Personal Finance Blog By MoneyRates

The Bureau of Labor Statistics (BLS) announced Tuesday that there was no inflation overall in April. This is good news, but the reasons behind it may not be so good.

The BLS announced that the Consumer Price Index (CPI), the most widely followed index of U.S. inflation, was unchanged for the month of April. Inflation is always a force to be reckoned with, and in an era of low pay increases and virtually non-existent interest rates on savings accounts and other deposits, most household budgets are especially sensitive to inflation. So, seeing inflation simply not show up for a month is a bit of a relief.

But there is a catch to this good news.

The latest inflation trend

The unchanged CPI for April marked the first 0 percent monthly inflation reading so far in 2012. Prior to that, inflation was starting to look as though it might be a problem this year. Inflation increased by 0.9 percent in the first quarter, which put it on pace to rise by more than 3.6 percent for the full year. That's not extraordinary by historical standards, but certainly an out-sized threat given the extraordinarily low level of interest rates today.

Instead, inflation cooled off in April. As a result the year-over-year inflation number dropped to a moderate 2.3 percent. That's still more than enough to wipe out a couple year's worth of savings account interest, but if April's reading marks a turn in the inflation trend, prices may ease even more.

The influence of oil

For better or worse, the key driver of inflation so far this year has been the price of oil. When the combination of Middle East tensions and economic optimism sent oil prices soaring earlier this year, it was the biggest factor in pushing the CPI higher. However, April saw the price of oil influence the CPI in the other direction.

Overall, the energy component of the CPI declined by 1.7 percent in April, meaning that while prices overall were flat, energy prices were actually falling. Gasoline prices fell by even more, dropping by 2.6 percent in April. Based on developments so far this month, it looks like the trend of falling energy prices could continue in May, taking even more pressure off of inflation.

Here's the catch

Given the star-crossed nature of the U.S. economy in recent years, it is almost inevitable that there should be a catch to this piece of good news, and here it is: Oil prices are falling in large part because of growing pessimism about global economic growth.

For workers looking at minimal pay increases and retirees getting barely any interest from their savings accounts, seeing the level of inflation subside should be a relief, but it also means those pay raises and interest rates aren't likely to get bigger any time soon. Still, half a loaf is better than none -- and in this economy, half a loaf is all that many can afford.

It's nothing new for banks to offer gifts to new customers -- a free toaster is the age-old example. However, a bank in Florida has come up with something a little sexier: a new Mercedes in exchange for opening a 5-year CD.

As is often the case with flashy promotions, this one isn't quite as good a deal as it sounds. However, it does say something about today's low-interest-rate environment.

Devil in the details

It's true -- C1 Bank in Florida is offering customers the option of receiving a new Mercedes when they open a new account. But, before you get excited, consider some of the details of this offer.

First of all, it only applies to customers who open a $1 million, 5-year CD. That puts this deal out of reach of the vast majority of bank customers.

Second, the Mercedes isn't exactly a gift. It actually represents the pre-payment of interest on the 5-year CD. In other words, you are exchanging five years of interest on $1 million for a new Mercedes.

There can be some economic value to getting your interest paid in advance, but there is a third catch to this deal. The C1 Bank 5-year CD pays a 1.20 annual percentage yield. That's not bad when 5-year CD rates nationally are averaging 1.10 percent, but you could do even better by shopping around.

The fourth catch is an unusually heavy penalty for early withdrawal. Most CDs will penalize you a portion of your interest if you take your money out before the CD matures. Since this C1 Bank offer effectively pays you your interest upfront, if you want to withdraw your money early they will not only reduce your principal by the purchase price of the car -- effectively confiscating all five years of interest -- but they will also tack on an additional $3,000 penalty.

What it says about CD rates

C1 bank has come up with an attention-getting gimmick, but it is far from certain that anyone will actually take them up on the offer. Still, it is an interesting symptom of the low-interest-rate environment.

With 5-year CD rates barely above 1 percent, the C1 deal attempts to make a low interest rate more attractive, simply by demonstrating what could be bought with five years of interest -- if you have a million dollars to deposit.

This deal is also symptomatic of low interest rates on CDs in what it says about the bank and any customer who would take this deal. For the bank's part, being willing to pay interest in advance indicates just how diminished the time value of money has become with rates so low.

As for the customer, locking into a 5-year CD with such an onerous early-withdrawal penalty would demonstrate a belief that the low-rate era is here to stay. On balance, though, the customer would be better off with a toaster -- if it also came with old-style CD rates.

After a string of disappointing economic reports in April, May began with an encouraging report on U.S. manufacturing growth. One of the few strong points in the first quarter GDP report may also be related to this recent strength in manufacturing, which could represent a sustainable source of progress for the economy.

The question remains, though: Will this be enough to break the economy out of its rut?

Escaping the rut

The recent economic rut represents more than just the dreary series of economic reports that appeared in April -- disappointing employment growth and weak GDP figures among them. Although the economy technically escaped from recession in the third quarter of 2009, for most of the time since it has been in slow-growth mode. Real GDP growth has reached a 3 percent annual rate just once in the past seven quarters.

The signs of the rut are everywhere. Nearly three years into the economic recovery, unemployment is still high. Interest rates, from savings accounts to treasury bonds, are anemic. The stock market's progress comes in fits and starts, and investors are so cautious that they seem almost to be walking on egg shells.

Manufacturing rises

Against this dreary backdrop, a May 1 report on the manufacturing sector provided some welcome good news.

