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Will stronger job growth finally rescue savers?

May 15, 2014

| MoneyRates.com Senior Financial Analyst, CFA

Employment growth had a strong April, and now has logged three consecutive good months. Is this the breakthrough that could eventually rescue interest rates on savings accounts and other deposits?

In its most recent Employment Situation Report, the Bureau of Labor Statistics reported that the U.S. economy added a net total of 228,000 jobs during April. In addition, this report included upward revisions to the February and March employment estimates totaling 36,000 new jobs, putting job growth for both months above the 200,000 mark as well.

New jobs had averaged just 190,000 a month over the past year. Also, after job growth had slowed to 84,000 in December and 144,000 in January, getting back above 200,000 new jobs a month is a definite step in the right direction.

A sluggish recovery

Some economic recoveries are all about confidence -- getting people to believe that it is safe to spend money again. This one, though, is more about reality than perception. Unemployment has been stubbornly high, and consumer balance sheets are still over-burdened with debt. Job growth can change that reality, by putting more people back to work and by creating sufficient demand for labor to drive wages higher.

This is why job growth is such a crucial economic indicator to watch -- and why job growth has been the poster child for the stop-and-start economic recovery. Fading job growth was an early clue to the slowdown in economic growth toward the end of last year. Perhaps the recent resurgence in employment is an indication that the economy will regain its momentum as spring turns into summer.

The interest rate train

Rising employment and renewed economic activity should be good for interest rates on savings accounts, money market accounts and other deposits -- eventually. However, those accounts can be thought of as being at the very end of a long-train of interest rates -- they are going to arrive at higher rates last.

Long-term interest rates, on things such as Treasury bonds and mortgages, are likely to react to changing interest rate trends first. This is because they represent commitments that stretch out for many years into the future, so it would be very costly for issuers to get caught with substandard rates. Their long-term nature makes these vehicles likely to anticipate rather than react to changes in the interest rate environment.

Interest on savings accounts and other deposits, on the other hand, is likely to react to a change in the trend only after it is well-established. For one thing, these rates can change at anytime, so there is no urgency to try to anticipate long-term trends. Also, banks are currently awash in deposits. They have no trouble attracting deposits, so why pay more for them?

Only when economic growth is more firmly established will it create the demand for capital that will encourage banks to raise deposit rates. Only then will the back of the interest rate train arrive at the station.

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