Timely Financial News

Is Good News Finally Good News Again?

BY Spectrum Wealth Management | Aug 23, 2023

Good news is bad news: It had been the mantra in economic circles ever since inflation took off in early 2021. A strong job market and rapid consumer spending risked fueling further price increases and evoking a more aggressive response from the Federal Reserve. So every positive report was widely interpreted as a negative development.

But suddenly, good news is starting to feel good again.

Inflation has finally begun to moderate in earnest, even as economic growth has remained positive and the labor market has continued to chug along. But instead of interpreting that solid momentum as a sign that conditions are too hot, top economists are increasingly seeing it as evidence that America’s economy is resilient. It is capable of making it through rapidly changing conditions and higher Fed interest rates, allowing inflation to cool gradually without inflicting widespread job losses.

Igor Bastidas

A soft economic landing is not guaranteed. The economy could still be in for a big slowdown as the full impact of the Fed’s higher borrowing costs is felt. But recent data have been encouraging, suggesting that consumers remain ready to spend and employers ready to hire at the same time as price increases for used cars, gas, groceries and a range of other products and services slow or stop altogether — a recipe for a gentle cool-down.

“If you go back six months, we were in the ‘good news is bad news’ kind of camp because it didn’t look like inflation was going to come down,” said Jay Bryson, chief economist at Wells Fargo. Now, he said, inflation is cooling faster than some economists expected — and good news is increasingly, well, positive.

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Markets seem to agree. Stocks climbed last Friday, for instance, when a spate of strong economic data showed that consumers continued to spend as wages and price increases moderated — suggesting that the economy retains strength despite cooling around the edges. Even Fed Chair Jerome Powell has suggested that evidence of consumer resilience is welcome as long as it does not get out of hand.

“The overall resilience of the economy, the fact that we’ve been able to achieve disinflation so far without any meaningful negative impact on the labor market, the strength of the economy overall, that’s a good thing,” Powell said during a news conference last week. But he said the Fed was closely watching to make sure that stronger growth did not lead to higher inflation, which “would require an appropriate response for monetary policy.”

Powell’s comments underline the fundamental tension in the economy right now. Signs of an economy that is growing modestly are welcome. Signs of rip-roaring growth are not.

In other words, economists and investors are no longer rooting for bad news, but they aren’t precisely rooting for good news either. What they are really rooting for is normalization, for signs that the economy is moving past pandemic disruptions and returning to something that looks more like the pre-pandemic economy, when the labor market was strong and inflation was low.

As the economy reopened from its pandemic shutdown, demand — for goods and services, and for workers — outstripped supply by so much that even many progressive economists were hoping for a slowdown. Job openings shot up, with too few unemployed workers to fill them.

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But now the economy is coming into better balance, even though growth hasn’t ground to a standstill.

“There’s a difference between things decelerating and normalizing versus actually crashing,” said Mike Konczal, director of macroeconomic analysis at the Roosevelt Institute, a liberal research organization. “You could cheer for a normalization coming out of these crazy past couple years without going the next step and cheering for a crash.”

That is why many economists seem to be happy as employers continue to hire, consumers splurge on Taylor Swift and Beyoncé concert tickets, and vacationers pay for expensive overseas trips — resilience is not universally seen as inflationary.

Still, Kristin Forbes, an economist at the Massachusetts Institute of Technology, said it was too simple to argue that all signs of strength were welcome. “It depends on what the good news is,” she said.

For instance, sustained rapid wage growth would still be a problem, because it could make it hard for the Fed to lower inflation completely. That’s because companies that are still paying more are likely to try to charge customers more to cover their growing labor bills.

And if consumer demand springs back strongly and in a sustained way, that could also make it hard for the Fed to fully stamp out inflation. While price increases have moderated notably, they remain more than twice the central bank’s target growth rate after stripping out food and fuel prices, which bounce around for reasons that have little to do with economic policy.

“We are closer to normal now,” said Michael Strain, director of economic policy studies at the American Enterprise Institute. “It makes it seem like good news is good news again — and that’s certainly how investors feel. But the more that good news becomes good news, the higher the likelihood of a recession.”

Strain explained that if stocks and other markets responded positively to signs of economic strength, those more growth-stoking financial conditions could keep prices rising. That could prod the Fed to react more aggressively by raising rates higher down the road. And the higher borrowing costs go, the bigger the chance that the economy stalls out sharply instead of settling gently into a slower growth path.

Jan Hatzius, the chief economist at Goldman Sachs, thinks the United States will pull off a soft landing — perhaps one so soft that the Fed might be able to lower inflation over time without unemployment having to rise. But he also thinks that growth needs to remain below its typical rate, and that wage growth must slow from well above 4% to something more like 3.5% to guarantee that inflation fully fades.

“The room for above-trend growth is quite limited,” Hatzius said, explaining that if growth does come in strong he could see a scenario in which the Fed might lift interest rates further. Officials raised rates to a range of 5.25% to 5.5% at their meeting last month, and investors are watching to see whether they will follow through on the one final rate move that they had earlier forecast for 2023.

Hatzius said he and his colleagues weren’t expecting any further rate moves this year, “but it wouldn’t take that much to put November back on the table.”

One reason economists have become more optimistic in recent months is that they see signs that the supply side of the supply-demand equation has improved. Supply chains have returned mostly to normal. Business investment, especially factory construction, has boomed. The labor force is growing, thanks to both increased immigration and the return of workers who were sidelined during the pandemic.

Increased supply — of workers and the goods and services they produce — is helpful because it means the economy can come back into balance without the Fed having to do as much to reduce demand. If there are more workers, companies can keep hiring without raising wages. If more cars are available, dealers can sell more without raising prices. The economy can grow faster without causing inflation.

And that, by any definition, would be good news.

Spectrum Wealth Management, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Additional information about Spectrum’s investment advisory services is found in Form ADV Part 2, which is available upon request. The information presented is for educational and illustrative purposes only and does not constitute tax, legal, or investment advice. Tax and legal counsel should be engaged before taking any action. The opinions expressed and material provided are for general information and should not be considered a solicitation for purchasing or selling any security.