Employment and stock markets send conflicting signals

New housing starts are down, and the stock market goes up.

Bad news produces new profits.  That’s kind of a “man bites dog” story.

Why does negative economic news stimulate the stock market? And why does the stock market rise to record highs when employment is recovering slowly and new jobs pay less?

Before you ask why you should care about the stock market, it is worth remembering that more than half of the American people have stock market investments, either through their direct purchases or through their retirement plans.

The stock market is supposed to reflect the outlook for the economy.  When prices rise, investors buy shares of companies that they believe will become more profitable in a growing economy.

Obviously, something different is happening now.  On Labor Day weekend, perhaps it is a good idea to consider the growing disconnect between the uncertain prospects for working people and what happens in the financial markets.

First, here’s the answer to the question why bad economic news causes higher stock prices.

In the absence of any economic stimulus coming from a deadlocked Congress and a frustrated president, the Federal Reserve, the government banker, has stepped in to provide the only boost to the economy coming from Washington.

The Fed has only a limited array of measures it can deploy to boost the economy.  Its main tool has been to create more money to make available at almost no cost to lenders allowing them to offer it at low rates to borrowers to buy new homes or invest in developing their businesses.

The nation’s banker is responsible for much of the recovery in the economy as the unemployment rate has continued to decline, however slowly.

From the perspective of investors, lending their money is not a great idea when interest rates are kept so low by the Fed.  Instead, they turn to stocks, pushing their prices up as funds flow from bonds, the usual form of lending to corporations, into share ownership.

The Fed wants to avoid inflation, with its rapidly rising prices, that could result from too much money flowing into the economy.  So it will slow down its creation of more money as soon as it is sure that the economy is on the path to recovery.

Its officials have been saying recently that they see signs the economy is coming back.  They have begun talking openly about cutting back on the Fed’s support for lower rates in the belief that private lenders will take over as higher rates make loans more attractive.

That sounds like good news.  As interest rates rise, investors are putting more money into lending and send less money into stock purchases.

So the stock market, sensing the coming change, goes down simply because the Fed sees the economy improving.

This simplistic view takes hold, even against data that shows stock and bond markets have in the past been able to grow at the same time.

There is yet another contradiction between the outlook for workers and increases in stock prices. 

How can companies be booming with so many people still out of work or forced to take lower paying jobs?

The answer lies in the nature of recession itself.  It was not simply a slowdown that is often the normal part of the cycle of growth.  It marked a major change in our economy.

Goods and services are increasingly produced by technological tools, like computers and robots, and require less hands-on labor.  And the labor-intensive production that remains is mostly carried out in lower-wage countries.

The most successful companies include many that rely less on labor and more on technology.  If they seek new employees, they want people who a better educated than in the past and who are capable of devising and using the tools of technology.

In other words, many of those companies that are doing well in the stock market depend less on labor or buy it abroad where it is cheaper than in the United States.

What can turn the situation around and improve the outlook for working people?

For one thing, workers need to be better educated and trained.  For many, a high school education will no longer be enough.  And training will need to become a life-time responsibility, not one that ends when a person gets a job.

For another, a sound immigration policy that admits more people who can be customers will at the same time create more jobs to serve those customers.

Labor Day could again be a day to celebrate jobs not a day to worry about them.