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The reason author has said that the Dow Jones Industrial Average is not a good indicator of the economy because the stock market does not entirely reflect the actual reality of the economy of a country. Similarly, the Dow Jones Industrial Average does not reflect the actual state of US economy hence, pointing it out regularly as the performance indicator of US economy is not recommended.
The prosperous and promising outlook of the stock market to the investors is in stark contrast to the economic uncertainty and huge amount of economic loss currently being experienced by the millions of American workers.
The combined total value of goods produced and services provided in a country over a period of 12 month or a year is referred to as gross domestic product of the country for the year.
GDP helps in truly understanding the actual reality of an economy hence, it is a snapshot of the economy’s size and growth rate since the economy in its true sense means the production and consumption of goods and services. The US GDP in the first quarter of 2020 has decreased by 5%.
The situation of breadth and depth of employment income in a country is effectively reflected in the federal tax receipts hence, it is a good gauge of overall economic health of a country. Federal tax receipts have only increased by 2.6% in April, 2020 as compared to the increase of 19.7% in 2015 thus, the author has stated that economic activity has fell off the cliff.
The stock market is a place where the shares of public companies are traded, i.e. brought and sold based on the futuristic perspective. Economy is on the other hand is the current state of affairs of a country in terms of production and consumption of goods and services. Thus, stock market is significantly different to the economy hence, the former is not a good indicator of the health of economy.
Stock market is forward looking and is driven by the positive narrative that the production and consumptions of goods and services will improve in the future hence, it is important to consider the narrative as it definitely influences an economy.
Considering that there are large number of corporations operating across the US thus, to show an industrial average of merely 30 major corporations is definitely not indicative of the overall industrial mood in US. Hence, it is a big disadvantage for the Dow Jones Industrial Average as it only indicative of 30 major corporations across the country.
Small business definitely has a role to play in the overall economic situation in any major economy and it is not different in the US. Hence, lack of representation of small businesses in the stock market is significant as the stock market in the absence of small business not entire show the correct state of corporate America.
The lack of resources and uncertainty over the economic situation in the country will millions of Americans loosing their job it is all but natural that consumers are not confident as compared to the investors who are primarily wealthy and elite people different from workers, especially when the investors of Dow Jones Industrial Average Index are concerned.
The day to day market swing in the stock market is primarily based on the news and information related to the companies and its operations however, in most situation these are not entirely reflective of the economic activities in the country.
The current state of US economy is definitely quite uncertain with the millions of job cuts and lack of demand and supply in the market. For example, the personal finance situation of most ordinary Americans is not very good with many have failed to pay their mortgages in recent months due to the lack of income.