 | Click the image to the left to learn more about measures of macroeconomic conditions that you may want explore, including links to key sources of data that Filene uses and trusts. |
Credit unions, their managers, directors, employees, and members are all affected by and need to remain informed about macroeconomic conditions, their short-term upheavals, and the long-term trends in their local, regional, national, and, increasingly, even international economies.
Here, we provide a very brief refresher (or introduction) for anyone who may need to dust off their Economics 101 or for anyone who may want to start learning it anew. We also provide links to key sources of macroeconomic data that Filene uses and trusts.
This guide, the links within, and the data therein can help you and your credit union (1) better quantify, understand, and navigate short-term macroeconomic upheavals and (2) engage in more informed long-term strategic planning.
The three main measures of macroeconomic conditions
1. Economic growth
Economic growth or growth in gross domestic product (GDP), is the broadest measure of the total amount of goods and services that are produced within a territory during a period of time.
Why does economic growth matter?
Economic growth is very important for members because long-term increases in their standards of living, and wages, are deeply influenced by economic growth rates, and ultimately by improvements in technology and worker productivity.
Economic growth is also very important for credit unions because bank asset growth rates (i.e., the broader market in which credit unions operate) historically have roughly tracked overall economic growth rates.
What is the historical range for economic growth rates?
In recent decades, economic growth rates in the U.S. have averaged about 2% or 3% annually (after adjusting for inflation, see below). While economies can experience long periods of expansion, they also experience periodic contractions, often called depressions or recessions. The largest contractions on record in the U.S. (before COVID-19) included the Great Depression, during which economic production fell by a staggering 26% during 1929-1933. More recently, during the Great Recession, economic production fell by 4% during 2007-2009.
2. Unemployment Rate
The unemployment rate compares the number of those actively seeking employment (defined as unemployed) and the labor force (the employed plus the unemployed).
Why does the unemployment rate matter?
The unemployment rate is very important for individual members, quantifying economy-wide the personal and financial stress that workers suffer as they lose their livelihoods.
The unemployment rate is also very important for credit unions who, during periods of higher unemployment, may experience:
- higher loan delinquencies and charge offs and
- lower loan demand and loan per asset ratios.
In contrast, during periods of high unemployment, credit unions often experience large inflows of deposits due to:
- members seeking the safety of credit unions for their savings and
- the impacts of expansionary monetary policies by the country’s central bank, the Federal Reserve.
What is the historical range for unemployment rates?
Analysts generally consider an economy to be experiencing full employment when the unemployment rate is low, e.g. historically about 4-6%. During, and particularly following, economic contractions, unemployment rates can reach much higher levels. The unemployment rate in the U.S. peaked at 25% during the Great Depression and at 10% during the Great Recession.
By April 2020, the unemployment rate had reached 14.7%. Many analysts came to conclude that, during the COVID-19 crisis, the unemployment rate would reach or pass levels last seen during the Great Depression.
3. Inflation Rate
The inflation rate expresses how much prices are increasing for a broad index (or basket) of goods and services. The most commonly used price index is the Consumer Price Index (CPI).
Why does the inflation rate matter?
The inflation rate is important for members and credit unions, as if affects the purchasing power of wages and the interest rates that members pay on loans and receive on their shares (deposits).
What is the historical range for inflation rates?
Inflation rates have been quiescent (low or very low) in most developed countries in recent decades, not having consistently exceeded 3% in the U.S. since the early 1990s.
Leading economic indicators
While the above are the three main measures of economic conditions, they tend to be “lagging indicators.” After the fact, they are clear, reliable, and readily understandable measures of how an economy was doing. However, in part because they are computed quarterly or monthly, these three measures are not effective as early warning systems of turning points in economic conditions, i.e., of either trouble ahead or of signs of recovery.
For that reason, observers often pay particularly close attention to a variety of “leading economic indicators” for which data are available more often, weekly, or even every second. Many observers pay particularly close attention to:
1. Leading Economic Index
The Leading Economic Index (also known as the Index of Leading Indicators) combines several key variables and seeks to identify turning points in the economy.
2. Initial unemployment claims
Weekly initial unemployment claims, or the number of those newly applying for unemployment insurance within the previous week. Before COVID-19, the highest level on record for initial unemployment claims was 695,000 (in 1982).
The early weeks of COVID-19 had levels each of 3.3 million, 6.9 million, 6.6 million, 5.2 million, 4.4 million, 3.8 million, and 3.2 million, totaling a historically-unprecedented 33.5 million job losses in seven weeks.
3. Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA), also known as the Dow 30, provides a rough measure of investors’ and retirement savers’ wealth and confidence. While they are volatile, stock market price indices often point out economic turning points, i.e., trouble ahead or signs of recovery, ahead of other economic data.
| Click the image to the left to learn more about measures of macroeconomic conditions that you may want explore to develop further your insights beyond the beginners’ level. |