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The Labor Department's report this morning indicates that the unusually low interest rates enjoyed by U.S. consumers during the later months of 2003 and the early months of 2004 continued to drive economic activity and job growth through the month of May. This growth should continue through most of the summer.

But the question facing economic policy makers today is what impact the more than one hundred basis point increase (from 3.69% to 4.75% on 10 year Treasuries) in long-term interest rates that has occurred in the last ten weeks will have on economic activity and job growth in the fall. (Economists generally believe that the impact of changes in interest rates is not fully reflected in economic activity for a period of six months.)

It is probable that the recent rise in interest rates will have a greater-than-normal impact on economic activity because of the enormous impact that home refinancing has had on the U.S. economy over the past year. Federal Reserve statistics indicate that American households used refinancing last year to withdraw equity from their homes and boost household consumption by about 4%. The Mortgage Bankers reported yesterday that new mortgage applications last week were 55.6% below the same level last year. The current rate of increase in employment levels, wages and hours worked will not be sufficient to offset this decline in refinance revenues, which has supported household consumption levels over the past year.

This morning's numbers also indicate that President Bush has a reasonably good chance of ending his four-year term with more jobs in the economy than when he took office. However, it is significantly less likely that Bush will avoid having the worst job creation record of any administration since Hoover. That record is currently held by the second Eisenhower Administration when employment increased by only 1.5%. To avoid that distinction, U.S. job growth between now and January of next year will have to accelerate to 394,000 jobs a month or about two thirds faster than the current rate.

Scott Lilly is a senior fellow at the Center for American Progress.

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