Improving Labor Market

Over the past week, investors became a little more optimistic about the prospects for U.S. economic growth. In particular, job growth remained strong. For mortgage rates, stronger growth is negative, and rates ended the week higher.

The key monthly employment report revealed that the labor market continued to improve. Job gains in February were significantly higher than expected. For mortgage rates, the concern with strong job growth is that it generally leads to higher wages, which raises expectations for future inflation. Mortgage rates are highly influenced by the outlook for future inflation. Job creation at recent levels reduces the pool of available workers. At some point, companies have to compete harder to attract employees, and raising wages is one obvious way to do this.

Unfortunately, it is very difficult to determine in advance when labor market conditions will produce upward pressure on wages. Currently, some indicators suggest that we are at that point. For example, the unemployment rate is below 5%. On the other hand, a lot of people left the labor force during the recession for a variety of reasons. As the labor market improves, some of them will return to the labor force and seek jobs, reducing the need for companies to offer higher wages. After holding steady for quite a while, the pace of annual wage growth has moved a bit higher in recent months. For mortgage rates, a big question is whether wage growth will continue to accelerate.

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