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Job growth raises hopes for the economy

February 06, 2012

| MoneyRates.com Senior Financial Analyst, CFA

The Bureau of Labor Statistics reported Friday that there was a net increase of 243,000 jobs during the month of January. This gave the employment market back-to-back months with job growth in excess of 200,000, raising the possibility that real progress is being made in the economy.

But while the report was a home run, the long-term question remains: Can the momentum be sustained?

People looking for jobs may be most directly affected by the growth in employment, but it also has a variety of other positive implications, from wages to stock values to savings account rates.

Employment and its effects

The growth in jobs benefits far more than people who have been looking for work. By increasing demand for labor, job growth can lead to higher wages for existing workers. With more people going back to work and with wages improving, business prospects should improve. In turn, this can buoy stock prices and eventually push savings account rates higher, restoring some of the wealth and income that has been diminished in recent years.

One reason why employment has been the critical economic indicator to watch is that it represents the potential for self-sustaining growth. This means growth that is not simply a function of people spending more, but growth resulting from people getting the means to spend more.

Obstacles to avoid

Even as the economy seems to be on the right track, it is important to remember that there are some obstacles it will have to avoid in the months ahead:

  1. Rising interest rates. Bank depositors deserve to see savings account rates rise, but the unusually low interest rates of the past couple years raise the question of how rates can return to normal without slowing the economy. The Federal Reserve has already made it clear that it is going to be very slow to raise rates, and while bond markets tend to anticipate events, the sluggishness of the economy in recent years will probably make the bond market move fairly slowly toward higher rates as well. With any luck, this will allow the economy to generate a bit more momentum before it has to withstand the headwind of rising interest rates.
  2. Outside shocks. While the domestic economy seems to be sorting itself out, outside shocks could quickly knock it off the rails. This could be anything from more financial trouble in Europe to war in the Middle East to the unexpected.
  3. Inflation. The trick with economic growth is always how to maintain it without inflation taking hold. With the Fed having committed itself to keeping interest rates low over the next couple of years, monetary policy won't be an option for keeping inflation in check.

Those potential obstacles for the economy are serious considerations, but there are always possible threats to economic growth. For now though, the economy seems to have exceeded expectations and lifted 2012 to a very promising start.

 

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