Main Street Macro: The elusive Goldilocks economy

When economists tell tales about the economy, it’s never about the Cinderella economy or the Snow White economy.

It’s almost always the Goldilocks economy. Because that’s what economists want: Growth that’s not too fast and not too slow, where inflation is neither too hot nor too cold, and hiring isn’t too strong or too weak.

We want economic conditions that are just right.

As we head into another busy week for economic data, here’s an economic tale about Goldilocks and the three cares: Inflation, jobs, and consumers.

Last week’s inflation data, as measured by the Personal Consumption Expenditures Price Index, or PCE, set the tone for this week. PCE is the most finely tuned of all the inflation indicators, which is one reason Federal Reserve policymakers rely on it so much. PCE measures not only how much Main Street spends on goods and services. It also detects how people change what they buy as prices rise and fall.

As part of its mandate to control inflation, the Fed is always looking for that sweet spot where price growth is neither too hot nor too cold. Right now, they’re worried that it’s too hot. Last week’s PCE release showed that inflation increased 0.3 percent in April from March, and 2.7 percent from a year ago. Economists tend to exclude volatile food and energy prices, known core PCE, when evaluating inflation. Core PCE was up 0.2 percent in April from March and up 2.8 percent from the previous year. That’s too high for the Fed’s “just right” target of 2 percent.

The Fed is waiting for that just right rate of inflation to sustain the economy, a level that won’t push prices up faster than the economy can support.

The second care of the Goldilocks economy is what we’re all watching this week: Jobs.

The ADP National Employment Report will be released Wednesday, and the Bureau of Labor Statistics will publish non-farm payrolls data Friday. When it comes to jobs data, two metrics-–the unemployment rate and wage growth—matter most for a Goldilocks economy.

The unemployment rate currently is just below 4 percent. Economists want to make sure it stays there and that hiring continues. But if wages grow too fast, that can trigger elevated inflation or keep it higher for longer.

In April, year-over-year pay growth was 5 percent; for people who had changed jobs in the past 12 months, pay gains were 10 percent, according to ADP’s Pay Insights. April pay growth is consistent with robust hiring, but if pay growth stays at this level, or accelerates in future months, it could throw the economy off balance by fueling inflation above the Fed’s 2 percent target.

Our third Goldilocks care is consumers. Consumer spending accounts for roughly 70 percent of the U.S. economy, so we care a lot about how they’re doing. Two data sets that monitor consumer health are pending home sales and consumer credit.

Economists worry when housing prices heat up too quickly because housing costs, for both renters and homebuyers, have been a strong driver of inflation in the past year.

Last week, pending home sales fell to levels last seen in the aftermath of the pandemic, dropping 7.7 percent in April from March. If this cooling trend holds, house prices and, ultimately, rents could moderate, which would take some heat off inflation.

The latest data on consumer credit comes out this week. Economists are keeping a close eye on debt, especially given today’s high interest rates. If consumers are forced to slow their spending, the Goldilocks economy could become elusive.

My Take

Fairy tales are useful tools for making a point; the Goldilocks narrative gives us a point of reference for an ideal set of economic conditions. But remember that fairy tales are also a form of fiction.

For the last year and a half, many aspects of the economy in fact have been on an ideal trajectory. We’ve seen strong hiring and solid economic growth balanced by falling inflation. It’s all been almost just right.

But last week, the Bureau of Economic Analysis reported that economic growth in the first three months of 2024 was slower than previously thought, at 1.3 percent. Recent inflation readings suggest that price growth has been sticky and we’ve had less progress toward reaching our 2 percent target than economists or Main Street would like. Consumers are starting to slow their purchases in the face of these higher prices.

No fairy tale is complete without a moral, and today, it’s this: Economists might dream about a Goldilocks equilibrium, but the economy itself is in a constant state of change. Even if we find our just-right economy, it’s likely to be short-lived.