MainStreet Macro: What to do with good news?

Wall Street has a complicated relationship with good news, especially when interest rates are high, like they are now. Investors know that economic growth is good for their portfolios, but economic growth plus rock-bottom interests are even better.

When rates are high, however, the Federal Reserve is more likely to cut them when the economy is slowing, not when it’s picking up. And strong numbers aren’t always as strong as they might first appear. Hence Wall Street’s good-news-is-bad-news conundrum. 

Main Street got a lot of good economic news last week. But Wall Street’s reaction was mixed.

Hence our question of the week: What to do with good news?

First step: Identify

Good news came from three sources in recent weeks.

First, the International Monetary Fund updated their forecast of global economic growth through 2025. The outlook published Jan. 30 improves on the fund’s October report, mainly due to better-than-expected growth in the world’s two largest economies, the United States and China.

Which brings us to the second piece of good news. U.S. economic growth is rocking and rolling. Instead of the recessions many Wall Street players were fretting about last year, the initial estimate of U.S GDP in 2023 was a robust 3.1 percent, according the Bureau of Economic Analysis.

Economic growth was strong partly because of a rebound in labor productivity. After a record slowdown in 2022, labor productivityincreased by 1.8 percent in 2023, according to the Bureau of Labor Statistics.

Finally, the BLS non-farm payrolls report for January delivered the big finale in this string of data releases. U.S. employers added 353,000 jobs in January, a big step up from the 226,000 jobs added averaged over the three previous months.

Second Step: Contextualize

When is news “good”? It’s not just the numbers. Context counts. 

First, let’s look at economic growth. Global growth, at 3.1 percent in 2024 according to the latest IMF forecast, is below the historical average of 3.8 percent. And geopolitical risk and large fiscal deficits are working against the outlook for this year.

Closer to home, the U.S. economy’s overall strength hides weakness in manufacturing and completely ignores the federal government’s burgeoning debt, which stands at 120 percent of GDP. That’s the second-largest ratio in U.S. history, behind the period that immediately followed the pandemic. 

Labor productivity growth, at 1.8 percent, is lower than the historical annual average of 2.1 percent.

Together, these factors suggest that the economic expansion might be slower in 2024 than it was in 2023.

And while the job market has been on an even keel of steady hiring and moderating wage gains, it delivered a burst of earnings growth in January. The BLS payroll report showed that average hourly earnings grew 4.5 percent from the previous year. That rate of growth could threaten some of the progress we’ve seen in inflation over the past six months.

Finally, there’s the Fed. When is good economic data too good? That is, when is it strong enough to dissuade monetary policymakers to cut rates for fear the economy is heating up inflation yet again?

My Take (aka Third Step: Personalize)

Economic data releases frequently move stock prices, but it’s pretty common for markets to fall on what looks like good news—strong economic growth, big job gains, and the like—depending on the context.

Main Street doesn’t have the same freedom to act on data that investors have. Presented with new information, investors waste no time moving to greener pastures or tweaking their holdings for maximum return. By the end of last week, they largely had put aside the good news/bad news conundrum of the job market to focus on earnings at large tech companies. The stock market rallied.

Main Street can’t be that selective, nor can it act that quickly. Whatever the headline of the hour, businesses focus on sustaining operations and managing labor costs. Consumers and workers contribute to the economy based on their personal economic situations, rather than the broad-brush measurements of economic reports.

So, what matters most isn’t the news of the day, but the long-term trend. Overall, if inflation is falling and the economy is growing, that’s unequivocal good news for Main Street—and even Wall Street.