Posted by: Dale Franks on Saturday, August 05, 2006 The Labor Department reported yesterday that job growth slipped to 113,000 last month from 124,000 in June, with the unemployment rate rising to 4.8% from 4.6%. June's labor numbers were already a bit weak, and the July numbers show even further weakness. Over the past two years, the Fed has raised short-term rates from 2% in June 2004 to 6% today. For consumers, this has increased the price of money by 26% over the last two years, while during the same time, the average wage has risen by just over 9%. Obviously, rising interest rates are taking a bigger bite out of budgets, especially in terms of both credit card costs as well as rising adjustable mortgage rates. ARMs probably look a lot less attractive now than they did in 2004. With the Fed meeting to look at interest rates on Tuesday, this newest data should give them pause about continuing the rate increases they've been imposing over the last two years. The labor market is clearly softening, which indicates that we've passed the peak of labor-driven price wage/price increases. Looking at inflation in general, it appears that the increases in the Consumer Price Index peaked in September of last year. That peak was mainly due to increases in energy prices, since the Core CPI (prices ex food and energy) increases have been relatively restrained overall. Although, having said that, the Core CPI has been holding steady at a 0.3% monthly increase for the past three months, probably as a result of higher energy prices filtering into the cost of production. This would, I think, be a good time for the Fed to pause, and take a breath. In fact, considering the weakness in employment markets—although, with a 4.8% unemployment rate, the term weakness is relative—it might be time to consider whether the Fed has gone slightly too far in raising rates. |
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