DANIEL VAUGHAN: The economy where good news is bad news

In normal economic conditions, reports that say people are getting jobs and don’t need unemployment benefits are good things. Markets see that as a strong economy, businesses are thriving, and investment flows. And, of course, we get to watch politicians go out and claim credit for a strong economy. We’ve entered a mirror world in our inflationary moment. What was good news is now bad.

The rule of the moment is this: if markets see good news like a strong jobs report, lower use of unemployment benefits, or something similar, they sell off. Markets are taking that action because it signals the Federal Reserve’s attempt to kill economic demand through interest rate hikes is failing. Those rate hikes are destroying the value of stocks, which means good news is bad news for investors.

No need for unemployment insurance.

Case in point, the latest jobless claims report came out this week. It was great news if you’re an average person. The Wall Street Journal reports:

Initial jobless claims, a proxy for layoffs, decreased to a seasonally adjusted 193,000 last week from a revised 209,000 the previous week, the Labor Department said Thursday. The total was the lowest since late April and below the pre-pandemic average of 218,000 in 2019, when the labor market was also tight.

The Journal added, “The Commerce Department separately said inflation in the second quarter was higher than previously estimated, pointing to the difficulties the Federal Reserve faces in tamping down persistent price increases that have spread through the economy.”

Responding to this and other news, markets dropped rapidly. CNBC reported, “The tech-heavy Nasdaq Composite rose on Tuesday and Wednesday, but the buying came after the worst two weeks since the onset of the Covid pandemic. Now the downward trend is back, with the Nasdaq off 2.8% on Thursday — it’s steepest one-day setback since Sept. 13. The broader S&P 500 fell 2.1%.”

A strong labor market is bad news.

This report is bad news because the Federal Reserve is trying to tackle inflation. They’re raising interest rates trying to drain the economy of demand and prevent a wage-price spiral. The Fed’s greatest fear is that wages and prices spiral up, out of control, causing ever higher levels of inflation.

The Fed’s goal is for unemployment to go up. The more economic data that comes out saying that unemployment stays low means that the Fed has to continue tackling inflation. As CBS News noted to its readers, “It’s about to get much more painful.”

Where are we headed? That’s hard to determine. CBS News estimated the following based on the Federal Reserve’s forecasts:

Fed Chair Jerome Powell made that amply clear last week when the central bank projected its benchmark rate hitting 4.4% by the end of the year — even if it causes a recession. “There will very likely be some softening of labor market conditions,” Powell said in his September 21 economic outlook. “We will keep at it until we are confident the job is done.”

In plain English, that means unemployment. The Fed forecasts the unemployment rate to rise to 4.4% next year, from 3.7% today — a number that implies an additional 1.2 million people losing their jobs.

At a minimum, the Federal Reserve seeks to kick 1.2 million people out of their jobs. They also want to reduce the number of job openings available from the current metric of two openings per every worker to a number closer to 0.9 openings per every worker. But you have to remember, these are the same forecasters that said inflation was transitory. Actual unemployment is likely to end up much higher.

The Fed wants layoffs.

When asked about increasing unemployment, Fed Chairman Jerome Powell said, “I wish there were a painless way to do that … There isn’t.”

The irony is that the labor shortage is so acute employers are still highering even though the economy is contracting. The WSJ reported, “Gross domestic product growth slipped into negative territory in the first half of the year. Borrowing costs have risen steeply as the Federal Reserve boosts interest rates in an attempt to reduce inflation. Even so, monthly payrolls have grown an average of 438,000 from January through August, nearly three times their 2019 pre-pandemic pace.”

Job growth is outpacing pre-pandemic trends. There are many factors explaining why that’s the case. Still, it means that economic pain is increasing on everyone, inflation is running hot, the Fed is pushing for layoffs, and we’re far from the Fed declaring victory.

Good news is bad news. 

Markets are selling off because they understand the reality in front of us. The Federal Reserve has to continue raising rates until 1.2 million people, at least, get laid off across the country. That’s stark fact and reality, but it’s coming from the Fed’s own mouth. 

We’re no longer trying to figure out whether or not we’ve hit peak inflation. The question is whether or not enough economic pain has radiated through the economy to kill off inflation for good. The last CPI report had inflation north of 8% on a year-over-year basis, meaning there’s much more pain coming. 

That’s bad news for everyday people. It’s good news for the Fed. Welcome to the mirror world.