Assessing Macroeconomic Performance According to the business cycle dating commi

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Assessing Macroeconomic Performance

According to the business cycle dating committee of the National Bureau of Economic Research (NBER), the U.S. economy entered into a recession (now dubbed the 2007-2009 recession) in December 2007. By the time that the NBER made its announcement in late 2008, that “news” came as a shock to no one. Virtually everyone (including the NBER) had already known for months that the economy was sick. In fact, one was hearing words such as “crisis,” “meltdown,” and even “depression” at least as frequently as mere “recession.” That recession ended, again according to the NBER, in June 2009. That announcement, on the other hand, did come as a surprise to many, since so many Americans said the economy felt like it was still in a recession. Officially, the 2007-2009 recession was only an 18 month ordeal. But was it really?

Even today, some seven years after the recession was declared to be officially ended, opinions still are divided—largely along political affiliation lines—regarding the degree to which the economy has recovered, and how well the economy is currently performing. Depending on the “news” source and/or political party affiliation of the reporter/speaker, one might conclude that the U.S. economy is still in the throes of stagnation, recession, anemic/jobless recovery (you pick the descriptor) the likes of which Americans have not seen since the Great Depression--or else that the economy has largely if not fully recovered and moving steadily in the right direction.

Relevance side note: One thing is clear. If policy makers don’t know where the economy is today, that casts serious doubt on the usefulness of our forecasts of where the economy will be next month, next quarter, and next year. And when one considers that countercyclical policy-making invariably involves time lags, both before and after the policy action is taken, it becomes obvious that policy-makers very much need to know where the economy is, and where it’s headed. Otherwise, their actions have as good a chance of making matters worse as making things better. Ignorance is not bliss!  

Given that the ubiquitous assessments/opinions/pipedreams offered by politicians and pundits often are less than totally objective (or honest), a person really needs to have some knowledge base on which to judge for himself/herself the health of the economy, whether it is performing as it should, and whether it is headed in the right direction. One of the objectives of this course is to help you to develop some knowledge and skills in that regard.

Your Project 1 assignment has to do with how one should go about assessing the performance of the U.S. economy. You are being asked to identify specific metrics or measuring sticks that you believe should be noted and/or analyzed in order to arrive at an accurate reading of how the economy is doing and where it is headed. (Note: You are not being asked at this point to assess the performance of the economy. Rather, you are being asked to consider the process (focusing on the appropriate variables-metrics-measuring sticks) involved in arriving at such an assessment.

Specifically, you are to identify no more than six metrics that you would use to assess the performance of the economy. For each of the six selected metrics, explain why you chose it and how you would use it. Please do not exceed 1000 words.  

Explanation / Answer

It is true that performance of economy is measured with the help of indicators or metrics, but they represent the economy as an aggregate. Thus, most of the indicators don’t reflect the true health of the economy. It is also applied to the US economy also. That’s why, experts' opinion is found to be flimsy or not so accurate as per the views of some of the audience as their own status and achievement in terms of employment, per capita income and growth in salary package is not the same as reflected by the experts.
Here, following metrics has been identified that can identify the overall performance of the US economy with precision:
1.   Investors' confidence in the economy
Economic status of any country can be easily judged by the mood and inclination of the investors in that particular country. Positive outlook will attract the investors and negative outlook with drive away the investors from the country. It will affect the economic activities taking place in the economy that decides the well being of the society. All major policies by Fed focus upon investors to increase their activities so that economy grows at a faster pace.
2.   GDP
It is the simplest measure of the performance of the economy. But, it should be compared with the past performances. Also, GDP should be dissected into different sectors and industries. Then, the growth rate of each and every industry / sector should be analyzed to understand the true health of the economy. Also, a balance between manufacturing and services.
3.   Inflation and rationale behind it
Inflation is not so bad as it is termed in an economic sense. A controlled inflation represents the systematic growth of the economy. Inflation takes place due to increased demand over supply and willingness of people to spend more for the same good. Also, inflation takes place due to increase in demand of labor as well as the labor cost. Thus, it helps workers to earn more. Moreover, inflation is individualistic experience. If someone earns with higher growth rate than the inflation, then it is good for that person and vice versa. So, sector wise inflation and the rise in wages need to be calculated and compared.
4.   Disposable income of the individuals
Growth in disposable income makes people happier because it increases their purchasing power provided prices don’t change fast. Thus, change in disposable income will give indication about prosperity and growth among individuals in a society.
5.   Employment level
Change in employment level in each industry needs to be analyzed. The overall employment situation is an indicator, but, it seldom helps in gauging the actual situation. Thus, identifying employment opportunities at industry level will indicate towards the problem and performance of the economy can be better judged.
6.   Growth of entrepreneurs or small & medium enterprises

Entrepreneurs are the soul of any economy because they create job opportunities rather they absorb it. The growth rate of such enterprise tells the impact of policy initiatives and overall performance of the economy. A negative growth rate in numbers of entrepreneurs reflects that employment opportunities are not being created. Also, innovation and creativity are not getting due recognition in that economy. It will have a negative effect in the long term because they generate a considerable number of employment opportunities.

Indicators are good to judge the economy, but social issues such as income inequality, improper distribution of resources and wealth as well as cultural environment don’t let economy to grow in uniform manner.

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