Complain about a product or service

Weak Jobs Report Sparks Interest Rate Fears

By Martin H. Bosworth
ConsumerAffairs.com

August 5, 2006
Employers added 113,000 new jobs in July, according to the monthly report from the Department of Labor. The number was well below the estimated forecast of 145,000 new hires, leading the unemployment rate to rise to 4.8 percent.

The job numbers were the lowest since May, when businesses and government added 100,000 new jobs. The slower pace of hiring is being attributed to increased energy prices, and concerns over higher interest rates for lending.

The data has analysts and economists anxiously watching the Federal Reserve Board for whether or not it will raise interest rates at its next meeting, on August 8th. There is much debate as to whether or not Fed chair Ben Bernanke should consider raising interest rates again, or take a "breather."

The Federal Reserve has been raising interest rates steadily for the past two years. The tightening of available credit has made it more difficult for consumers to obtain loans, and those who are already deep in debt from maxed-out credit cards or adjustable-rate mortgages are finding it harder to make their monthly payments as interest rates continue to spike.

Volatility in energy prices and rising costs for consumer items are fast outstripping increases in salaries, making consumers much more reticent about spending. And given that consumer spending accounts for 70 percent of the country's gross domestic product, a downturn in borrowing and buying could tip the economy into a recession.

The New York Times' David Leonhart noted that Americans are becoming increasingly anxious over the widening gap between their salaries and the costs of living.

"It's a particular anxiety that people have about their paychecks," he said. "Whether the culprit seems to be Wal-Mart's drive for profits or an illegal immigrant who takes someone's else job, many families feel as if they're falling behind, and they're right."

Much of the economic growth in the last four years has been driven by increased government spending and the astounding profit gains in the housing market.

Consumers were encouraged by low interest rates that enabled them to buy homes well beyond what they could normally afford, using their homes as ATMs to take out loans against their equity for various pursuits.

The combination of rising interest rates and a slowing housing market has made it difficult for homeowners to sell their homes just to break even, and there are reports of more defaults and foreclosures in hot real estate markets such as California.

Bernanke himself recently noted the weakness of the housing sector, saying in June that the sticker shock from higher mortgage rates was a specific vulnerable point for the economy, and would restrain other forms of consumer spending.

Bernanke's Next Move

All eyes are therefore on the new Fed chief. What will he do? Will he raise interest rates to combat inflation, or will the Fed pause in their campaign in the hopes of encouraging more spending on the parts of consumers and business?

Bernanke's tenure as Fed chair has been met with mixed reviews.

Wall Street has been increasingly nervous about his moves after several gaffes in which comments he made were interpreted to mean plans for economic policy. Speaking to CNBC's Maria Bartiromo about the possibility of a pause in interest rate hikes in May, Bernanke was reported to have "flatly said 'No'."

Jittery investors caused the Dow Jones average to drop over 108 points the Monday after Bernanke's remarks reached the news. Sen. Jim Bunning (R-KY), who sits on the Finance and Banking Committees and opposed Bernanke's nomination, blasted him for speaking without considering the consequences of his words.

"He's thrown panic into the markets when there was nothing to panic about and has raised unfounded fears of inflation," Bunning said. "Bernanke is acting like a bad doctor who over prescribes a lethal dose of medication to a patient who is not sick."

Bunning isn't the only one who thinks Bernanke may be overly focused on combating inflation.

Former Labor Secretary Robert Reich recently wrote that Bernanke and his fellow Fed governors were fighting "the last war" against double-digit inflation, which has less chance of happening in a globalized market.

Reich wrote for the American Prospect magazine that housing prices were dropping specifically due to an avalanche of inventory of unsold homes, both new and existing, leading to deflation, rather than inflation.

"Deflation is often accompanied by stagnant or falling wages, which make it harder for consumers to afford to buy. Look what's been happening to American wages, " Reich said.

Some economists think that Bernanke will raise rates again, due to his focus on proving his "inflation-fighting credibility" to Wall Street.

The fear among bearish analysts is that Bernanke is determined to ensure corporations do not lose gains to wage increases, while ensuring workers stay productive. In other words, people will be working more while not bringing home any more money.

Report Your Experience
If you've had a bad experience -- or a good one -- with a consumer product or service, we'd like to hear about it. All complaints are reviewed by class action attorneys and are considered for publication on our site. Knowledge is power! Help spread the word. File your consumer report now.

Share		Follow us on Twitter.

Back to the top |