As I wrap up this week's edition
of the Sterling Weekly and look
back at last week; it strikes
me as a rather boring week with
the exception of the Treasury
Department's decision to re-introduce
the 30 year long bond to the
market (more on that in a later
edition.) What does stand out
about last week was the amount
of positive economic news that
was released during the week,
and the results of a poll from
Friday's edition of Kudlow &
Co. on CNBC showing that 55%
of the population disapproves
in the way President Bush is
handling the economy. While
45% of the over 3,500 poll participants
did approve of the way President
Bush is handling the economy.
These poll results did not seam
correct given the recent ecomoinc
news. During a conversation
with another market professional
late Friday, the comment was
made that the majority of the
population would not know how
to define a good economy, or
for that matter what defines
a bad economy.
Well for starters a bad economy
is defined by negative economic
growth and high unemployment.
A good economy isn't necessarily
defined as not being a bad economy.
There is an area between an
economy that is not in a recession
(or depression) and one that
is a strong, growing economy;
there is a form of economic
malaise that is somewhere in
between. Let's focus on how
to define a "strong, growing"
economy. A strong and growing
economy is typically defined
as having relatively low and
declining unemployment and strong
economic growth, as measured
by Growth Domestic Product (GDP).
When I was in college the unemployment
was experiencing a long term
decline and had dropped to around
6.25%. College textbooks described
the "natural rate"
of unemployment, that level
for which unemployment could
not drop below without causing
a severe overheating of the
economy and rampant inflation
as 5.5%. It was literally thought
of being nearly impossible for
the unemployment rate to drop
below this level. Well in the
late 1990s and early 2000 the
unemployment rate actually dropped
below 4.0%! Something that had
never happened in the post Great
Depression modern economic era!
Not even close in modern economic
times! Last week the government
announced that the unemployment
rate had declined to 5.0%, a
level to still be considered
a historical low by modern economic
standards.
Since the end of World War
II when millions of soldiers
returned from the war and the
United States shifted from a
war-time economy back to a civilian
economy the long term rate of
GDP growth has been 3.0%. This
is a very simple economic indicator
to understand. It basically
measures the growth of the US
economy. There are three (3)
types of GDP growth rates to
remember. A negative GDP growth
rate for two (2) consecutive
quarters signals the start of
a recession (that is not good,
and makes for a painful economy),
a positive GDP growth rate that
is less than 3% is a growing
economy, but not necessarily
worth celebrating. A positive
GDP growth rate above 3.0% is
a strong and growing economy,
let the good times roll. (If
the GDP number is above 5-6%
a level of growth very rarely
is ever seen, then its party
time but be prepared for the
hangover afterwards!) The recently
released GDP numbers show that
the economy is growing at just
under 4%, significantly enough
above long term average of 3%
to demonstrate solid growth.
(One percentage change in GDP
is a huge amount)
The bottom line is we have
a strong and growing economy.
Unemployment would not be this
low, the GDP numbers would not
be this strong, and inflation
would not be this low if the
economy wasn't hitting on "all
cylinders," not to mention
there would not be all this
talk of a real estate bubble.
I believe that the feeling that
this is not a good economy is
created by negative media and
political hype and a lack of
economic knowledge.
