[Song Seungseop's Financial Light] The Blonde Girl and the US Economy

US Inflation Falls While Employment Remains Strong
Wall Street Debates "Goldilocks" vs "Premature"

Editor's NoteFinance is difficult. Confusing terms and complex backstories are intertwined. Sometimes, you need to learn dozens of concepts just to understand a single word. Yet, finance is important. To understand the philosophy of fund management and consistently follow the flow of money, a foundation of financial knowledge is essential. Therefore, Asia Economy selects one financial issue each week and explains it in very simple terms. Even those who know nothing about finance can immediately understand these ‘light’ stories that illuminate the ‘light’ of finance.

Cover of the British fairy tale book "Goldilocks and the Three Bears".

[Asia Economy Sejong=Reporter Song Seungseop] If you were to pick the hottest debate topic on Wall Street recently, it would be ‘Goldilocks.’ There have been expectations that the U.S. and global economies are heading toward a Goldilocks scenario, as well as pessimistic views that it is premature. What is Goldilocks, and why is it controversial now?

Goldilocks means ‘golden-haired’ in English and originates from the British folk tale ‘Goldilocks and the Three Bears.’ Goldilocks is the name of the main character, a blonde girl. The story is often mentioned because of its unique content. Here is a summary:

One day, Goldilocks got lost in the forest and found a remote cabin. The owners were three bears (baby, mother, and father bear), but they were not home. When she entered the cabin, she found three bowls of soup on the table. One was piping hot, another was completely cold, and the last was at a ‘just right temperature, neither hot nor cold’. Hungry Goldilocks ate the soup that was just right. After eating, feeling sleepy, she went into the bedroom to lie down. There were three beds: one very hard, one very soft, and a ‘just right bed, neither too hard nor too soft’. Goldilocks started taking a nap on the just right bed. Then the bears returned home. Seeing a stranger girl secretly eating their soup and sleeping, the bears got angry. They shouted loudly, startling Goldilocks, who woke up and ran away.

The Goldilocks story, which excludes extremes and chooses moderation, began to be used as a metaphor in various contexts. In economics, David Shulman, chief economist at UCLA Anderson Forecast, first used it in 1992. It referred to an ideal situation where employment rates are maintained, inflation is moderately low, and economic growth is solid and high. At that time, the U.S. economy was growing steadily without high inflation. The British financial newspaper Financial Times popularized the term widely. In 2004, it described China’s high growth without inflation as Goldilocks.

But why is there now a Goldilocks expectation in the U.S.? Despite high interest rates and concerns about low growth, the U.S. is experiencing a peculiar economic situation. Inflation is gradually decreasing while the labor market is improving. On January 12 (U.S. time), the Department of Labor announced that the December Consumer Price Index fell by 0.1% compared to the previous month. This is the first time since May 2020, when COVID-19 began spreading, that the price index dropped month-over-month.

"Signs of Goldilocks" vs "Overly Optimistic"

Lower inflation is usually interpreted as a signal of recession (rising unemployment). However, the December employment report shows the labor market actually improved. Nonfarm payrolls increased by 223,000 compared to a year ago, exceeding the initial forecast of 205,000. The unemployment rate dropped 0.1 percentage points from the previous month to 3.5%, the lowest in 54 years. January’s new jobs numbered 517,000, nearly three times the forecast of 187,000. Since 1969, the unemployment rate is at an all-time low, indicating a boom.

As a result, voices suggesting the economy could head toward Goldilocks are emerging. Bloomberg economists Anna Wong and Eliza Winger said, “The December U.S. jobs report looks like signs of Goldilocks.” Efek Ozkadeskaya, senior analyst at Swissquote Bank, said, “Easing inflation and a strong labor market support the Goldilocks scenario.” Liz Ann Sonders, chief investment strategist at Charles Schwab, wrote, “Rapidly falling inflation while avoiding a severe recession is a Goldilocks scenario.”

However, Goldilocks does not last forever. In the fairy tale, Goldilocks enjoyed the delicious soup and comfortable bed and took a sweet nap, but eventually had to flee in surprise when the bears returned. The U.S. was similar. After enjoying Goldilocks due to the housing market boom, the U.S. economy collapsed in 2008 due to the subprime mortgage crisis. The self-praise of a Goldilocks economy was revealed to be a bubble economy.

There is also strong opposition saying it is premature to mention Goldilocks now. Mary Daly, president of the San Francisco Federal Reserve Bank, criticized, “I don’t understand why the market is so optimistic about inflation.” James Bullard, president of the St. Louis Fed, also pointed out, “Inflation could go in another direction again.” Standard Chartered (SC) explained, “The Goldilocks scenario spreading in the market now seems overly optimistic,” and added, “We are returning to a cautious stance on risk assets.”