Introduction

To gauge the US economy I examined Real GDP, an inflation index, housing units authorized by building permits, nonfarm payroll employment (jobs created and lost), and venture capital investment.

Real GDP

Real GDP is a great measure of the economy’s health and the direction it is heading.  The data I was able to find was only through 2008 and is missing a piece of the puzzle.  To give an idea of the missing piece and attempt to extend the puzzle I pulled a forecast from http://forecasts.org for October 2009 - June 2010.

The forecast for Real GDP turns positive in April giving hope that the general market believes the economy will begin to grow again.

Inflation

Inflation is currently low, which may be unexpected as the Fed has been infusing the system with massive amounts of cash in an effort kick start the economy.  It was not enough to lower interest rates to virtually zero to jump the economy, so the infusion of cash made sense, but it may have consequences.  There is almost no question that the inflation rate will go up as 1% is a definite support point, but the infusion of cash could turn out to be too effective.  If the infusion is too effective and the cash doesn’t make it back out of the system there could be a coming period of hyperinflation that would only exacerbate the economy’s current problems.  The Fed is of course aware of this fact and has been making the right moves by requesting reimbursement from the banks it lent to.  If these moves are enough, then hyperinflation shouldn’t need to be a worry, but a watchful eye still needs to be kept on inflation.

Housing Units Authorized by Building

There is no doubt this current recession was caused by the housing market bubble.  If the market is to recover the housing market will need to recover as well.  To gauge that recovery it is useful to look at the permits being authorized for new homes.

If we were to examine the full data it would be shown that 500 is an incredibly low number for a month.  We would also see when the number of permits being authorized was above 1,500 for a month this was usually preliminary to a fall off in the near future (about 1-2 years).  However, before this recession that was not the case, permits had been above 1,500 since January 1998.  To get a better idea of the severity and possible duration of this fall off it is useful to look at another drop off, in this case the early 1970s.

The 1970s market looks very similar to the current situation.  Both fell off shortly after crossing the 2,000 mark.  The differences are that the 1970s fall wasn’t quite as deep and before 1971 the market was not sustained at above the 1,500 mark for nearly as long as in the 2000s (remember the cross started in 1998).  In these fall offs the market’s demand is catching up to the inflated supply until it gets back to equilibrium.  We can infer that since supply was inflated for so long in the 2000 market, the catch up is going to take much longer.  From this data series we can conclude that although the housing market most likely hit its bottom the recovery is going to be a long and slow one.

Nonfarm Payroll Employment

The employment rate is important, the more people employed, the greater the GDP and wealth of a nation.  To simply look at the unemployment rate though is not as effective as it could be when examining the health and future of the economy.  In December 2009, 660,000 workers left the labor force (most likely because they couldn’t find work) and no longer were considered unemployed.  The unemployment rate did not change from November to December and could give the false impression of a decelerating growth in unemployment.  However, if those workers had been included the rate would have gone up 1%.  The underemployment rate could be used to measure the true unemployment rate, but it is often too subjective as the analyst has to decide what’s considered underemployed (is someone in a job that doesn’t use their skill set underemployed? or just a discouraged worker? or just people who have to settle for a part-time job instead of full-time?).  Instead I chose to examine job creation and job loss to get a better gauge of the prospects available for those who are unemployed (whichever way you consider unemployed).

More jobs have been lost in this recession than any recession in the last half century.  To get a better understanding of where we’re at now, let’s examine the tail of this graph closer.

The numbers are beginning to improve, and improve dramatically, but will the improvement continue?  Sometimes looking at the past can illuminate the future.

Examining the last recession (granted a much different recession) the recovery took time and job creation didn’t steady until after December 2003.  This recession has been much more severe and it wouldn’t be a far leap to take to say the recovery will also take longer, although the wheels do seem to be moving forward.

Venture Capital Investment

Vital to the creation of jobs is the entrepreneur.  The entrepreneur can start up a new business that can create jobs for thousands and eventually significantly stimulate the economy.  If there are many entrepreneurs at once this significant stimulation doesn’t have to be long term.  Entrepreneurs can’t do it all on their own - they need capital.  To get capital, especially when banks aren’t lending, entrepreneurs turn to venture capitalists to either get them off their ground or help their business grow.  The question is: are the venture capitalists there and ready to help when the entrepreneurs turn to them?

The numbers turned and fell in this recession, just like all the other numbers, but are the venture capitalists coming back, or have they at least stopped their flight?  The National Venture Capital Association conducted a survey during November 30 - December 8, 2009 and received responses from more than 325 venture capitalists in the United States.  The venture capitalists are optimistic.

63% of those surveyed thought investment would be the same in 2010 as 2009 (at least not lower).

44% of those surveyed thought investment would rise to $21-$25 billion.  Some quotes from venture capitalists:

“We will fund growth more aggressively in 2010 as we come out of the recession.” - Don Rainey, General Partner, Grotech Ventures

“We will increase our investment pace because we believe this a great time to invest - innovation and strong companies abound!” - Jeanne M Sullivan, General Partner, StarVest Partners L.P.

“Since Sep08 we have focused on firms that can reach breakeven on this round. In 2010 our willingness to take finance risk will likely return.” - Bronson Lingamfelter, Associate, Rose Tech Ventures

Conclusion

The general market thinks GDP will rise.  Hyperinflation doesn’t seem that likely.  Housing has hit bottom, only way to go is up, it might just take a while.  Job loss has slowed and job creation has begun, but it will likely take a while to sustain.  The venture capitalists are returning to empower the entrepreneur.  The entrepreneur can help with job creation.  From these signs it seems the economy has turned, but not abruptly.  It is only the beginning of a long path out of the woods.