The economy is strong so where is the worry?

In a world that too often seems to have gone mad, where can one look for advice? How about none other than the face of Mad magazine, Alfred E. Newman: “What, me worry?”

The kids today probably won’t get that reference. Too many of us also don’t get economic statistics and what they mean in our daily lives either. This is despite the fact that knowingly or unknowingly, they affect not only the decisions we make today, but the economic conditions we live with tomorrow.

Instead of spilling out a few hundred words of economic garble, let’s boil it down to one word here. We’ll deal with “worry.”

The stock market has bounced off the April lows quite strongly, when tariff threats tanked the market and subsequent easing of threats and new trade deals provided a bit more security and clarity for investors. For stocks, the decision whether they go up or down is often boiled down to fear versus greed. Fear is just Wall Street’s word for worry.

The long term trend in stocks has been almost universally upward since the great financial crisis, save for a break during COVID and a smaller downtrend when the Federal Reserve began hiking interest rates to deal with the inflation that excess COVID era stimulus pushed into the system.  That inflation didn’t just push up the prices of our gas and our groceries. Most asset classes – stocks, commodities, houses, etc. – also have higher values today too.

This has led to a bit of a divide between Wall Street and Main Street. The real divide, as it usually is when we speak of economic class warfare, isn’t between the streets one identifies with. It’s between who owns things and who doesn’t.

Main Street middle class folks who owned their homes and have a 401K have prospered along with Wall Street for the past couple of decades. It’s the renters who might be fully employed yet have credit card balances and live paycheck to paycheck who have begun to feel left behind. 

Stimulus checks are welcomed, and sometimes even demanded, by the folks in that latter category. Who, after all, doesn’t like free money?

The problem here is that their money is spent for temporary necessities. It eventually ends up in the hands of those in the first class as rent, interest, or an investment return to those who own things. This is, in fact, how the rich (and the middle class) get richer.  

Meanwhile, when too much money is created at once, price levels adjust to the reduced value of newly printed dollars. Thus, those things which are owned cost more because each dollar is worth less. Those who don’t own things see the gap between themselves and the rich folks get bigger, and bigger. Their worries about falling even further behind grow.

For them, some of their worries are easing. A recent Morgan Stanley survey shows the number of consumers listing inflation as their top economic worry is now at the lowest level since 2022 – when the most recent inflation spike started. It’s still the top concern cited by more than half of respondents, but the fact that it is declining rapidly is actually a good sign.

The decline in the perception of future inflation is actually part of solving inflation. People act today based on what they think the future will be. When they fear prices going up, they buy more today to beat the price increase, pulling forward demand and keeping prices high. When they don’t fear increases or expect decreases, they wait. This reduces demand and ultimately, price increases.

So we’re almost done with worry, right? Oh no. This is economics. We call it “the dismal science” for a reason.

Often the trade-off for lower inflation is higher unemployment. While parts of the economy are so hot they might be a bubble – big tech, data centers, anything that can generate electricity – other parts of the economy look to be softening.  Even within technology companies, the tech itself is making companies more efficient that they need fewer employees to do the same job.  

The Federal Reserve has what is called a “dual mandate.” They’re to fight inflation and keep prices stable. They are expected at the same time to keep conditions favorable to stable employment. These mandates, as noted above, are in direct conflict with each other. 

The Federal Reserve has made great progress on inflation by keeping interest rates high. It’s now their time to worry. They can either finish the job on inflation, or they can shore up the cost of investment and job creation by lowering interest rates.  

They worry they may get it wrong, either way. Those who haven’t enjoyed the run up in housing and stock prices worry they’ll either have to pay even more for groceries, or they won’t have a paycheck to use to purchase them. Dismal science, indeed.