May marks a tough month for savers

June 06, 2012

| MoneyRates.com Senior Financial Analyst, CFA

It used to be that you had to have a stake in the stock market to have your financial condition hang so heavily on month-to-month economic developments. Now, even depositors in savings and money market accounts need to cast a wary eye at the economic news, and developments on that front were not very encouraging in May.

What has raised the stakes for depositors in recent years is having savings account interest rates fall persistently below the rate of inflation. Until savings account rates once again top inflation, depositors are consistently losing purchasing power.

When will this end? That's the key question, and one that explains why savings account holders need to follow economic developments more closely than in the past.

A series of setbacks in May

The following are some examples of the ugliness that dominated the financial news pages during May:

  1. Europe lurches from crisis to crisis. Every few weeks seems to bring a new crisis point for the euro. There never seems to be an actual solution to any of these crises, just some form of stopgap that prolongs the agony until the next crisis.
  2. U.S. economic growth is confirmed to be slowing. May began on the heels of a GDP estimate that had real economic growth in the U.S. slowing to 2.2 percent in the first quarter. The month ended with the news that the economy was even weaker than previously thought, as this estimate was revised downward to 1.9 percent.
  3. Stocks take a beating. The deteriorating economic outlook was reflected in the performance of the stock market. The S&P 500 actually began May with a strong first day -- and then proceeded to lose money in 11 of the next 13 trading days.
  4. Facebook flops. It may be just one stock, but when hype turns so quickly to disappointment, as it did with the Facebook IPO, it signals a seriously sour investment environment. This brings back bad memories of how the dot-com crash in 2000 heralded a bear market and recession.
  5. Bond yields plunge to new depths. A significant bellwether for interest rates, 10-year Treasury yields, fell to new lows in May. They spent the early part of 2012 fighting to stay above 2 percent, but by late May they had plunged to around 1.6 percent.

Depositors are not likely to see substantially higher interest rates until the economy develops some consistent, positive momentum. The way the economy got bogged down in May seems to indicate those higher savings and CD rates may still be a long way off.

Was there a bright spot?

There are so many different aspects of the economy that in any situation there is bound to be a positive development or two, and in the case of this past May the positive news involved inflation. In mid-May came the news that the Consumer Price Index was flat for the month of April, largely due to falling energy prices. With oil prices continuing to fall in May, there's a good chance that inflation will again be flat, or even turn negative.

A lack of inflation takes some of the sting out of chronically low interest rates, but not enough for the "merry month of May" to have lived up to its name.

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