Businesses are hiring again.  The addition of nearly 1 million jobs in the past three months is setting the pace for the creation of more than 2 million jobs by year end.  Although the economy has chugged along briskly since midyear 2003, it took far longer for hiring to pick up its pace.  Only recently have managers begun to be confident enough about the sustainability of the economic recovery to start building up their payrolls significantly. 

However, the unemployment rate is likely to remain fairly steady throughout this year. As more of the discouraged unemployed (those who have dropped out of the job market) are encouraged to actually look for work, the proportion of job seekers to jobholders can rise, even if more people are being hired.

With the economy now humming along and employment on the rise, more businesses are finding that they can pass along higher prices to other companies and to consumers.

Strong job figures and recent inflation gains set the stage for the Federal Reserve to begin raising interest rates at the end of the month.  This will be the first rate increase since May 2000 as sustainable economic expansion no longer needs monetary stimulus.  Fed Chairman Alan Greenspan recently gave U.S. lawmakers an optimistic assessment of the economy.  He warned that the federal funds rate "must rise at some point to prevent pressures on price inflation from eventually emerging."

Banks and financial firms have already started taking a hit to their lending businesses as would-be borrowers anticipate the inevitable rate hikes and ease up on credit exposure. Banks also have to pay out more interest on savings accounts, trimming lenders' margins.

Other sectors that might feel a pass-through effect from higher rates are manufacturers of household appliances, furniture and home electronics, along with the retailers that sell them. Utilities will also feel a financial pinch as they will have to dip into profits to increase dividends and retain shareholders.

But the rate increases won't prove much of a hardship to the economy as a whole.  Although consumers and businesses will face higher costs to borrow money for purchases and investment, they'll do so at a time when they are also making more money.

J.D. Crowe
Vice President,
Mortgage Services
F&D Advisors, LLC