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Interest Rates And Jobs: A Variation On The Model

Hale Stewart profile picture
Hale Stewart

By New Deal Democrat

Friday is nonfarm payrolls day, so in the absence of more noteworthy economic news, let me follow up on Monday's post in which I discussed "A simple model of interest rates and the jobs market."

In it, I suggested that:

1. A YoY increase in the Fed funds rate equal to the YoY% change in job growth has in the past almost infallibly been correlated with a recession within roughly 12 months.

2. The YoY change in the Fed funds rate also does a very good job forecasting the *rate* of YoY change in payrolls 12 to 24 months out.

One shortfall of that model is that there are two "false negatives" in the low interest rate environment of the 1950s, during which the YoY increases in interest rates by the Fed were relatively modest, and did not exceed the YoY change in payrolls until after the recessions had already begun.

I suspect that in a low interest rate environment, more modest increases in interest rates might have a more pronounced effect. For example, an increase in mortgage rates from 2% to 4% doubles the monthly interest payments on a mortgage (i.e., a 100% increase), whereas an increase from 8% to 10% only increases it by 25%.

While I haven't explicitly looked at mortgage rates as of yet, what I did do is plot the simple rise in interest rates from their low points near the beginning of each expansion since the mid-1950s, and see if, during a period of Fed tightening, they always rose to exceed the YoY% change in job growth *before* the onset of all of the recessions since. Here's what I got:

So the simplest answer is, yes they did. To be more precise, here is the number of months by which this metric led

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Hale Stewart profile picture
Hale Stewart spent 5 years as a bond broker in the late 1990s before returning to law school in the early 2000s. He is currently a tax lawyer in Houston, Texas. He has an LLM in domestic and international taxation (MagnaCumLaude). He is the author of the book The Lifetime Income Security Solution. Follow me on Twitter at @originalbonddadYou can read his legal analysis on his law office's blog.

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Comments (1)


I greatly appreciate all the work you do; I rely on it as a personal investor and professionally as a sales forecaster. However, I'm confused by a particular piece of terminology in this recent string of posts: when referring to jobs growth, your charts appear to use YoY % change in the number of jobs, but you refer to it as the change in the rate of change of the number of jobs (change in the YoY % change of jobs). If you or one of your readers could clarify I would find it helpful.

Thank you
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