Jobs Letdown Threatens To Halt Rising Rates

The first six months of 2013 represented the best half-year for job creation since 2006. But last Friday's jobs report cast doubt on whether the economy can build on this momentum.

The Bureau of Labor Statistics announced that 162,000 new jobs were created in June, the lowest total since March. To add insult to injury, previously released figures for May and June were revised downwards by a total of 26,000 jobs.

Until those downward revisions, the job creation numbers for the second quarter had been 199,000 for April, and 195,000 for each of May and June. The hope was that the employment market could build upon this consistency and start to post in excess of 200,000 new jobs per month. Instead, the figure of 162,000 new jobs was a letdown. If job creation continues at that pace for the second half of the year, it would be the worst half-year since the second half of 2010.

This loss of momentum could slow the upward progress of interest rates. This is good news for consumers looking for mortgages, but bad news for people with money in savings accounts and other deposit vehicles.

Impact on mortgage rates

About a month ago, an encouraging report on June's employment was released on July 5. Not coincidentally, the week that followed saw 30-year mortgage rates hit their peak for the year at 4.51 percent. They've since slipped back, as the outlook for the economy has begun to appear more clouded.

At under 4.5 percent, current mortgage rates may be higher than they were a few months ago, but they are still much lower than they've been throughout most of their history. They should be low enough to remain attractive to new home buyers, and if there are any more setbacks for the economy, some current homeowners may even get another shot at refinancing.

Impact on savings accounts

On the opposite side of the fence, depositors in savings accounts and other interest-bearing bank offerings would welcome a rise in interest rates.

While mortgage rates were quick to respond to economic developments by rising, deposit rates have been much slower to react. Since deposit rates represent a cost to banks, they are apt to be slower to raise them. From a bank's perspective, there is little reason to anticipate economic events by raising deposit rates. Instead, they are most likely to sit back and wait until the lending environment becomes so compelling that they have an incentive to attract more deposits. With the recent setback in job growth, that wait may have just gotten a little longer.

Watching for inflation

The next key development for interest rates may be the report on July's inflation, due out on August 15. If inflation shows signs of gathering steam, it could force interest rates higher. But it's a losing proposition for both mortgage and savings account customers when higher interest rates come alongside higher prices.