June 10, 2019
Since early 19th-Century children around the world have been enchanted by “Goldilocks and the Three Bears”. The first known version was titled “The Story of the Three Bears” and told a frightening tale of an old woman only “deserving of a stint in the House of Correction”, who came upon the home of three trusting, good-natured bears; “a little, small, wee bear, a middle-sized bear, and a great, huge bear.”
In 1852 the original tale was rewritten as the fairy tale and nursery rhyme we all know today, and forever popularized in 1878 with Mother Goose’s Fairy Tales. The old woman of ill repute was replaced by Goldilocks, an innocent young girl fond of tasting the porridge. Her discerning testing took her from porridge that was “too hot”, to porridge that was “too cold”, before she found some that was “just right.”
Since my early career beginning I have heard the term “Goldilocks Economy” used when things are “just right”. Some may argue our current economy is not just right, but I guess that depends on your perspective. Last Friday’s lower than expected May non-farm payrolls increase of 75,000 jobs, against an expectation of around 180,000, provided another justification for lower interest rates. The report also revised down the job count for March and April by a total of 75,000. Two of the last four months have seen payrolls increase by less than 100,000 which suggests a weakening in the labor market. Yet, a silver lining in the report was the unemployment rate which continued to remain at a 50-year low of 3.6%, while hourly earnings climbed 3.1% from a year earlier.
Both the bond and stock market rallied in response. Some stock investors are betting lower interest rates will be stimulative to the economy and inflation expectations. These investors are buying the “Goldilocks” tale. In contrast, some bond investors are thinking not only an economic slowdown, but maybe a recession, and certainly not a “just right’ economy. Fed Funds rate futures are now pricing a 75-basis point decline over the next year, taking Fed Funds down to a range of 1.5% to 1.75% from their current 2.25 to 2.5% level.
Just a year ago it was unthinkable that the Fed would ease up on its tightening campaign. The Fed’s tone greatly changed last fall when it telegraphed a more dovish position with signs of slower global growth. Recently a member of the Fed Board said a rate cut “may be warranted soon.” Fed Chairman Jerome Powell even pitched in last week noting the Fed will “act as appropriate to sustain the expansion.”
It seems the Fed is less concerned about inflation and more interested in keeping economy moving – and the party going. Perhaps that is the reason the stock market is again lifting. Maybe a Goldilocks economy does exist but that might depend on your taste in porridge!
Gary B. Martin