Strong jobs reports, robust manufacturing data, still-hot consumer spending. Any time America reports its economy is strong, Wall Street has a freak-out.
So why is good news taken as bad news on Wall Street?
“The short answer is that as the economy continues to grow, particularly on the jobs front, that puts more pressure on the Federal Reserve to increase interest rates,” explains John Leer, chief economist at Morning Consult.
Strong economic reports mean the Federal Reserve’s historic rate hikes may not be having the effect that they should, and Jerome Powell & Co. may need to raise rates for longer to slow the economy and cool inflation. Rate hikes are bad news for stocks because they eat into companies’ profits.
Wall Street is particularly sensitive to strong jobs numbers. The resilience in the jobs market has been remarkable. The US economy last year created 4.5 million jobs, the second most in history, with more than 10 million job openings. The fear is that the strong jobs market (good for Main Street) will spin off more inflation (bad for companies and Wall Street.)
The Goldilocks scenario for investors would be a strong job market showing signs of cooling. (Not too hot, not too cold, but just right.)
Case in point: the December jobs report. December posted a strong 223,000 new jobs but it was the slowest pace since December 2020. And wages in December grew 4.6% on an annual basis, the slowest since August 2021. That may not sound like great news to you or me, but Wall Street took that reading as a sign the Fed’s medicine may be beginning to work.
“One of the things that we’ve seen is that wage growth has been fairly strong and there’s the fear that wage growth is going to ultimately drive inflation higher,” Leer told me on CNN’s Early Start. “So the Federal Reserve wants to raise interest rates to try to curb the demand for workers and hopefully bring down wages, which in fact will then ultimately bring down inflation.”
It’s a challenging balancing act. The Fed wants to kill too-high inflation but not drive the economy into a recession.
It’s the latest storyline in the confusing “yes, but” economy. Yes, the economy is strong, but it means the Fed may need to deliver more medicine that will hurt later. Yes, the jobs market is strong, but showing signs of slowing. Yes, it was the second-best year in history for job-creation, but it’s not expected to last and that may be good news, because it takes some of the froth out of the economy.
Adding to economists and Wall Street’s confusion: Covid, war in Ukraine, the labor shortage, supply chain chaos…. All these problems mean we have to throw conventional economic wisdom out the window. We have no history to guide us on any of this. And there are no easy solutions.