Comments Off on Why It’s Not So Bad That Unemployment Reached Its Highest Rate Since November 2005

Why It’s Not So Bad That Unemployment Reached Its Highest Rate Since November 2005

2008
01.04
When consumer spending is strong, the economy expands.  This tends to be bad for mortgage rates because a growing economy is at risk for inflation.

On the first Friday of each month, the Bureau of Labor Statistics releases key data about the American workforce.

The report is officially called “Non-Farm Payrolls” but most people refer to it as the “jobs report”.

The jobs report’s influence on markets is palpable for two major reasons:

  1. Consumer spending makes up two-thirds of the economy
  2. When more people are working, there is more consumer spending

When consumer spending is strong, the economy expands. This tends to be bad for mortgage rates because a growing economy is at risk for inflation.

Inflation causes mortgage rates to rise, making home ownership more expensive.

By contrast, when consumer spending is low, the economy tends to contract. This tends to be good for mortgage rates because — well — it’s not inflation.

So this morning’s jobs report held two key data points:

  1. The Unemployment Rate reached 5.0% in November 2007
  2. For all of 2007, payroll growth averaged 111,000 per month, down from 189,000 in 2006

The newspapers and television shows are saying that this news is terrible and that the U.S. is headed for recession. That point is debatable. What isn’t conjecture, though, is that with fewer Americans in the workforce, there is less money available to propel the economy forward.

That’s why mortgage rates should fall today — because the threat of inflation is reduced.

Source
U.S. payrolls rose 18,000 in Dec
Glenn Somerville
Reuters.com, January 4, 2008
http://www.reuters.com/article/economicNews/idUSN0324081520080104

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