Full Employment and Consumer Spending Effects on Stocks
The stock market history is full of examples when good news has had a negative effect on the stock market.
This has been caused by the fact that good news doesn't have equal meaning and influence on consumers and other groups as the one experienced by the overall economy. Thus, consumers may be happy about certain news, but it may in turn have a negative reflection on the businesses.
In order to clarify why certain good news are bad for the economy consider the issue of employment. Generally, everyone is happy when there are enough job positions for those willing and able to work. Additionally, many politicians have used employment in their campaigns in order to win support.
Full employment is observed whenever the unemployment rate drops below 5%. The workforce generally constitutes of people who may be looking for a job, but are less likely to work even if they find one. Additionally, there are others who occupy part time positions.
In order to be part of the workforce you should be engaged in an active search for a job. Thus, if you stay at home or you are a retiree you are not considered as part of this pool.
What is more the competition among business for employees is significantly increased whenever the labor market shrinks. As a result workers benefit in terms of higher salaries. On the other hand, this represents a higher cost for doing business.
Some businesses solve the problem by transferring the increased cost to consumers. However, this may lead to further complications since the customers may turn to cheaper goods and services offered by global companies.
Another problem with this tactic is that the higher prices may lead to higher inflation rates. As a result the Fed may increase interest rates as a way to curb potential high inflation rates.
Apart from high employment as good news with negative effects on the economy, another example is consumer spending.
Consumer spending represents one of the major drivers of our economy. Thus, the importance of stable retail sales is heightened.
But too much of something is not always good. Hence, a higher consumer spending will lead to too much money in circulation chasing too few goods and services. This in turn will result in higher inflation rates. As a result the purchasing power of your dollars will decrease, which means that you will buy less with the money you have than before. Additionally, the increase in the prices is generally not accompanied by an increase in product value.
The increased prices may in turn lead to increased interest rates by the Fed.
Finally, consumer spending and unemployment represent only two of the many factors which the Fed studies in order to make decisions regarding the future level of interest rates. Since the results of the implemented by the Fed inflation curbing policies show their effects over longer periods of time it is not unusual to experience inflation over the short term.
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