Merry Christmas. The economy is recovering.
In assessing our economy or, really, any economy, you want to know if the economy is growing, that there are enough jobs for people, that people can borrow at reasonable rates and that the dollar you hold today is worth about the same as it did a year ago. If those four metrics are solid, we are good. Using Pareto’s 80/20 principle—the idea that 20% of any set of numbers constitutes 80% of the value of the entire set—we know that real GDP, the unemployment rate, interest rates and inflation drive the vast majority of what is important.
If those four numbers are excellent and all other economic metrics are falling apart, we still get a B grade. If all other numbers are great and those four numbers are bad, we get an F.
These four pillars are the best antidote to the idea of the “vibecession”—a state defined by persistent negative “vibes” and a sense of malaise about the economy due to factors like high grocery prices and housing costs, with no regard to what the hard data says.
When rhetoric gets loud in politics, look at the basic math. First, consider gross domestic product (GDP). GDP is simply the value of all the goods and services a country produces within a time period. Think of GDP as a country’s sales or revenue, just like the top line for a company. After a minus 0.6% growth rate at the start of the year, the second quarter bounced back with a 3.8% increase. New data this week showed third-quarter GDP growth accelerating to 4.3%—the highest rate in two years. Historically, a real GDP growth rate above 3% is outstanding. Real GDP—check.
In contrast, unemployment sits at 4.6%, the highest since 2021. But look at context: Since 1950, the average U.S. unemployment rate has been about 5.7%. In 2020, it spiked to 14.8%. By any historical measure, if you want a job in America today, the math is on your side. Employment—check.
Next, interest rates. The Federal Reserve recently set a target range of 3.5% to 3.75%. Historically, 30-year mortgages run two to three percentage points higher than that rate, and they currently sit around 6.3%. We are in a cooling-off period after mortgage rates peaked near 8% in late 2023. If you are anchored to the sub-3% rates of 2020—a once-in-a-century anomaly—6.3% doesn’t feel so good. But the historical average since 1971 is 7.4%. We are currently borrowing at low rates compared to the last five decades. Interest rates—check.
Finally, the annual inflation rate is currently around 2.7%, higher than the Federal Reserve’s 2% target but well below the 75-year average of 3.5%. Remember, the COVID-era high was 9.1% in June 2022. Things still “feel” bad around inflation because groceries can cost $150 for two bags and because of what has occurred over the past five years. Prices aren’t dropping, but the speed of their increase has significantly slowed. We are still paying for the 24% total price hike endured since 2021, but the bleeding has stopped. At 2.7%, the engine is cooling to a healthy temperature. Inflation—check.
The answer: Despite the “vibecession” narrative, the economy is recovering. I think we get an A-minus, no matter who the teacher is—Democrat or Republican.
One last item. Who drives all these metrics? Certainly not the politicians. It is the small-business person. They create the jobs and the growth. A healthy economy is built by small businesses. They create about 65% of all new jobs and the vast majority of innovation. These businesses have been operating in a fog of mixed information and a quickly changing policy environment. Predictability is the oxygen needed for entrepreneurs because their lives are already upside down with risk. They need the certainty to plan, hire and invest. So, people, let’s not confuse the creators. It is time to move past the noise and get back to business. The math says we’re going to be just fine.
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