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Personal Finance Blog By MoneyRates - September 2010

How long will unemployment keep money market rates down?

September 28, 2010

By Barbara Marquand | Money Rates Columnist

Today's stubbornly high unemployment rate could go even higher in the next nine months, even without a double-dip recession, Federal Reserve Bank of San Francisco economists say.

In a Sept. 27 "Economic Letter," economists David Lang and Kevin Lansing point to forecasts by the Chicago and Philadelphia Federal Reserve Banks that predict real U.S. GDP growth through the first half of next year will remain at or below potential.

"If these forecasts prove accurate, then the historical relationship between real GDP growth and the labor market suggests that the unemployment rate could rise by as much as 0.5 percentage point during this period," they write.

That's bad news for anyone hoping for a rise in savings rates for CDs, money market accounts or savings accounts. The economy has to pick up the pace befor such rates are likely to go up.

The dreaded double dip

In an August "Economic Letter," Federal Reserve Bank of San Francisco economists Travis Berge and Òscar Jordà estimated the chance of a double-dip recession at around 50 percent. But even if the economy avoids another recession, Lang and Kensing argue that real future economic growth might be too weak to keep unemployment from going up.

The U.S. economy has grown for four consecutive quarters since the recession ended in June 2009, but that growth has been relatively weak, Lang and Lansing point out. Sales of goods and services produced domestically rose just 1.1 percent on average.

"Due to the severity of the recession and the lackluster nature of the recovery so far, the level of real GDP at the end of the second quarter of 2010 was still 1.3 percent below the pre-recession peak reached more than 2.5 years ago," they write.

Yet the Congressional Budget office estimates the economy's potential annual growth rate over the next five years is 2.1 percent, and some other estimates are even higher. "If real GDP growth were to fall below potential growth for a sustained period, then the unemployment rate would be expected to rise," they conclude.

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Readers say family comes first

September 27, 2010

| MoneyRates.com Senior Financial Analyst, CFA

MoneyRates.com recently published a list of the best and worst states for retirees. These lists were compiled using a quantitative approach based on economic factors, crime rate, climate, and life expectancy. Naturally though, there is more to choosing a retirement home than just crunching the numbers, so we turned to the readers of MoneyRates.com and GetRichSlowly.org to get a sense of how more subjective factors stack up alongside the cold hard facts.

In a poll, we asked which was the most important factor in choosing a place to retire:

  • Being near children and grandchildren
  • Weather
  • Economic conditions
  • Low crime rate
  • Life expectancy/health care

Based on the results so far, family is the clear winner. 40% of poll respondents said this was the most important factor in choosing a place for retirement. 28% cited economic conditions, and 20% cited weather. Life expectancy and crime rate were distant laggards, at 7% and 5% respectively.

These results are not surprising. For one thing, it explains why there are perfectly happy retirees in every state of the union, regardless of some of the problems those states may have. Factors on the MoneyRates.com list of best/worst state criteria are not stronger than family bonds, but they do provide a good starting point for people who are researching where they should life in retirement.

It is significant that economic factors ranked second only to family in the poll. One might wonder why the economy would be so important to a retiree, who no longer has to depend on a job for a living. However, with money so tight these days, retirees have to be concerned about things like cost of living and tax burden cutting too deeply into their savings. Also, employment is a factor, even for retirees -- nobody wants to live in an economically depressed area, and many retirees find themselves wanting or needing to work again, at least part-time.

In short, retirees want family around them, but they also want that family to be able to work and support themselves financially.

Posted in: Miscellaneous

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Savings accounts and employment between recession and recovery

September 22, 2010

| MoneyRates.com Senior Financial Analyst, CFA

Most Americans have probably never heard of the National Bureau of Economic Research, but they know they don't agree with them.

The National Bureau of Economic Research (NBER) is the organization which officially sets the dates for recessions and expansions in the U.S. economy. They recently announced that the Great Recession actually ended over a year ago -- as of June 2009.

The news of the NBER announcement was not greeted with dancing in the streets.

Savings accounts and employment suggest otherwise

To many Americans, this does not yet feel like a recovery. Interest rates on savings accounts, driven down during the recession, remain near zero -- 0.18 percent on average as of September 20th, according to the Federal Deposit Insurance Corporation (FDIC). Money market rates aren't much better, at an average of 0.26 percent.

Employment also remains down, though it has shown some improvement. U.S. employment peaked at 137,951,000 jobs in December 2007. Then it started losing jobs, and by the time employment hit bottom in December 2009, the economy had lost 8,363,000 jobs.

