No Single Number Defines Our Economy

Anderson Connors beat me to it. I’ve been working on this entry for a couple of months, but Anderson posted yesterday: “The Dow Is NOT The Economy”, including this helpful summary:

“1. The stock market is NOT the economy.
2. The Dow Jones Industrial Average is NOT the stock market.”

Like me, he was referring to the president’s regular insistence that the economy is booming, based on a single number — and the national news media’s implicit agreement that this number represents our nation’s economy.

I went into more detail, which is why my entry took so long to prepare:

Our nation’s temporary president tweeted some time ago:

“Dow hit a new intraday all-time high! I wonder whether or not the Fake News Media will so report?”

One reply was: “The stock market is an immediate indicator of how you’re doing as President”, which wasn’t said ironically or sarcastically at all.

The Washington Post responded with an entire story about how “the Trump rally is hard to distinguish from the upward slope launched under the previous administration” — the Dow Jones industrial average has been climbing steadily since the financial collapse of 2008.

What the Post (and other news outlets) failed to mention is that the Dow is just one tiny indicator, not always a very good one, that focuses narrowly on a single bracket of the economy.

There simply is not a single number or series of numbers that indicate whether our economy is “good”, despite regular attempts to make it so. Also, if you say to a friend: “The economy is really good right now”, which specific things are you referring to?

Dow Average, 1896 to 2015
The Dow can be presented in various ways on a graph, but this is the best one I found that shows the vertical scale in linear fashion rather than using logarithmic values. Note the steep cliff in 2008-09, which represents a loss of more value than the entire average just a few years earlier.

I think most people are thinking of their own financial situation when they refer to “the economy”. Do I have a job? Am I making my bill payments on time? Do I have any money in savings? What is my personal net worth? Do I struggle to buy everyday things? Can I make big purchases without breaking the budget? How many of my friends or family members are struggling? And so on.

• The Dow Jones Industrial Average

The number we hear most often, if we watch or read the news, is “the Dow” (read more), because even the non-financial news reports it every single day. As you likely already know, it’s a stock market index, a scaled and price-weighted average that shows how 30 (very) large publicly owned companies based in the United States have traded during a standard trading session.

Despite the figure being read daily — “today, the Dow closed above 21,000” — all it refers to is the price of stocks of 30 companies, and because the average is weighted and scaled, it’s not even what we normally refer to as “average”. At best, it’s a reflection of certain investors’ confidence or lack thereof in the stock market.

Issues with the Dow, as an indicator of overall market performance, are well-known, which is why investors look at many indices, including the somewhat well-known S&P 500. But ALL of them are still limited to telling us only one thing: the current performance of the general stock market.

They say nothing of jobs, average salaries, wealth accumulation, financial preparedness, inflation, quality of life, or any other part of the world or national economy. The indices don’t predict crashes or booms; they only show the values now, and in the past. To use the Dow alone as an indicator of “the economy” is very nearly absurd.

Half of Americans (and two-thirds of blacks and Hispanics) don’t even own stock in anything. Even fewer people in certain demographics own stock: no college degree, lower income, unmarried, women, living in the South, not employed, etc. Day-to-day changes in the stock market (especially “intraday” highs like the president mentioned) are completely irrelevant to half the population. And most people who do own stocks have very small portfolios.

Gloating about the stock market’s skyward rise primarily shouts: “The rich are getting richer!”

U.S. Unemployment Rates, 1890-2009
The percentage of the U.S. labor force that is unemployed has jiggled along nicely, except for the major exception in the 1930s.

• The Unemployment Rate

Another number you’ll hear if you’re a regular consumer of news is the state or national unemployment rate, which is typically updated once a month. (When I worked for a small-town paper, one of my jobs was penning the very non-exciting monthly unemployment story.) As with the Dow, newscasters and politicians attempt to use this lone number as a grade for the entire economy. Entire speeches are built around it, and every month hundreds of articles try to pull from this number something that it cannot possibly provide.

The U.S. Bureau of Labor Statistics uses complex formulas and quite a few estimates to come up with the figures they release. Notably, the only thing that the unemployment rate tells us is what percent of the labor force fits the definition of “unemployed” at any given time. The definition does not include children, retired persons, members of the military, or people (like myself) who are otherwise not available for the pool known as “the labor force”.

Another related but less-well-known number is the labor force participation rate, which politicians occasionally try to use for one purpose or another. Both Bernie Sanders and Donald Trump brought up this number often during their 2016 presidential campaigns, and both tried to cast the numbers in a bad light. I took particular interest in these discussions, because I am technically part of the “bad” number — the group of people who don’t have jobs yet aren’t looking for them. In my case, it’s a very good sign: it means our household can afford to stay afloat without help from a second salary. Most people took it as a bad sign: people must not be able to find jobs, so they just quit looking.

As with the Dow, these employment figures each tell us only one thing about the economy: how many people are/aren’t working, and how many people could work, but don’t. Notably, fluctuations in the unemployment numbers don’t match up with fluctuations in the Dow (compare the above two graphs, for example).

U.S. and Canada GDP, 1900-2016
As this graph shows, gross domestic product, at least for the U.S. and Canada, simply continues to rise, with almost no dips.

• Gross Domestic Product

Gross domestic product (or GDP) is another common economic indicator, often used to contrast one economy with another (U.S. versus China, for example), but can also show trends within one economy. It is “a monetary measure of the market value of all final goods and services produced in a period (quarterly or yearly)” within a given locale. Since GDP does not reflect cost of living and the inflation rate differences between countries, many argue that “gross domestic product at purchasing power parity per capita” (“GDP PPP”) is a more accurate number when making comparisons.

