CNN New York –
Strong employment reports, solid data on manufacturing and consumer spending are still fresh. Whenever America says its economy is strong, Wall Street gets scared.
So why does Wall Street see good news as bad news?
"The short answer is that as the economy grows, there will be more pressure on the Fed to raise interest rates, especially on jobs," said John Lear, chief economist at Morning Consult.
Strong economic reports suggest the Fed's historic interest rate hikes may not have the desired effect, and Jerome Powell & Co. may need longer rates to slow the economy and curb inflation. The price increase is bad news for stocks, as it fuels corporate earnings
Wall Street is especially sensitive to strong job numbers. The stability of the labor market has been impressive. The US economy added 4.5 million jobs last year, the second-highest job increase in history by more than 10 million. The fear is that a stronger job market (good for Main Street) will lead to higher inflation (bad for business and Wall Street).
For investors, the Goldilocks scenario will be a strong labor market showing signs of cooling. (Not too hot, not too cold, just right.)
For example, the December jobs report. December added 223,000 new jobs, but it was the slowest pace since December 2020. Wages increased 4.6% year over year in December, the slowest since August 2021. That may not sound like good news for you and for me, but this is Wall Street. This reading has been interpreted as a sign that the Federation drug may be starting to work.
"One of the things we've seen is that wage growth has been very strong and there's concern that eventually wage growth will drive up inflation," Lear told CNN's "Early Start." "So the Fed wants to raise interest rates to try to reduce the demand for workers and lower wages, which will ultimately reduce inflation."
It's a balancing act. The Fed wants to end high inflation, but it doesn't want to plunge the economy into a recession.
This is the latest story of the messy yes-but economy. Yes, the economy is strong, but the Fed may have to provide more painkillers later on. Yes, the job market is strong, but it's showing signs of slowing down. Yes, it was the second best year in terms of job creation, but it's not expected to last, and that could be good news as it comes out of the economy a little bit.
This adds to the confusion of Wall Street economists. Covid, the war in Ukraine, labor shortages, supply chain disruptions… all of these issues mean we need to throw conventional economic wisdom out the window. We have no history to guide us in this matter. There are no easy solutions.