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.
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.
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."
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.
The Real Economic Outlook Behind Bernanke's Numbers