The U.S. economy is the largest and most complex in the world. And true to human nature, we have developed a myriad of statistics to decipher it. The challenge, however, is that at any given time, the numbers conflict making it difficult to predict with certainty the degree to which the economy will expand or contract. Also, the stock market, a group of individuals making decisions based on the perceived future profitability of corporations, somehow tends to be a leading indicator. Therefore, given the recent rise in the stock market, is it trying to tell us that the economy is finally finding traction? Or is the message more about the Fed’s ongoing $85 billion per month monetary expansion? In other words, how much of this expansion, weak as it is, is attributable to the Fed’s stimulus and how much is organic growth? Clearly, the Fed is having a significant impact. However, the 64 million dollar question is, how much? In this article, we’ll take a look, not at the Fed’s effect, which may be immeasurable, but rather at what the statistics may be trying to tell us.

Loans

The economy will not grow unless consumers and business spend more than they earn. However, when this occurs in excess, events like 2008 can transpire. That said, without strong loan growth, GDP would be weak. At this point, loans to consumers and businesses are near an all-time high. Hence, someone out there is borrowing against future income which may portend a brighter economic future.

Housing

Several months ago, I wrote about the acceleration in home prices, as it seemed the housing market was beginning to rebound. My concern at that time was whether it was investors buying up cheap inventory or “mom and pop” buying their next home. At this point I think the jury is still out. While high unemployment is an impediment to a robust housing market, strong home sales are a catalyst for higher home prices. Hence, if the unemployment rate continues to fall, housing should continue to rebound. The canary in the coal mine could well be the remaining shadow inventory held by financial institutions who got caught holding abandoned properties when the music stopped. However, if they continue to release these uninhabited dwellings slowly, the damage to housing should be minimal. Conversely, if this glut of houses were to hit the market all at once, the result could be devastating, as a sudden increase in supply could send home prices tumbling.

Employment

This is the single most important issue in my mind. Mainly because, the more workers there are, the more taxes are paid, the more money is spent, and when the velocity of money accelerates, economic growth cannot be far behind. Also, the duration of those collecting benefits is falling and the unemployment rate of is declining. On the flip side, the labor force participation rate is falling, and in fact, is at a level not seen since October 1978. Today, the official number of unemployed is down to 11.6 million from 15 million. However, the actual number is around 21.5 million. The result? The employment picture is improving, but it’s still far from where it needs to be.

Summary

As the sequester cuts continue to materialize and the 2013 tax hikes settle in, if the U.S. economy is gaining traction, these headwinds, along with the potential deflation-debt-depressive time bomb in Europe, may be just enough to bring our economy to a halt. Stay tuned. It’s gonna be an interesting ride!

Source: http://www.forbes.com/sites/mikepatton/2013/05/17/is-the-economy-finding-its-footing/