The answer is that what may be good for consumers, workers or other groups is not always good for the economy and what is not good for the economy, ultimately is going to be trouble for businesses.
A good example is labor supply and wages. Every politician wants to claim credit for creating jobs, and we all want everyone who wants a job to have one.
When unemployment drops below five percent, the country is getting close to what many call full employment. There is an assumption that a certain percentage of the population won’t work no matter what, even though they profess to be looking for jobs and there’s another part of the population that only works part of any year.
Looking for work
Stay at home spouses, retired people and so on are not counted in this pool; only people actively looking for work.When the labor market shrinks, businesses are forced to compete more for labor and that means higher salaries. This is a good thing for workers, but not so good for businesses.
Most businesses can pass along the extra costs to customers but they face two problems. First, more and more businesses compete in a global marketplace where they are already at a disadvantage when it comes to labor costs.
Secondly, if labor costs rise significantly across the board they can contribute to inflation, which means the Fed may be forced to raise interest rates to slow growth.
Complex problem
This is a simple explanation of a complex problem that economists spend a great deal of time studying, but the concepts are correct and worth your consideration.Consumer spending is another example of the good news-bad news phenomena. Much of our economy is driven by consumer spending, so it is important that retail sales stay strong.
However, if consumers go on a spending spree, it can result in too much money chasing too few goods, which is a classic definition of inflation. Prices rise with no corresponding increase in product value, which reduces the purchasing power of your dollars.
Inflationary pressures equal an increase in interest rates by the Fed.
The Fed watches these indicators and many more for signs that inflation is on the move. Many of the indicators are lagging by a month or more. Corrective measures take time to work, so the Fed can’t afford to let inflation get out in front.
