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Personal Finance Blog By MoneyRates

Job growth sustains hope for savers

November 14, 2014

| MoneyRates.com Senior Financial Analyst, CFA

The latest figures from the Bureau of Labor Statistics (BLS) show that strong U.S. job growth continued through October. This is obviously good news for people looking for work, but it could also have much wider benefits -- including help for consumers with savings accounts and for mortgage shoppers.

The BLS report indicated that 214,000 new jobs were created in October, lowering the unemployment rate to 5.8 percent. However, perhaps the most significant aspect of this jobs report was beyond the headline numbers. The report also included an upward revision of August's job growth number, from 180,000 to 203,000.

That means that job growth has now exceeded 200,000 for nine straight months. That is the longest stretch of monthly job growth in excess of 200,000 since a run of 19 such months from late 1993 through early 1995.

The improving strength of the job market can also be seen in the changing characteristics of the labor force. Over the past year, the number of long-term unemployed (people out of work for 27 weeks or longer) has declined by 1.1 million (a drop of 27.5 percent). Over the same period, the number of people working part-time rather than full-time for economic reasons dropped by just less than a million (12.3 percent).

Two potential positives for bank customers

The direct benefit of job growth is clear -- putting people back to work helps those individuals and their families get by. However, there are broader, knock-on effects of employment growth that help a much wider swath of the population, including customers of savings accounts and mortgage products:

  1. Consumers with savings accounts could benefit from higher interest rates. It has been a long wait since rates on savings accounts dropped to nearly zero. The key behind that wait has been the fragile state of the economy. Increased economic activity would give banks more productive ways to deploy the deposits they have on hand, by making profitable loans and investments. Employment growth helps spur this activity by broadening the base of wage-earning consumers, and injecting more income into the economy.
  2. Mortgage shoppers may benefit from wider loan availability. Current mortgage rates may still be among the lowest in history, but lending standards have been so tight they have only been available to extremely well-qualified borrowers. While a stronger economy may come a a price to mortgage shoppers in the form of higher rates, it is better to pay a little more and be able to get a mortgage than to have low rates in theory but have loans unattainable to many would-be borrowers.

The prevailing skepticism that has surrounded the economy in recent years has muted the immediate impact of positive employment news. However, the defining characteristic of the recent employment trend is not just that it has been good, but that it has been consistent. It is this consistency that could ultimately put both the economy and the financial markets on firmer ground.

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Did inflation hit the 'sweet spot' in September?

October 31, 2014

| MoneyRates.com Senior Financial Analyst, CFA

Like Goldilocks looking for porridge that was "just right," financial markets struggle to accept large monthly fluctuations in inflation. However, the September figure released last week may represent the kind of happy medium investors want.

The Consumer Price Index (CPI) for September showed that inflation rose by a seasonally adjusted 0.1 percent during the month -- a figure that may fall into the "just right" zone, especially when compared to the swings in inflation in the months that led up to September.

A welcome calm

Earlier this year, inflation appeared to be on an upward track. March, April and May saw monthly inflation numbers of 0.2, 0.3, and 0.4 percent, respectively. That not only represented a troubling trajectory, but it left inflation running at an annual pace of nearly 5 percent.

Inflation eased back in June and July, and then in August reversed course altogether. The CPI declined by 0.2 percent, hinting at the kind of deflation that is symptomatic of a failing economy. In this context, seeing a positive but mild inflation number for September may have been the best outcome possible. The latest reading puts inflation at the easy-going pace that has made low-interest-rate policies possible, but without the deflation scare.

What investors want

These inflation developments are occurring during a tumultuous time for the stock market. At one point, the Dow Jones Industrial Average was down by more than 5 percent during October, but it has since recovered to about the breakeven point for the month.

Among other things, last week's inflation report seems to have had a positive effect. As news of global economic weakness grows, any repeat of August's deflation would have reinforced suspicions that global weakness had started to drag down the U.S. economy. That's why a rise in the CPI was actually welcome news to stock market investors.

