Why Does A Good Job Report Bad For The Economy?


I understand why increasing interest rates can negatively affect the economy, but why would the Feds raise the rate because of the positive jobs report?

I always assumed that more people employed means more discretionary spending leading to more corporate profits.

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Theres something called the natural rate of unemployment, which occurs when recessionary pressures and inflationary pressures are balanced.

But when the unemployment is lower than the natural rate, that means the nation is experiencing inflationary pressures, with cash flowing around the economy but not actual value flowing.

To make sure this doesn’t aggravate or create long-term inflation, the Fed raises rates, lowering purchasing power and the ability for firms to higher more employees.

I dom’t think that the jobs report is a significant factor in central bank decisions, because employment is a lagging indicator. Trying to fine tune an economy based on slow-to-come data like employment means that banks can be grossly wrong in their corrections to cool or heat up the economy.

Inflation is a leading indicator. Central banks usually give much more weight to inflation for that reason. That’s why many central banks have an inflation target rather than an unemployment target,

When people say “the economy” they tend to be referring to lots of different things.

“How is my job(satisfation, and pay) ? Do I feel confident that I will have a job in the future?”

“How is my neighbor (community) doing? What about his/her/their future?”

“How are my investments (the stock market, ussuallt) doing?”

“Is GDP Growing?”

“Is REAL (inflation adjusted) GDP growing?”

Raising rated will tend to lower business investment, which will tend to make fewer people have jobs, and tend to make GDP go down.

But if jobs are being added that are inefficient — that might be good for the economy, overall.

And what the stock market does, and what GDP/Real GDP/Real GDP per Capita do, are all kinda different.

The FED is tasked with trying to get the economy to grow at its highest sustainable rate. No-one knows EXACTLY what level is sustainable. Historically, economies with overall unemployment below 4 TEND to follow that up with high inflation AND THEN A CRASH.

The fed is looking at lots of indicatorsx and many of them are doing some of the things they do right before the economy gets overhot, followed with a crash.

One of those indicators is the employment rate. The fed sees it dropping, and are trying to avoid a crash, later.

So stong employment numbers on their own are probably a good economic indicator.

Coupled with high inflation, that is often followed with a hard crash.

We are in this weird zone of what is historically high inflation, but it seems to be coming down. But, historically, high inflation, coupled with very low unemployment has been a strong signal of an overhot economy, which will crash hard, in a year or two. So do you pay more attention to “historically high inflation” or “inflation coming down”? Coulle that with “unemployment levels lower than we have seen in 70 years”…

It isnt that strong employment numbers are BAD, but combined with other economic indicators, they MIGHT mean an overheating economy, that will soon crash.

Low unemployment means higher labor costs for companies, more discretionary spending also creates pressure on demand that keeps inflation higher.

First off – economics can be very counterintuitive, and also very complicated. What’s good for the goose isn’t always good for the gander, so to speak.

Many economists consider an “ideal” state of the US economy to have an unemployment rate of about 5%. That means that there is a pool of people looking for jobs, and a pool of people that a company can turn to if they need to hire and expand.

If the unemployment rate is below that, if a company wants to hire someone, they likely have to try to entice someone who works for another company to quit and come join their company. Doing that means offering a higher salary. Doing that puts pressure on companies to increase the salaries of existing workers so they are content or don’t quit.

This increase in wages means there is more discretionary money in the economy “chasing” the same amount of goods and services, which leads to inflation.

The Federal Reserve has two primary missions – low inflation and high employment, or rather price stability and maximum employment. The two very often are at odds with one another, and getting the economy into a “balanced” state is what they strive for.

In times of high unemployment they slash interest rates so it’s cheaper to borrow money to expand businesses and buy cars and houses so that more people can get jobs. In times of high inflation and low unemployment they hike interest rates so that people spend less, and companies can’t expand and may even start laying people off and people buy less cars and houses, etc. This increases the unemployment, which under some models will bring down inflation.

Yes, everyone likes the idea of “everyone” having a job. In reality it can cause the economy to “overheat” and drive prices up.