Here’s an Economic Snapshot on Obama’s Inauguration Day

Source: WhiteHouse.gov

Monday marks the kick off of President Barack Obama’s second term in office. Under Obama’s presidency, the S&P 500 rose 79 percent, the Dow climbed 69 percent, and the NASDAQ shot up 112 percent. These tremendous gains move the markets from post-crisis lows to near all-time highs for the S&P and Dow, but this recovery is just the tip of the iceberg.

Beneath it, the global economy is still in the throes of an economic downturn and after the novelty of vilifying financial institutions wore off public ire moved to federal policy makers for their role in the country’s growing share of fiscal problems. Obama helped negotiate a last-minute tax agreement that avoided the worst of the fiscal cliff, but spending cuts remain and the status of the debt ceiling remains a concern.

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The last note in Obama’s first term will be about how on Friday, Republican leaders announced they would vote on a short-term increase to the debt ceiling that came tied up with a few caveats. One, Congress would not get paid if they failed to adopt a budget by April 15. Congress has a shaky history with incentive devices like this (evidenced by the fiscal cliff ordeal), and it’s unclear if Democrats, who control the senate, are okay with the provisions.

With this as a backdrop, several economic indicators released in January paint an interesting picture of the economy heading into Obama’s second term…

The Consumer Price Index and Real Earnings report were both released on January 16. Through the CPI, market participants can get a glimpse of inflation. The CPI was flat in December, and increased an unadjusted 1.7 percent for 2012. This compares to a 0.3 percent increase in real average hourly earnings for all employees for the month, in line with a 0.3 percent average increase for the year. This can be used to get a glimpse of the relative purchasing power that consumers have.

The cost of employee benefits to employers rose 0.8 percent toward the end of the year, compared to a 0.3 percent increase in compensation costs. On average, employer compensation costs are 70 percent wages and salaries, and 30 percent benefits. Meanwhile, non-farm business sector productivity increased at a 2.9 percent annual rate during the third quarter, unit labor costs fell 1.9 percent, and hours worked rose 1.8 percent.

The unemployment rate is the key indicator most people turn to when evaluating the health the economy. U3 unemployment, the official though incomplete reading, was 7.8 percent in January of 2009, and after peaking as high as 10 percent in October of the same year, it was back down to 7.8 percent at the end of 2012.

The U-6 unemployment rate, which includes marginally attached members of the workforce such as the underemployed, was 14.2 percent in January of 2009, and was 14.4 percent at the end of December. This rate hit a ceiling of 17.1 percent.

U-3 Unemployment

The unemployment rate has become a particularly highly-watched indicator because of the Fed’s decision in December to link its monetary policy to the strength of the workforce. The Fed announced that it will continue asset purchases until the U-3 rate his 6.5 percent, as long as inflation doesn’t pass 2.5 percent (more on that next).

At the current rate of job growth, about 150,000 positions per month, the U.S. won’t see 6.5 percent unemployment until sometime in 2014. This is troubling because the Fed’s balance sheet has grown to an enormous and risky size. Competently unwinding the Fed’s position becomes more difficult the larger it is. Because of this, and the declining effect of the program itself, Fed board members expressed their interest in ending asset purchases in 2013.

Federal Reserve Balancesheet

Don’t Miss: The Cautious Optimism of Timothy Geithner.