Savings Accounts Strengthen as the Economy Weakens
August 02, 2010
| MoneyRates.com Senior Financial Analyst, CFA
Friday was one of those classic good news/bad news days for the economy--and for CDs, savings, and money market accounts.
To begin with the bad news, the advance estimate of second quarter real GDP came in slightly below expectations, at 2.4%. This confirms the growing impression that the economic recovery is losing steam. Reflexively, some pundits are already calling for more government stimulus. Financial types would normally fall into the "small government" camp, but this is a little like the old saying that there are no atheists in foxholes. When a recession looms, a lot of people suddenly become believers in government intervention.
The problem is that the government has already played its hand. Interest rates are already near zero, and the federal budget deficit is badly swollen. Government options from this point forward are limited.
What's the good news? The household savings rate rose to 6.2% in the second quarter. While this represents money that isn't flowing into the economy in the near term, it is good medicine for the long-term health of the economy. In other words, while people aren't spending much, at least they are shoring up their savings accounts.
Unfortunately, that medicine will have a bitter taste for anyone in CDs, savings accounts, or money market accounts. A slow economy in the near term means CD, savings, and money market rates will stay low for a while longer. Meanwhile, banks already have more deposits than they no what to do with. Higher savings rates leave banks little incentive to attract deposits by raising rates.
In other words, higher savings rates are a positive development--but more for next year's economy than this year's.
