At first, it didn’t look as if it would turn out that way. When the jobs numbers came out, U.S. stock futures fell reflecting the knee-jerk reaction to sell equities in anticipation of shifts in Federal Reserve policy. But the markets regained their composure, recouping the losses and more.
This positive market reaction is unusual given recent trends. For quite a while, good news for Main Street, while reinforcing a much-hoped-for economic recovery, has been regarded as bad news for Wall Street.
That is because markets would typically interpret good data as accelerating the Fed’s exit from its policies of extraordinary monetary stimulus and, therefore, pulling the rug from under financial assets that have depended heavily on such support, including very low interest rates. By contrast, bad news on the economy would be treated by investors as good news because it helped prolong the sizable liquidity support provided by the central bank.
Now the economy is looking at its best employment year since 1999. In addition to substantial positive revisions for prior months, the U.S. economy created an impressive 321,000 new jobs in November, the best monthly addition since January 2012, for a total of 2.6 million new jobs this year. And the month’s employment gains were broad based, leading to the highest diffusion index since January 1998.
November’s robust job creation was accompanied by wage growth, something that has been lacking for too many years now. This helps the economy by boosting consumer income, including among the more challenged segments of society. And it gives companies greater confidence to invest in new productive capacity. All of this contributes to growth, and there nothing the U.S. economy needs more than high, durable and inclusive growth.
In addition to its beneficial economic and social effects, high growth could help reduce political polarization in Congress. It might also lead to the stronger fundamentals that validate high equity prices. And in doing so, it would make it more probable the Fed can normalize monetary policy without triggering disruptions in markets that would also drag the economy down.
The hope, admittedly based for now on only one data point, is that this new pattern persists: That the U.S. maintains solid jobs and wage growth; and that financial markets continue to respond positively, facilitating an orderly normalization of monetary policy and leading to a solid validation of asset prices.
In addition, there is an important international challenge. With the increasing divergence that results both from contrasting economic circumstances among countries and from monetary policies heading in different directions, the global system needs to accommodate this reality without breakage – and this won’t be easy if the only adjustment that takes place occurs through large moves in the currency markets.
Yes, there are still domestic and international challenges ahead. Yet it is better to have these challenges than remain mired in a low-growth world where the fortunes of Main Street and Wall Street were so misaligned.
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