Here is where the "just right" balance comes in. Deflation would almost certainly have spooked investors, but they also would not have welcomed a high inflation figure. Investors want solid economic growth, but they want interest rates to remain low -- something that would be virtually impossible if inflation flared up. That is why 0.1 inflation seems to have been just right.

The outlook for savings accounts

To some extent, people with savings accounts, CDs and money market accounts are seeking the same balance between steady growth and low inflation. The important difference is that they do not want artificially low interest rates to continue.

From the perspective of savings accounts, "just right" represents an economic growth rate that is strong enough to allow interest rates to rise to more normal levels, but not so strong as to stir up inflation.

What is clear so far is that on balance, inflation was virtually nonexistent during the quarter. Now, depositors just have to hope that economic growth did not disappear along with it.

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Market volatility threatens mortgage and deposit rates

October 17, 2014

| MoneyRates.com Senior Financial Analyst, CFA

In the first 12 trading days of October, the Dow Jones Industrial Average suffered six daily losses of 100 points or more. Given that the month started off with encouraging economic news, what could be plaguing the market?

It seems the market has slipped into a worst-of-both-worlds mentality. That could make stocks a volatile place to be, and could eventually impact consumer interest rates.

The worst-of-both-worlds outlook

Toward the end of September, the Bureau of Economic Analysis released an upward revision to their estimate of second-quarter GDP growth, pushing it to 4.6 percent. A week later, the Bureau of Labor Statistics released an report showing strong employment growth -- 248,000 new jobs -- in September. With such a positive lead-in to October, why has it been such an ugly month for the stock market?

There are a couple of factors at work. For one thing, the market has long been wary that signs of growth will bring higher interest rates, something that can have a suppressive effect on both economic growth and stock valuations. Meanwhile, the other factor is that a variety of developments have recently cast doubt over global economic growth rates.

As a result, the market seems to be suffering from a worst-of-both-worlds outlook, viewing the economy as just strong enough for interest rates to rise, but not strong enough to withstand a global slowdown.

Impact on bank rates

The worst-of-both-worlds scenario could result in the widening of two interest rate spreads that impact consumers:

  1. The spread between mortgage and savings account rates. Current mortgage rates may seem low, but according to the MoneyRates.com CLIP Index, they are actually unusually high compared to rates on savings accounts. This could actually get worse, as the Fed has already largely discontinued its active program to keep long-term rates low, but may keep short-term rates down a little longer if global growth concerns become pervasive.
  2. The spread between rates for bad and good credit customers. A slow economy often means lower interest rates, but it also raises credit concerns. So, people with shaky credit histories may actually see rates on things like credit cards and mortgages rise, while general market rates hold steady or decline. The message is, this is a very important time to keep your credit history in good shape.

After the Fed held interest rates at unnaturally low levels for such a long time, letting those rates rise always had the potential to be disruptive. Now, a variety of factors on the global scene threatens to further shake up the interest rate picture.

The message for consumers is to lock in borrowing rates, and be alert for changes in savings rates. At just over 4 percent, current mortgage rates are still historically low, meaning that people in the market should act soon to secure their mortgages, and favor fixed over adjustable-rate loans.

People with savings accounts, meanwhile, should closely watch both their own rate and the market for rates in general. A volatile environment tends to create both opportunities and risks.

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Report reveals unfavorable banking trends for consumers

October 4, 2014

| MoneyRates.com Senior Financial Analyst, CFA

The FDIC recently updated its annual Summary of Deposits, which tallies the number of banks and branches in the U.S., along with the amount of money they have on deposit. These figures, along with the FDIC's running total of bank closures, reveals some noteworthy -- and contradictory -- trends for bank customers.

The good news is that the banking industry continues to become more stable. The bad news is that consumers may be paying a price for that stability, in more ways than one.

