Is the economy passing its annual evaluation?

Most of us – especially senior citizens like me – have a yearly medical evaluation.  In fact, I just had mine, and my doctor was mostly  pleased overall.  Sure, I have some aches and pains – mainly knees – but most of my key metrics are in the normal range, especially for someone in their mid-70s.

In today’s column I’ll switch roles.  Rather than being the patient evaluated by a medical doctor, I’ll be the doctor analyzing a much bigger patient – the US economy.  What kind of evaluation will our economy receive?  Like me, is the economy in fairly good shape, but with some aches and pains? Or are there some big problems that may need surgery?  After my evaluation, I’ll let you decide.

Just like people, where there are some key measures like blood pressure, pulse, and body temperature, there are similar key measures for the economy.  My list includes four measures, aggregate production, total employment, the unemployment rate, and “real” worker earnings.  Also like the human measures, economists like to look at both the level and recent change in the measures.

Aggregate production, where the output of all products and services in the economy is combined, is measured by a concept called “real gross domestic product,” often shortened to just “GDP.”  GDP is currently at a record high of $23 trillion.  However, GDP normally increases with population growth and improvements in worker productivity. Most economists tract the growth annual rate of GDP, which currently is 2.8%.  Ironically, exactly the same rate was recorded immediately before the pandemic hit in 2020.  Still, economists note there has been a modest downward trend in GDP’s growth rate in recent decades, and many attribute this trend to smaller gains in worker productivity over the same time period.

Employment both in the country and North Carolina is also a record levels. Both economies quickly recovered the jobs temporarily lost during the pandemic and then resumed the growth path of jobs that was occurring prior to the pandemic. 

However, recently there has been a slowdown in job growth, with the monthly increase falling short of the number needed to accommodate new individuals entering the workforce.  Consequently, the jobless rate in both the nation and North Carolina has risen to the low 4% range in 2024 from the low 3% range in 2023. However, historically 4% is a low jobless rate.

Household income is a big part of our everyday economy.  There are numerous measures of household income, so comparisons can be confusing.  My favorite measure is “average real weekly earnings of workers.”   The measure is simpler than it sounds.  It compares over time what the average worker earns weekly.  But instead of comparing the actual dollar values, the dollar values are first adjusted for what each dollar can buy.  In other words, the comparisons are of the “purchasing power” of weekly earnings, meaning they account for price inflation.

Comparing today to four years ago, the purchasing power of workers’ average weekly earnings is 3% lower.   This means workers are still behind in what they can purchase when confronted with higher prices. But this setback has improved.  A year ago the average worker’s purchasing power was 5.5% lower than in early 2021.

I would rate this diagnosis of the economy  as “fairly good, but with room for improvement,” about what my doctor told me about my personal health.  But just like my doctor did, another evaluation looks at the long run.  While my health may be good now, am I potentially headed for something bad in the future, like diabetes or a heart attack?  Let’s do the same kind of evaluation for the economy.

The first worry is the national debt, which has grown enormously in  the last decade. Measured against the size of the economy, today’s national debt is the highest ever.  Just as concerning is the fact there appears to be no end in sight for increasing the national debt. Trillion dollar annual deficits – which add to the national debt – have become common in the federal budget.  Also, during the recent presidential campaign, neither major candidate offered a plan for containing the national debt.

One of the observable impacts of the national debt is its effect on interest rates.  Those involved in the financial markets know that an increasing national debt creates more borrowing by the federal government.  Increased public borrowing competes with normal private borrowing, with the ultimate result being higher interest rates.  Indeed, since the Federal Reserve’s recent interest rate cut, some interest rates have actually increased rather than decreased.  And higher interest rates translate into reduced ability for businesses and households to borrow.

Another sleeping long-run concern is regulations.  In the last five decades federal regulations more than doubled.  While many regulations are well-meaning, they do create additional costs for businesses.  Economic research has found a link between more regulations and slower growth in worker productivity. Modest improvements in productivity costs businesses revenues and workers money in their paychecks.

The third potential long-run problem I see is education and training for the future AI (artificial intelligence) dominated economy.  While there is much discussion about where AI will take us and the capabilities it will provide, I don’t hear enough about how formal education and training will need to be revamped so millions of workers are not left without a job.   We need to have these discussions now, because AI is rapidly expanding and being applied in vast parts of the economy.   Before we know it, AI will be a big part of our lives, especially our work, or non-work (!) lives.

I walked away from my recent medical evaluation with a smile on my face.  All of my health systems are operating smoothly now.  But my doctor warned me there are a couple of things I should consider changing now to avoid something really bad when I hit my 80s, or even if I’m lucky, my 90s.  I listened and agreed.  Should we apply the same advice to the economy? You decide

Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.