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How employment affects money market rates

August 16, 2011

| MoneyRates.com Senior Financial Analyst, CFA

Employment figures may be the most important economic indicator right now, but not just any employment data will do. You need to focus on the right stuff.

Every week, the news media dutifully report weekly figures for unemployment claims. They discuss whether the number of new claims is up or down. They measure whether that number is above or below 400,000, which has become an arbitrary benchmark for unemployment claims. Based on all this, they issue either an optimistic or pessimistic reading of the economy. They might be almost as accurate if they based their assessment of the economy on that day's weather.

All of this should be of interest to people with money market accounts, because it is going to take sustained economic growth to get money market rates up off the ground. However, the story will be told by employment growth, not by unemployment claims.

Pitfalls of relying on weekly unemployment claims figures

It's easy to understand why the news media eagerly grasp hold of weekly unemployment claim figures. Economic events often develop very slowly, while reporters have short-term deadlines. Weekly unemployment figures give them a steady stream of new information to report.

Unfortunately, though, there isn't much in the way of perspective to be gained from these weekly figures. Consider the following:

  • Short-term figures are erratic. In economic terms, trying to judge conditions from a week's worth of data is like trying to assess the progress of a baseball game based on a single pitch.
  • Unemployment has multiple moving parts. A rise in unemployment claims could mean that jobs have been cut. Or it could mean that there are more people who have reached the eligibility requirement for benefits. The unemployment rate is not a pure measure of any single economic factor.
  • Unemployment is a residual statistic. Unemployment measures a problem, but employment measures the potential solution to that problem. Looking at employment growth is a much more direct way of observing the progress of the economy.

Over time, in a strong economy you should expect to see unemployment claims declining. In the meantime, though, there are more reliable ways of checking whether economic strength is improving. As described above, unemployment is partially the residual effect of changes in employment. Therefore, the real story is told by growth in the number of jobs. These figures are released monthly, which will show trends more clearly than weekly data.

Money market rates and economic growth

The ability of employment growth to drive the economy onward is critical to money market rates right now because banks are somewhat at a loss for how to make money on your deposits. When the economy is strong, investment opportunities are more attractive, but that's certainly not the case at this point. So, with limited ways of making money from your deposits, they are less inclined to pay much in the way of money market rates.

Employment growth will be both a sign that the economy is improving and a source of future growth as those new wages are pumped back into the marketplace. So, you might get a clue as to the direction of money market rates by watching employment figures--as long as you focus on the right stuff.

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