Again, this single number cannot give a real picture of the economy at any given time. As with the Dow and the unemployment rate, GDP simply shows one single thing. (And, fluctuations on the graph don’t match up with the fluctuations on the others.)

We toy with this number, dividing it by population (per capita), or looking at the growth rate — expressed as a percentage — which most economists agree should be around 2-3%. (Though some environmentalists are increasingly pushing the idea that zero growth, or even contraction, will eventually be necessary.)

(I recently learned that GDP is determined by surveying companies; it’s entirely self-reported.)

GDP v. Median Income
This chart shows how the GDP rose sharply for 20 years while median household income stayed flat.

For economists, some version of GDP growth is the “real” number that defines an economy. However, there is a pushback against this. From The Economist (here): “Money spent on activities that generate pollution, or on medical treatments that don’t work, adds to GDP but does not reflect any improvement in national welfare.”

• Limited Usefulness

Each number — even if they were based entirely on real numbers instead of estimations — can only tell us a few things. And they don’t always tell us what we think they do. For example, GDP growth seems to tell us that things are getting better for everyone, but very often things are only getting better for the very wealthy. When a relatively small number of households greatly increase their wealth, the GDP rises, even though 99% of the population experienced no improvement at all to salary, net worth, or purchasing power. The unemployment figures (and related “jobs added in [month]” numbers) don’t tell us whether pay is rising or stagnating. Even the rarely mentioned inflation figures only say that prices are rising in certain categories — they don’t say whether you’re able to save more than you used to.

• We Need Better Indicators

Are there things I’m missing? The above are the three economic indicators I hear about regularly in the news.

Having recently read Capital In The Twenty-First Century, I’m aware that economists use other numbers, but they typically aren’t reported often nor are they well-understood by the general populace. Wealth inequality, income inequality, cost of living indexes, etc.

I think we need better indicators of the overall economy.

For example: I would be interested in a chart of bottom-to-top income ratios. In other words, track the lowest income earned in a nation each year versus the highest income earned in that same nation each year. (As I’ve covered before, the minimum wage is a misnomer; many people actually are paid less than that.) Similarly, I think it would be useful to compare the average wage of the bottom 1% to the average wage of the top 1% year to year. Already, there are statistics on the ratio of “Top [X] CEO Salaries To Average Worker Salaries” (example).

Likewise, it would be helpful to show the net worth of the top 1% versus the net worth of the bottom 1% over the course of time. At certain points in history — most notably just after World War 2 — the numbers grew closer than they ever have in history, and remained close for a couple of decades. Then the wealthy began to pull away again.

Another scale I’d like to see on a chart is cost-of-living versus salary over the years. This page shows that salaries really haven’t increased in 50 years, but it’s not discussed often like the DJIA.

What information would you like to see represent the state of our economy?

  1. ‘I think most people are thinking of their own financial situation when they refer to “the economy”.’

    Probably. But I also think most of us are aware that “the economy” affects everyone differently. While I know my own situation has barely changed in 20 years — sometimes up, sometimes down, but always slightly — I also know that it’s doing very well for certain OTHER people and very poorly for yet another group. Oddly enough, it *always* seems to be doing well for the obscenely wealthy, almost as if the economy was designed that way. Once you get past a certain amount of wealth, it becomes very difficult to lose it or even to cease increasing it. Below a certain number, it’s almost impossible to get ahead.

    ‘Gloating about the stock market’s skyward rise primarily shouts: “The rich are getting richer!” ‘

    Indeed. But we’ve been trained all our lives by the evening news reports that it means *everyone* is doing better, so even people who don’t own stock are encouraged by these reports. And we all *feel* a sense of loss when it drops, because we’ve been trained to.

    ‘Another related but less-well-known number is the labor force participation rate… In my case, it’s a very good sign: it means our household can afford to stay afloat without help from a second salary.’

    Yes, this number is misused a LOT. Your household is a good example. There are others. A neighbor of mine didn’t work for a year or more because he had saved up money during his last 10 years of working, and just didn’t want to work for a while. He lived frugally, relaxed, cleared his head, and then rejoined the labor force. Imagine if everyone was doing well enough to take a year off once in a while. The labor force participation rate would drop, but it would actually mean things are looking up.

    ‘I think we need better indicators of the overall economy.’

    I agree. And I like your examples. I’m tired of numbers like the GDP and Dow, which mainly reflect how well the very wealthy are doing. And I’m tired of economic policies that primarily enrich the wealthy under the false assumption that “a rising tide lifts all boats”. We know it only lifts the people who own boats; the rest of us are anchored to the sea floor.

    • Wil C. Fry says:

      Thanks for the long comment.

      * You’re probably right that I oversimplified what “most people” think about the economy. And there are certainly *multiple* economies in our country. There are businesses and *kinds* of businesses that wealthy people will never step foot in (pawn shops, payday lenders, rent-to-own stores, bodegas, laundromats etc.) and there are kinds of businesses that poor people rarely if ever step foot in (brokerage firms and CPAs, for example).

      * It’s true that I still *feel* the gain/loss when stock market numbers are reported, even though I *know* it doesn’t affect me or my life at ALL.

      * Another example of the labor force participation rate telling us the wrong thing: Contrast two scenarios: (1) two-job households with minimum wage jobs, and (2) one-job household with middle class income, benefits, and retirement plan. The first scenario shows almost everyone is working; the second scenario shows only half the people are working. But which one is doing better?

  2. Dana says:

    The New York Times kinda sorta agrees with you*. At least to the extent that the health of the stock market doesn’t have much of an impact on the average American.

    *The NYT is a subscription site but allows non-subscribers to view 10 free articles/month.

    • Wil C. Fry says:

      At least the writer (Patricia Cohen) agrees – mostly. And the NYT is, on average, smarter than most news media outlets. :-)

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