The Dow Jones Industrial Average (DJIA) is at a record high, and the unemployment rate has ticked down to 7.7 percent, but this is no time to celebrate. The economy is still in the doldrums.
A little perspective: The news media trumpet changes in the Dow as though it tells us almost all we need to know about the economic fate of the American people. That’s nonsense. Not everyone thinks the arbitrary index of 30 busily traded blue-chip stocks is terribly relevant to gauging the condition of the economy. Moreover, the average, which reflects the daily change in the companies’ stock prices, is not adjusted for inflation. In nominal terms the Dow hit a record high of 14,447.29 this month. But in real adjusted terms, the average is only at the level reached in the year 2000. In other words, if you invested in the companies that year, you’re no richer now, because the dollar has depreciated thanks to the Federal Reserve. That doesn’t sound so remarkable.
Fixation on the Dow might encourage neglect of other, less upbeat economic indicators. While the DJIA soared, the unemployment rate dropped to only 7.7 percent last month, which is disturbingly high, especially when you consider that the Great Recession officially ended more than three and a half years ago. Even better light is shed on the employment picture by looking at the civil employment-population ratio. According to the Bureau of Labor Statistics, before the recession the rate was over 63 percent. During the recession it hit a low of slightly over 58 percent and has barely recovered since. (In the late 1990s it was close to 65 percent.)
In light of such dismal signs, how are we to account for the stock market? The Federal Reserve is working hard to keep key interest rates close to zero. The Fed has bought hundreds of billions of dollars in long-term government securities (“Operation Twist”) in order to lower the return from such investments.
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