If you want to evaluate the overall economic health of the United States, you have a variety of options available to you. GDP is probably the most popular metric that's used, although it doesn't tell the whole story. Not even close.
The United States is running deep in the red with regards to its current account (part of its balance of payments) which would be reflected in much stronger GDP numbers for the time being, but much lower GDP numbers later on when the accumulated debt comes back to bite us in the rear. The best example of this concept of action can be found in the Eurozone right now.
There's another way we can look at it - if the United States were a company on the NYSE it'd be negative on EPS with an increasingly high debt on its balance sheet, a pension bomb waiting to explode in the near future, and significant depreciation eating away at its existing assets (which may or may not be fairly valued to begin with). This is a well-known fact, but what's not as obvious is the trouble that the United States will run into with coming years.
The sign I'm referring to originates in our education system, which is simply not providing the opportunities for the young generations now entering the workforce. Whether or not this is the fault of higher education, or of the economy, doesn't matter as much as the fallout. A recent release by the Department of Education, according to this New York Times article, pegs the total amount of student loan debt at over $1 trillion. To put this growing problem in perspective, this astronomical sum is almost twice the size of subprime mortgage originations at their peak in 2005.
Source: Federal Reserve Bank of San Francisco (2007)
While the vast majority of this debt is held by the government, which can absorb the delinquencies like not other financial entity on the planet, I would argue that this counts as valid, empirical evidence for long-term deterioration of our economic climate.
Even if it has not come to be fully realized, there is a nasty feedback mechanism built into this. As baby-boomers begin to retire, there should theoretically be more cushioning for those entering the workforce. The thing that we're seeing is that things have gotten so bad with the jobs market that this demographic "boost" is not enough to prevent total student debt from growing each year.
As baby-boomers begin to draw from their retirement savings to pay for their own needs as well as their unemployed (or underemployed) offspring, the whole "safety line" for personal finance gets thinner and thinner. Disposable personal income, which is a very direct way to measure trends in American purchasing power, has been slowing a lot this year (reflecting the bleak landscape that is the jobs market). This is where things get hairy, because the current rate of disposable income growth barely keeps up with inflation.
So, ultimately, because the labor market is so difficult (especially for the young and inexperienced), we will see major pressure on disposable income which actually turns around to hurt the same companies that were cutting jobs to begin with. As they say, it is all connected.
Major companies that sell products that fall under the "disposable income purchases" category - consumer electronics for instance, should have serious trouble growing US sales revenue. We haven't seen the weakness of the labor market reflected in revenue or earnings data at most companies that you'd expect to be hindered by this environment, but at this rate it's only a matter of time.
This also implies that the education landscape is a good indicator to study future economic growth. Since education feeds formalized talent into the labor market, we can expect some serious trouble when that pipeline isn't headed anywhere useful. Unemployed college graduates are absolutely everywhere, and it seems that the whole situation with student debt is comparable to the situation with subprime mortgages back in 2005.
Indeed, these loans are all granted in anticipation that the individual taking the loan will make the money back (and then some). The subprime loans were feasible, on paper, due to the ever-rising price of homes. The student debt bubble makes a similarly confident assumption.
A college-educated student has historically been more than able to repay loans with a higher (on average) salary than a high school graduate. It remains to be seen if the labor market is going to move against that bet in coming years though, because even though students who are hired can generally repay their loans the real problem is the huge population of unemployed college-educated students who are only supported by their families.
What does this mean for investors?
For one thing, I think that our reliance on a strong outlook for the US economy is at stake. If you think about the current trend, we have a government that is spending more than it takes in and a huge segment of the population essentially living off of wealth that was accrued during the last few decades. The S&P 500 (SPY), Dow Jones (DIA) and NASDAQ (QQQ) will probably experience stunted growth until we can provide organic economic growth that originates in the labor market.
The second thing to take away from this is that emerging markets are looking pretty good as an alternative investment to the US economy. I would certainly stay away from the likes of Europe as much as possible as elaborated on here. If you aren't investing in emerging market funds like Vanguard's (VWO) or iShares' (EEM) I think it might be a good idea to have develop some exposure to what may be the only real source of worldwide economic growth for years.