So far this year, through August, 723,000 jobs had been added. This doesn't come close to restoring the number of jobs that were lost, but it is a start in the right direction -- and that's a key to understanding how savings accounts and employment factor into an economic recovery.

The long road of economic recovery

To understand how there can still be so much bad economic news even though the recession is over, think about someone who has lost 20 pounds of muscle during a serious illness. Even after the illness is over, it can take a long time before that person regains that lost weight and is up to full strength.

In short, there is a difference between starting a recovery and being fully recovered. The economy has a long road of recovery to travel, but at least now it is moving in the right direction.

Let us know what you think -- when will the recession finally be over, in your view, or do you already see signs of recovery in your daily life?

Posted in: Miscellaneous

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Banks expected to make more money next year despite new limits on overdraft fees

September 21, 2010

By Barbara Marquand | Money Rates Columnist

Banks and credit unions lost at least $6.3 billion in 2009 and 2010 following scrutiny over debit card overdraft fees and new federal regulations requiring them to get customers to opt in for overdraft coverage, says a new study by Moebs Services, a financial research firm in Lake Bluff, Ill.

A drop in profitability due to increased regulation isn't all that surprising. But the projected comeback is. Moebs predicts that next year's revenue from overdraft fees will climb to $38 billion, the highest ever for the industry.

According to the study, banks and credit unions lost about $2 billion in revenue at the end of 2009 when, under pressure from Congressional and consumer complaints, they started putting their own lid on fees. Then they lost another $2.3 billion during the first quarter of 2010 when they introduced opt-in registration and yet another $2 billion from operational costs to meet the new federal regulations that went into effect this summer.

Those require banks to get customers' permission to cover debit card overdrafts. Before, banks covered the overdrafts automatically and charged fees, much to the surprise of some customers.

Some banks lower checking account overdraft fees

Among banks and credit unions, 6.5 percent decreased their overdraft fees, according to the Moebs study.

"We have never seen this many institutions decrease the price of a fee service in almost 30 years of tracking bank and credit union pricing," Economist and CEO Michael Moebs said in a press release. "Our data shows institutions which decreased their overdraft fees, actually maintained or increased their overall revenue in the past year."

Other banks get in the game

Meanwhile, while giants such as Bank of America and Citibank dropped their overdraft programs, community banks and credit unions started offering them for the first time.

A relatively small share of customers pay overdraft fees. In fact 90 percent of overdraft revenue comes from frequent users, Moebs said. Almost all customers with 10 or more overdrafts a year opted in to the new programs. Among all consumers, consent ranged from 60 percent to 80 percent.

Apparently the banks were right. A lot of customers really are willing to pay for the service.

Posted in: Checking Accounts

Tagged in: checking account

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Best 10 states for retirement -- which states will make the list?

September 20, 2010

| MoneyRates.com Senior Financial Analyst, CFA

MoneyRates.com has released the 10 worst states for retirement. This Wednesday, you'll get the good news -- a list of the 10 best states for retirement.

What do you think makes a place great for retirement? Is it balmy weather and sandy beaches? Perhaps golf courses and tennis courts, or maybe museums and theaters?

10 best states for retirement: the criteria

Everybody has their own tastes, but MoneyRates.com assembled its list of the best states for based on some quantifiable criteria:

  • Economic conditions. Cost of living, tax burden, and unemployment rate were all factored into the assessment of economic conditions in each state.
  • Crime rate. Crime is a serious issue in choosing a place to live at any stage of your life, but it is especially critical in retirement.
  • Climate. Not everybody has their heart set on a warm-weather retirement site, but climate is enough of a factor that MoneyRates.com looked at how consistently a state's temperature stayed close to a moderate 68 degrees.
  • Life expectancy. There are many things that go into life exectancy, from the cleanliness of the environment to the quality of the health care. Presumably, any issue that affects life expectancy would be important to retirees, so this is one more factor in the MoneyRates.com list.

Tell us what you think

What were the results of these calculations? You can find out on Wednesday, but for now it's fair to say that there are some surprises on the list. Which is great -- after all, what would be the point of doing the analysis if the answers were predictable from the outset?

What's significant is that the list contains a representative cross-section of Americas states. Members of the top 10 list range from the Atlantic to the Pacific, from the northeast to the southwest.

That should mean there's something for everybody -- but is your favorite state included? Give us your opinion in the comments section of this blog.

Which state do you think will be number one? What would you do differently in assembling your list? Let us know.

Posted in: Miscellaneous

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