Certain indicators are used to gauge the strength of the economy. While every indicator isn’t 100% accurate, they can help provide a sense of where things are headed.
It is important to understand strength and weakness in the economy to adjust your personal finances accordingly. For example, if a weak economy is looming, it may be beneficial to save extra cash in case you lose your job.
The most common economic indicators are Gross Domestic Product (GDP), Household Income, the Unemployment Rate, Interest Rates, the Stock Market, and Inflation.
Gross Domestic Product
GDP is the total value of goods and services produced in a certain area. In 2019, the United States GDP increased 4.1 percent to $21.43 trillion!
Strong, consistent GDP growth means that a country’s economy is expanding and people are paying more for goods. It also means that the particular country’s economy is strong.
Household income is the the total amount of income earned by each member of a single household. In 2018, household income increased 1% to $62,000.
Steady increases in household income means that people are earning more money. In turn, those people will spend more money, helping the economy grow.
The unemployment rate is defined as the percentage of people who are jobless, actively seeking a job, and are available to have a job.
Decreases in the unemployment rate means that less people are out of a job. Therefore, they earning money and purchasing goods and services.
Interest rates are the costs paid to receive a loan from a bank or financial institution.
Higher interest rates are typically found in strong economies as central banks try to control inflation and discourage borrowing. This is done to prevent over-expansion of the economy.
Lower interest rates are typically found in weak economies as central banks try to encourage people to borrow and spend more money.
The stock market is an organization where investors can buy and sell shares of companies.
A strong, rising stock market is typically found in strong economies. As consumers spend more money, companies make more, pushing stocks higher.
A weak, declining stock market is typically found in weak economies. As consumers spend less money, companies make less, pushing stocks lower.
Inflation is the general increase in the cost of goods and services over time.
High rates of inflation are typically found in strong economies as demand for goods and services outweighs the supply, causing larger price increases.
Low rates of inflation are typically found in weak economies as lower demand for goods is not enough to result in large price increases.