This post was originally published on TKer.com.
In normal times, no one really questions whether good news in the economy is actually good.
But in an economy where supply and demand are misaligned, things get complicated.
For months, we’ve had supply significantly lagging demand, causing inflation to surge to its highest levels in decades. This has forced the Federal Reserve to step in, tightening monetary policy in its effort to bring demand more in line with supply.¹
To put it another way, the Fed is actively trying to slow the economy — even if it means “some pain” for businesses and consumers — because it believes that is the prescription for getting inflation under control.
In this world, good news about the economy is potentially bad news if it’s exacerbating the dislocation between supply and demand.
Let’s review a few hypothetical headlines and examine why good news might be bad news — and vice versa.
Stocks rally 👍
This is typically good news because it means investors and savers have a little more wealth, and they’re probably making progress toward their retirement goals. Everyone shares in the wealth effects, as consumers have more money to consume, which is great for economic growth. Furthermore, rising stock prices are a sign that financial conditions are actually loosening, meaning businesses are able to raise funding cheaply.
It’s bad news now because: Excess economic growth is one of the reasons why we have high inflation. So, robust consumer spending and strong business investment aren’t exactly things the Fed wants to see right now. And so, a market rally may force the central bank to get even more aggressive with monetary policy as it further tightens financial conditions. Back in June, Fed Chair Jerome Powell all but confirmed that he was hoping for a bear market when he said, “Over the course of this year, financial markets have responded and have generally shown that they understand the path we're laying out.” Just last week, Minneapolis Fed President Neel Kashkari said he was “happy” to see stock prices fall after Powell’s hawkish speech from Jackson Hole. It’s a conundrum for investors, as the stock market is effectively being held hostage by the Fed.
Unemployment rate rises 👎
This is usually bad news for workers, especially those who are out of work and actively seeking work.
It’s good news now because: A rising unemployment rate suggests we’re getting some slack in what’s been an unusually tight labor market. Labor market tightness has caused wage growth to accelerate, which in turn has helped fuel inflation across the economy. A little slack in the labor market is exactly what the Fed wants right now. It has made clear that bringing down inflation is a higher priority than keeping unemployment low.
Manufacturing activity cools 👎
This is usually bad news, as it reflects a slowing economy. A lot of people work in manufacturing, so a downturn in the sector could come with significant layoffs.
It’s good news now because: Manufacturing, of course, is a key part of the supply chain. While slowing manufacturing activity is not great, it provides some relief for persistently gummed up supply chains. Those still ordering from manufacturers are seeing their goods delivered in a more timely manner. And all of this ultimately means less pressure on prices.
Home prices rise 👍
This is generally good news for homeowners, many of whom are seeing their largest asset rise in value. As of the end of Q2, there were 143.3 million housing units in the U.S., 84.2 million of which were owner-occupied.
It’s bad news now because: Shelter is a massive component of most measures of inflation. Surging prices put homeownership farther out of reach for prospective homeowners. And there are second-order effects: Rental costs also rise. It’s all a part of the inflation narrative the Fed is trying to get under control.
🔀 While rising mortgage rates — another manifestation of tighter financial conditions — is a form of bad news, as it makes financing a home more expensive, it’s been helping to cool the housing market.
Inventory levels have become bloated 👎
This is almost always bad news for businesses, because it means they aren't selling as many goods as they had planned. Storing extra goods is costly. And goods they don’t sell are at risk of becoming obsolete. One of the few ways to clear excess inventory is to mark down prices. All of this means pressure on profit margins.
But it's good news now because: The prevailing economic narrative of the past year has been inflation caused by supply shortages. Anecdotes of bloated inventories are the opposite of that. These developments help bring down inflation as prices fall for some categories of goods. Also, markdowns are welcome news for consumers and businesses now buying goods at cheaper prices.
Sentiment plummets 👎
This is normally bad news, as sentiment can affect actual behavior. Indeed, despite what may be actual fundamental strength underlying the economy, bad vibes can cause consumers and businesses to operate as though conditions are deteriorating, thus perpetuating into fruition a slowdown that didn’t previously exist.
It’s good news now because: Maybe consumers and businesses will scale back demand on their own, relieving pressure on supply chains and in turn helping to bring down inflation. This is particularly good “bad” news because this cooling demand would not be the result of weak finances. In fact, the financial health of consumers and businesses remains quite good, which could help limit the downside of any downturn and help any recovery quickly gain momentum.
…For everything else
This is not an exhaustive list of “good news is bad news” scenarios. As a general rule, any good news that can be associated with strong demand may be considered bad news, since it may cause inflation to stay high, which in turn would force the Fed to get more hawkish and stay hawkish for longer.
YES, there’s some good news that’s good news 👍
Any good news that’s associated with improvements in the supply chain is generally good news for inflation. Sure, at the micro level there will be some players along the supply chain that will have to take lower prices. But at the macro level, most folks would agree that good news about the supply chain is good news for everyone.
Remember: The Fed’s ultimate goal isn’t to slow the economy. Its ultimate goal is to cool inflation. Using policy tools to slow the economy is just a means to achieve those ends. That means we should still consider the possibility that supply catches up to demand without demand having to fall too much. This is a bullish wildcard scenario — one in which inflation could be cooling in an economy that hasn’t been crushed by the Fed.
Give it time ⏳
Again, it’s a complicated situation. But it’s not expected to be permanent.
Whether it’s the invisible hand of the economy or the visible hand of the Federal Reserve, there are forces at work correcting the dislocation between supply and demand.
Prices will stabilize as inflation cools, the Fed will get to neutral policy, and good news will once again be good news.
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Related from TKer:
Why the recession we may or may not be heading for won't be that bad 💪
The complicated mess of the markets and economy, explained 🧩
1. Read all about how we got this complicated mess in the markets and economy here.
This post was originally published on TKer.com. Sam Ro is the author of TKer.co. Follow him on Twitter at @SamRo
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