First Take: Job gains won't cause rates spike

Aug 1, 2014 | USA Today

By John Waggoner

If you're one of the people who has been predicting a spike in interest rates, you're going to be just as wrong this month as you have been for the past five years.

The reason: Employment and wage growth just aren't strong enough to support higher interest rates. On the plus side, employment continues to grow, and that's a positive for stocks and the economy.

Interest is the price of money, and it takes a strongly growing economy to drive up the price of money. The economy added 209,000 jobs in July, according to the Bureau of Labor Statistics, and the unemployment rate rose to 6.2%. That's not strong enough to push long-term interest rates higher.

Currently, loan demand is so slack that you can get a 30-year mortgage for 4.12%, even though the Federal Reserve is tapering off its markets-friendly bond-buying program. If you're a bond investor, however, you'll get scant interest from your investments: The 10-year Treasury note yield was little changed on the July report, standing at 2.55% in pre-market trading.

But there was good news in the jobs report, starting with positive upward revisions for the previous two months. And, says Stacey Holland, executive vice president at DHR International, the economy has started to add jobs in high-paying sectors, such as construction, mining, manufacturing and professional services. "Those are good-paying jobs, not just the service sector," she says.

Good news tends to beget good news in the economy, Holland says. "You have six consecutive months of good job growth news," she says. "I think if you continue to see consumer confidence grow, you'll continue to see continued gains in future jobs reports."

When consumers are confident that they will stay employed -- or get raises or better jobs -- they're more inclined to spend. And that, in turn, boosts companies up the entire supply chain, from retailers to manufacturers to raw materials producers. That's all good news for stocks.

And if the good news continues, interest rates will rise, which is bad news for bond funds. But in the most likely scenario, yields will rise slowly over the next several years. A rate spike would require a sudden spike in inflation, currently running at a modest 2.1%. And even if inflation does tick up, it won't become a wage-price spiral unless wages move up with it. With so many Americans out of work, that's unlikely.

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