Labor Market Conditions and Interest Rates
Sources: Rates Data and Economic Calendar—Bloomberg Markets as of 10/7/14; Equity Market Returns and Fixed Income and Alternatives Data—Wells Fargo Advisers as of 10/7/14
Labor Market Conditions and Interest Rates
On the back of a volatile September, market participants this week are awaiting the release of the FOMC’s meeting minutes and the release of Alcoa’s earnings (which signal the start of Q3 reporting season), both scheduled for Wednesday October, 8. The FOMC’s September statement made it clear that the central bank plans to finish their historical asset purchase program this month when they gather again in a few weeks. This is in light of a stubbornly improving U.S. economy and a U-3 unemployment rate that has grinded lower despite sub-par, consistent U.S. GDP growth. The minutes will shed light on the discussions that took place behind closed doors last month and should offer insight into the various member views of the labor market.
Underutilization of the workforce is a phrase that Fed Chair Janet Yellen used multiple times in the press conference that followed the September Fed meeting and provides for continued monetary ease in the face of an official unemployment rate that has dipped below 6% for the first time since July of 2008. The term underutilization is an acknowledgment of the 5 other unemployment rate measures the Bureau of Labor Statistics calculates and the FOMC voting members take into consideration when voting on monetary policy. These six measures are defined below:
- U-1, persons unemployed 15 weeks or longer, as a percent of the civilian labor force;
- U-2, job losers and persons who completed temporary jobs, as a percent of the civilian labor force;
- U-3, total unemployed, as a percent of the civilian labor force (this is the definition used for the official unemployment rate);
- U-4, total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers;
- U-5, total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labor force plus all marginally attached workers; and
- U-6, total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.
While easy monetary policy has played a role in the continuing bull market that U.S. stocks have experienced since march of 2009, we, at Hennion & Walsh, believe that a return to normalcy should serve as a signal to businesses that the economy is ready to start standing on its own too legs. For this reason, we are optimistic about the prospects for continued growth in the U.S. stock market heading into and throughout 2015 and believe an increase in business confidence will lead to better labor market conditions and help fuel additional consumer spending.
Historically, periods of steadily rising interest rates are associated with rising stock and real estate prices as interest rates can be a tool that is used to help put the brakes on an economy that is expanding and prevent it from overheating. The U.S. economy may not quite be overheating but after 6 years of a near zero federal funds target rate, measured increases, and the confidence they signal, should be welcomed.
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