Low unemployment could be a bad thing

[Miulang]

With Hawai'i's unemployment rate (http://www.honoluluadvertiser.com/apps/pbcs.dll/article?AID=/20070125/BUSINESS12/701250319/1071)dipping to its lowest point in 30 years, some economists are worried that that could increase the rate of inflation for residents who already are plagued by a very high cost of living.

"From an economics standpoint, this is over employment," said Byron Gangnes, a University of Hawai'i economist.

Gangnes believes the tight labor market could fuel further inflation in Hawai'i. Low unemployment typically results in higher wages, which are eventually passed to consumers, he said.

The inflationary pressures come as Hawai'i residents already pay some of the highest prices in the nation for gasoline, electricity and housing.

..."But a good fraction of any wage increases gets passed on the consumer. It raises costs of doing business and may cause firms to pull back on some of their expansion plans."



Eventually the equilibrium will be reached again as companies start contracting and the unemployment rate goes upward, but in the meantime, there's also a question of whether people on CONUS, who are being laid off from their jobs due to company "rightsizing", will start eyeing Hawai'i as their next residence because of the likelihood of being able to find a job quickly?

Miulang

[joshuatree]

With Hawai'i's unemployment rate (http://www.honoluluadvertiser.com/apps/pbcs.dll/article?AID=/20070125/BUSINESS12/701250319/1071)dipping to its lowest point in 30 years, some economists are worried that that could increase the rate of inflation for residents who already are plagued by a very high cost of living.



Eventually the equilibrium will be reached again as companies start contracting and the unemployment rate goes upward, but in the meantime, there's also a question of whether people on CONUS, who are being laid off from their jobs due to company "rightsizing", will start eyeing Hawai'i as their next residence because of the likelihood of being able to find a job quickly?

Miulang

Doubtful, people don't just pick up and move for low wage jobs. It might be easy to get a job at Zippys or ABCs due to the tight labor market but I doubt Hawaii has a bunch of 80K career jobs desperately needing bodies to fill.

[craigwatanabe]

I remember taking an economics class years ago and the magic balance between unemployment and inflation was an equal 4%.

When unemployment drops below 4%, inflation rises above 4%. To some economists, inflation is a good thing where the costs of goods and services go up so do wages.

That can be a good thing until wages and products get to the point where it gets too expensive to buy goods or services.

Lowering inflation means increasing the unemployment rate, but of course that has it's problems as well. So the balance was set at 4% on either side to hold that see saw from swinging up or down wildly.

[Mike_Lowery]

Unemployment's down, but exactly how many people are no longer counted as being unemployed because they used up their eligibility?

[craigwatanabe]

It all comes down to how you spin those numbers. Now that everybody's employed, the demand for goods go up and supply drops. So to counter a limited supply, prices go up.

When prices go up the cost of living goes up accordingly, but wages typically lag and suddenly it costs more to live than what you earn and you find yourself priced out of your rental or home you wanted to buy.

Demand drops and supply increases and suddenly you're into a recession, so the Feds have to boost the economy by lowering the interest rates to make buying a home affordable. And the cycle starts again.

In the 80's the price of homes was on the rise, the economy was doing fantastic until new home owners who barely afforded their expensive homes forclosed and suddenly there was a glut of forclosed homes on the market and a lot of bancruptcies.

That glut led to a buyer's market and with the Feds dropping the interest rates it led to another bubble economy and here we are seeing the deflation of yet another bubble.

My advice to prospective home buyers in the late 90's upwards thru these past few years was to wait out the bubble and buy when the price of homes drop due to excess inventory. Yes the interest rates will be astronomically higher as both are inversely proportional. But when the economy improves and the Fed's start to drop the interest rates again you can alway refinance to a lower interest rate.

Bottom line is that you can renegotiate a lower interest rate on a re-fi but you can never renegotiate the original purchase price of your home. Plus even with the higher initial interest rate, that means more interest deductions you can make during that time. You get it back after a year.

It doesn't make sense to buy a piece of property when it's at it's peak KNOWING that the cycle will see a softening of it's price. Typically if you buy high with a mortgage and the housing market begins to soften you end up owing more than you have. Upside down in this case and with the softening comes decreased equity value in your home. Less value but with a high liability.

I do the opposite, buy cheap then when the equity rises with an increase in the housing market, refinance and use that equity wisely.