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Employment Situation Report: Most Important Indicator for Mortgage Interest Rates

November 1, 2013 / in Featured, Interest Rates, Mortgage News, Mortgages Explained / by tim

Investors who buy stocks and bond for their own retirement as well as professional money managers pay close attention to the array of economic reports released each month.

Some reports are viewed with more importance than others but regardless of the degree of impact, investors evaluate the numbers as they are released.

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Economic reports will tell us where we’ve been but more importantly where we might be in the future. Perhaps the most important release is the Employment Situation Report. This is quite simply the most important indicator of where the economy is headed, and mortgage interest rates rise and fall based on the health of the economy.

How the Employment Situation Report is Factored

Every month, typically on the first Friday, the Bureau of Labor Statistics, a part of the U.S. Department of Labor releases numbers that account for the total number of employed and unemployed workers for the previous month. This month however, the report for September wasn’t released until October 21, nearly three weeks late due to the partial government shutdown.

There is a survey called the Current Population Survey that contacts 60,000 households across the country, which is loosely about 110,000 individuals. Each month, the government contacts 15,000 of the 60,000 households who have been previously screened and included in the database. The government interviewer inquires about the status of the household since the last conversation, how many of those who are working-age are employed and if they are, is the employment full or part time.

Related: Mortgage Rates Fall Due to Employment Situation Report

If there are people who are not working but are actively looking for work are considered unemployed and those with jobs are of course, employed. There is a third and final category for those who are not employed and have not looked for work for the previous four consecutive weeks. These individuals are pulled from the database and not included in the statistics.

That’s what happens when the unemployment rate actually goes down but few new jobs are created—some citizens have simply given up.

The unemployment report will show how many jobs were created or lost, the sectors involved and if the unemployment rate is up or down from the previous months’ report.

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Employment Indicators

When the unemployment rate falls, it’s an indicator that the economy may be back on track and that businesses are once again hiring. That portends to a brighter future in the near term and employers will need to hire more people due to the increase in goods and services.

And the opposite is true. When the unemployment rate is on the rise, the economy is slowing down, businesses are laying off more workers and consumers begin to shelter their savings and spend less. The consumer confidence level, another economic report, is one of the first categories to respond based upon an unemployment report.

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Unemployment Rate Directs The Fed’s Involvement

Historically, when the Federal Reserve Board reads the unemployment data, they look for signals to increase or decrease interest rates. When an economy is going full speed ahead with a lot of people working full time and spending their pay checks, the Fed can ratchet up interest rates to slow down the financing of purchases to ward off the risk of inflation.

On the opposite side, the Fed can lower rates to encourage borrowing and keeping the cost of funds as low as possible for both consumers and businesses. When the economy appears to be on a recovery, the Fed will gradually allow interest rates to rise.

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Today, the Fed has continued its Quantitative Easing program, currently dubbed QE3, to the tune of $85 billion in mortgage-backed security and treasury buying. The Fed has stated that until they’re convinced the economy is recovering, in this instance when the unemployment rate hits 6.5%.

The closer the unemployment rate gets to 6.5% and as more and more people get back to work, consumers and investors worldwide can expect to see interest rates, and more specifically mortgage rates to begin their ride back to higher levels.

Guessing what the Fed may or may not do has always been a challenge to say the least, but this time around their intentions have been made clear. And now investors know what to look out for.

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