Weekly Economic Update- June 13, 2007

Thumbnail Sketch: Mortgage interest rates firmed noticeably this past week, but they will probably edge back down a bit. Still, the outlook is for generally positive overall economic growth, with continuing concerns about the potential for higher inflation. As HSH Associates explained, “Mortgage rates took quite a hit this week, but this was due largely to the Treasury selloff caused by a surprise rate hike by New Zealand’s Reserve Bank; this spurred fears that other countries’ central banks might follow suit. Even without this scare, the general run up in rates over the past few weeks isn’t wholly unexpected given the reports of stronger economic data and a revival of economic growth from a truly anemic 0.6% in the first quarter of this year. Investors have given up on a rate cut by the Fed this year.” There was also a quarter-point rate hike in England, but these hikes don’t seem harbingers of significantly higher interest rates. Still, our own rates are unlikely to head south any time soon. This flies in the face of a guess in this report several weeks ago that interest rates might decline largely because of lower employment, as construction workers lost their jobs in large numbers. Job losses in construction haven’t been as great as predicted and, more important, job gains in other sectors have been much stronger than anticipated. As was said here last week, therefore, the jobs data have become among the most important indicators for near- to mid-term interest rate movements. Also important is the evidence that labor costs are rising and that consumers are paying attention to the size of their credit card debt. The latest data, published in concert with the first quarter GDP figures, show that unit labor costs rose by an upwardly revised 1.8% (surprisingly higher than the first estimate of 0.6%). This is, in part, a natural result of lower productivity figures (1% growth, as against the initial estimate of 1.7% growth). If the per-worker output declines, the per-worker labor cost rises as a mathematical result. But there may be more to this than simple math, and economists—notably at the Federal Reserve—are concerned about the inflationary effects of higher labor costs. At the same time, revolving credit actually declined in April (by 0.5%), meaning that consumers paid off more of their credit card debt than they increased it. This rather unusual situation suggests a sobered mood among consumers. Whether it will translate into lower retail purchase levels—as indeed it may—remains to be seen. In the meantime, it is difficult not to find some solace in reduced credit card use among our nation’s intensely indebted consumers, even if it may suggest a slightly growing reluctance to finance large purchases, like autos and homes.

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