The MainStreet Mood Index: A Roadmap for the U.S. Economy

NEW YORK (MainStreet) — The U.S. economy has technically been out of the recession for a full year longer than it was in one, but many Americans would scoff if you told them that, and for good reason.

The primary statistic that economists use to determine whether the economy is in recession or recovery is the gross domestic product (GDP), which represents the total value of goods and services churned out in the country each quarter. While this data point serves as a good barometer for the country’s economic productivity, it doesn’t necessarily reflect the health of the economy – or the workers and consumers who make up that economy.

For that, MainStreet reached out to several economists to develop an alternative to assess the direction the economy is heading in. The result is the MainStreet Mood Index, which focuses instead on the percentage of the population employed, the amount of disposable income consumers have in their pockets and the gap between the economy’s current output and the amount it could have produced if the recession had never happened.

Though the country’s overall output began to grow again in the third quarter of 2009, officially ending the recession, all three metrics in our index only continued to worsen throughout that year and two of the three remained at or near their lowest points all the way through the third quarter of 2011.

Consumers saw their real after-tax incomes (adjusted for inflation) drop from $32,423 in the second quarter of 2009 to $31,782 in the fourth quarter of 2009, where it bottomed out and hasn’t budged much since. To make matters worse, the percentage of working-age Americans who actually had jobs dropped from 59.6% in the second quarter of that year to 58.4% in the fourth quarter, and didn’t bottom out until the third quarter of 2011 when it hit 58.2%.

That the economy could simultaneously be growing for more than two years without getting much healthier for working Americans might once have been unthinkable, but not anymore.

“The intuitive relationship is that if an economy grows faster, employers would increase hiring, but that relationship seems to have broken down in recent years,” says Bernard Baumohl, chief global economist at The Economic Outlook Group and author of The Secrets of Economic Indicators.

Much of this, Baumohl says, comes down to corporations’ desire to produce more and more with less and less. Businesses big and small are choosing to invest in machinery and software to boost their efficiency rather than hiring more workers. What’s more, as their profits increase, businesses are choosing to hold onto excess cash assets (in the billions for many companies) rather than take on new employees or offer raises to existing ones. Hence the relatively stagnant pay in recent years.

Unfortunately, without adequate employment and higher wages, consumers don’t have enough money to help the economy recover as fast as it could if a true recovery were underway. Instead, the country has a massive unused labor force and fewer consumers with an appetite to buy. That’s largely why the total amount of goods and services produced in the U.S. is still more than $900 billion below what the Congressional Budget Office estimates its potential to be.

“It’s a vicious cycle,” says Andrew Fieldhouse, a federal policy analyst with the Economic Policy Institute. “All three of these indicators are feeding back into each other.”