceutical drugs from any country

Life imprisonment for Medicare and Insurance fraud -- Upfront published fees and cost for every medical procedure and cost of material costs

'Ban Campaign contributions from Healthcare, Banking, DoD Contractors and Unions

May 24 2013 at 6:00 PM Report abuse rate up rate down Reply
1 reply to fakeconomics1's comment
seattlewkr

get a job, freak.

May 24 2013 at 6:12 PM Report abuse -2 rate up rate down Reply