The Institute for Supply Managers announced that its manufacturing index rose to 54.8 in April, up from 53.4 in March. That's the highest level in 10 months, and pushes the index more firmly into the above-50 territory that represents an expansion.

The manufacturing report takes on special significance because it is one of the first major economic indicators for the month of April. Following generally disappointing reports for March, economists are looking anxiously to see if the economy is sliding again toward recession.

Exports provide a source of new demand

One reason for the strength in manufacturing may be found in the first-quarter GDP report. Although overall GDP growth was lackluster, one bright spot was export growth. The Bureau of Economic Analysis reported that real export growth was 5.4 percent in the first quarter, up from 2.7 percent in the fourth quarter of 2011.

Foreign markets have mostly been a cause of concern lately, with a focus on the troubled economies of Europe. However, if large developing economies such as China and Brazil can sustain their growth, it could help demand pull through the current malaise.

What to watch for

Will the strength in manufacturing lead to more jobs, higher rates for savings accounts and a more reliable stock market? The stock market rallied on the news about the manufacturing index, so that's a start. It will take much longer before this translates into higher rates on savings accounts, but in the meantime, the next key sign for the economy will be if the job market firms up after its March stumble.

New housing data shows some signs that the real estate market has finally bottomed out. With current mortgage rates already near all-time lows and the government tapped out, this would be welcome news. But the question is: Will this prove to be the true turning point for housing -- or another false bottom leading to further depths?

Stabilization or pause?

The meaning of economic statistics is often in the eye of the beholder, and it's no different with the latest housing statistics.

An optimist would point to the following: Government figures released last week indicate the number of new homes sold in March was up 7.5 percent over the number sold in the same month a year earlier, and the median price was up 6.3 percent for the same period. Also, during the past year, the number of months' worth of new housing supply on the market shortened by 24.3 percent, while the median length of time it took to sell a new home shortened by 10.3 percent.

But a pessimist would respond that while the above suggests improvement over the past year, each of the above statistics actually worsened in the past month. So the question remains: Has the market really stabilized, or is it just starting on a new leg downward?

Sales, prices and starts

When watching the housing market, you are likely to hear about housing sales, prices and construction starts. The three are related, but ultimately sales is the category to watch most closely, as it helps drive the other two.

For example, if there is an excess supply of housing on the market, prices may take awhile to come around, even though sales are starting to pick up. The glut of foreclosed properties on the market may especially be distorting prices in housing right now. Therefore, sales is a more immediate indicator of whether demand is strengthening.

Also, housing starts may be a function of over-optimism rather than a reflection of actual demand, as was the case with the over-building at the peak of the housing boom. Again, sales bear watching more closely, because strong sales will eventually push up housing starts, but higher housing starts do not necessarily result in stronger sales.

The importance of interest rates

Current mortgage rates remain around 4 percent for a 30-year loan, which is close to the all-time low. These low interest rates have been an important tool in supporting the housing market, both by encouraging new buyers to enter the market and by helping current homeowners refinance so they can afford to stay in their homes.

But if the housing market has really turned the corner, the next question will be whether it can survive an increase in mortgage rates. From a historical perspective, today's mortgage rates are quite an abberration, and the true test of strength for housing demand will be whether it can be sustained once mortgage rates return to more normal levels.

Collectively, small businesses are often described as a barometer for economic conditions. In the world of weather, a drop in a barometer reading can mean stormy weather; similarly, a drop in a key small business confidence indicator may mean trouble for the economy.

Last week, the National Federation of Independent Business (NFIB) released its March survey of small business conditions. The results showed that conditions have taken a sudden turn for the worse. This is more than just bad news for small businesses -- the impact of this small business slump could be felt by the labor market, savings accounts and the economy as a whole.

Growth dries up

According to the March NFIB survey, 23 percent (seasonally adjusted) of business owners reported higher sales over the past three months. But 31 percent reported lower sales, and 22 percent identified weak sales as their primary business problem.

During the past six months, the percentage of small businesses reporting capital outlays declined, as those businesses responded to weakening sales with greater caution.

Optimism fades

As result of flagging sales, the outlook for the future is getting more pessimistic among small business owners. The Small-Business Optimism Index compiled by the NFIB fell in March, the first such decline in six months.

Out of 10 components to the Small-Business Optimism Index, nine reflected a negative outlook for the near future. The most negative areas involved sales and earnings trends and hiring plans.

Three broader effects

Here are three ways that the effects of recent trends may be felt beyond the small business sector of the economy:

1. Reduced hires. Employment gains slowed unexpectedly in March, and while monthly job numbers tend to be a little erratic, it will be hard for employment to regain its momentum if fewer small businesses plan on hiring.
2. Less borrowing. With fewer small businesses planning new capital outlays, this means less demand for loans. That's bad news for banks, but also bad news for savings accounts and other deposits. As long as loan demand remains low, CD, savings, and money market rates are likely to remain low as well.
3. A weaker heartbeat for the U.S. economy. Obviously, the fortunes of large, public companies matter to the economy as well, but small businesses have a finger more directly on the pulse of the U.S. economy. After all, they are more likely to be fully dependent on domestic conditions, and their hiring and other activities are more likely to take place exclusively in the U.S. Thus, the weakening outlook for small business could portend a weaker heartbeat for the U.S. economy.

This storm may yet blow over, but for now, the falling barometer of deteriorating small business conditions is making the forecast far less sunny than it was a month ago.