“Telling fairy tales” is a term often used these days to sugarcoat an accusation of lying. That’s too bad because many classic fairy tales contain timeless truths about love, loyalty, courage and, in one instance, economics.
The 19th-century British fairy tale Goldilocks and The Three Bears is a perfect (and thus often used) analogy for how we’d like the economy to run – and for how it’s operating right now.
Remember, Goldilocks is wandering the forest when she stumbles upon a house, and the smell of porridge wafting from inside makes her decide to knock on the door. When no one answers, she meanders in and finds three bowls, and she samples each in turn. One is too hot, one is too cold, and one is just right. Feeling sleepy after her meal, she finds three beds – one too hard, one too soft, and one just right, so she settles down and goes to sleep. Eventually, the three bears that live in the house come home and find a sleeping Goldilocks, but she wakes and escapes back into the forest.
So, aside from the fact that you should run away from bears, the story teaches us that it’s best to find a happy option in the middle. If something is too expensive or too cheap, get the thing that’s just right. Extremes on either end of the spectrum aren’t necessarily a good thing. We should swing towards the mid-point of the pendulum, no matter what the subject.
When the subject is the economy, the middle is, indeed, a very good thing.
In a Goldilocks economy, we want things to be “just right.” Hot data isn’t always good news, because often it isn’t sustainable. We want economic stability, so we want numbers that aren’t too hot (causing inflation) or too cold (causing recession). When we’re in the Goldilocks zone, it means that we have the ability to keep plowing new economic ground while maintaining stability for a more extended period of time. And who doesn’t want that?
As examples, to have 0% unemployment would be too hot, while a 7% or 8% rate would be too cold. In this case, between 4% to 5% is perfect.
When it comes to wage growth, we want that just right place of around 3%, not too hot 6% or too cold 0%.
And as for housing starts, if we need one million to stay even, then the Goldilocks rate is at about 1.2 million. Just. Right.
Remember, in the story, Goldilocks escapes harm from the bears by fleeing out the door and back into the woods. Economically speaking, it’s the role of the Federal Reserve (Fed) to keep us out of harm’s way – from bear markets or recessions.
The Fed’s primary goal is to create an environment that fosters a Goldilocks economy. That’s why they aim to keep inflation at around 2% and work for stable employment. We don’t need zero unemployment, remember, nor do we need record growth, either. We’re looking for sustainable growth as indicated by not too hot, not too cold economic data.
Now, while “just right” doesn’t translate to “perfect,” it does mean the economy is well-positioned to maintain at least a low level of growth, with the help of a patient and accommodating Fed.
Right now, we’re experiencing a taste of a Goldilocks economy, after last Friday’s Jobs Report. We gained 196,000 new jobs for the month in a follow up to February’s dismal number of only 20,000 jobs (which was later revised higher to 33,000, but still). The unemployment rate held steady at 3.8%, while wage growth (also known as the black widow of economic data) moderated to 3.2% year-over-year. The labor force participation rate (LFP) is holding steady at around the 63% level, after a slight increase and subsequent stabilization.
So, there you have it. This is a real-life fairy tale where things are going, well, just right. The economy is warm. Inflation is warm. Stocks are in a perhaps unexciting but effective environment. And the Fed continues to cultivate a healthy economy, and will for the near future.
Remember that the middle ground is always better than extremes, especially when it comes to our nation’s economy. We’re running a long race, and we don’t want to run too hot or too cold, but instead trot along with slow, steady growth.