Changes in banking

Here are some of the key trends indicated by the FDIC data:

  1. Failures continue to slow. Considering that it is still just a few short years after of the financial crisis, when the banking system seemed on the verge of collapse, perhaps the most important trend in banking is that the system continues to stabilize. Just 12 banks failed in the first half of 2014, 25 percent fewer than went under in the first half of 2013.
  2. Despite fewer failures, banks are disappearing. While fewer banks have been failing, the total number of banks is declining at a rapid rate. As of June 30, 2014, there were 281 fewer banks than there had been a year earlier. Even though there were not many failures, these numbers reflect a continuing trend of mergers and acquisitions in the industry. This consolidation is a response to the new, tougher financial environment for banks, which means that customers can likely look forward to further rising fees on their checking accounts.
  3. Branches are becoming more scarce. The total number of bank branches declined by 1,614 in the space of a year. This also reflects the industry's challenging financial realities, meaning that in addition to higher costs, customers can also look forward to less service in some areas.
  4. Deposits continue to grow. Even with reductions in the number of banks and branches over the past year, deposits increased by a net total of $679 billion. Despite low interest rates, rising fees and service reductions, banks are having no trouble attracting deposits. That is bad news for depositors with savings accounts -- with money continuing to flood in the door, banks have little incentive to raise interest rates to attract deposits.
  5. It is still a highly fragmented industry. The number of banks may be on the decline, but there are still more than 6,500 banks in the U.S. In addition, the proliferation of online accounts has broken down geographic barriers to make more options available in some areas. So, as a way of coping with rising fees and falling savings account rates, remember that there are many choices out there. Consumers who shop around can neutralize some of the negative trends in banking.

Ultimately, stability is what matters most to bank depositors, and the U.S. banking system continues to demonstrate its ability to deliver that precious attribute. Unfortunately, between low interest rates, rising fees and dwindling service, that system is providing little more than security to customers today.

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Savers benefit from rare inflation break

September 22, 2014

| MoneyRates.com Senior Financial Analyst, CFA

With average rates on savings accounts near zero, bank depositors have been long been waiting for some sort of relief. They got it from an unlikely source last week -- the report on inflation for August.

News that consumer prices actually declined in August was a sort of instant win for savers. The big question now is whether that win will prove to be short-lived.

An bright moment for savers

The Bureau of Labor Statistics reported that the Consumer Price Index (CPI) declined by 0.2 percent during August. Seasonally adjusted, this is the first decline in the CPI since April of last year, and is tied for the largest decline since December 2008.

A drop of 0.2 percent may not sound like much, but if continued over a full year it would project to a decline in prices of more than 2 percent. Any decline in prices increases the purchasing power of savings, which is how this decline in CPI represents an instant win for savings accounts.

The ideal situation for savings accounts would be for economic activity to pick up to the point where interest rates started to rise. That, however, is likely to be a long and halting process. In the meantime, the average savings account rate is stuck at 0.06 percent, meaning that in order for savings accounts to gain purchasing power, inflation virtually has to turn negative. This does not happen often, but it happened in August.

Instant, but temporary?

At this point, the question becomes one of how much lasting value this gain in purchasing power will prove to have. That instant win for savings accounts may prove to be temporary.

For one thing, inflation figures tend to be pretty erratic from month to month. This is especially true in the energy sector, and it was a decline in energy prices that was the primary reason the CPI declined in August. A drop in energy prices one month is often followed by a bounce back the next month, so the recent decline should not be looked at as a trend that is likely to continue.

The other issue is that any decline in consumer prices raises doubts about the strength of the economy. One month of falling prices does not put the economy on a long-term deflationary path, but it was enough to drag the year-over-year inflation number down to 1.7 percent. This is below the 2.0 percent level the Federal Reserve considers healthy. So, August's decline in prices might hurt interest rates in the long run by delaying the return of monetary policy to more normal rates.

Taking all this into consideration, today's inflation news represents the dilemma for interest rates right now. Too much inflation erodes purchasing power, and too little could delay the return of rates to normal levels. The temporary win savings accounts got from the drop in CPI will only have lasting value if it is followed by stronger economic growth.

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