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Personal Finance Blog By MoneyRates - April 2012

Falling barometer: Small business conditions weaken

April 24, 2012

| MoneyRates.com Senior Financial Analyst, CFA

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.

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Stocks show a fear of judgment day

April 12, 2012

| MoneyRates.com Senior Financial Analyst, CFA

On Wall Street, vague feelings of optimism about the economy have given way to specific fears of judgment day. The S&P 500 lost 1.71 percent Tuesday alone, and is down 3.47 percent already in April. In the process, falling stock prices have dragged bond yields down, which has ominous implications for savings accounts.

Judgment day in this case is the day each publicly traded company has to report its first quarter 2012 results. The season for those earning reports is about to begin, and investors are concerned that these results may not live up to the expectations built in to stock prices. It's becoming the recurring theme of this economic recovery: Somehow, every momentary improvement never seems to quite deliver on expectations.

Great expectations

From December 31, 2011 to March 31, 2012, the S&P 500 rose by an impressive 12 percent. However, bottom-up earnings estimates suggest that operating earnings for the quarter are going to be flat.

This isn't entirely unusual. Formal earnings estimates often don't keep up with changing outlooks for companies in the stock market. However, the pullback in prices suggest that expectations got too far ahead of what the actual earnings are likely to be. Investors are concerned that when judgment day comes, earnings won't be able to support stock prices.

Judgment day

In terms of earnings reports, the date of judgment day may vary for each individual company, but there is a season -- roughly over the next month -- in which first quarter results will begin to emerge. Quarterly reports should be somewhat routine, but with a persistently fragile economic recovery, they take on a pivotal feeling at this particular time. By the time earning season is over, two key questions will be answered:

  1. Will macroeconomic developments translate into actual earnings growth? Recent months have seen a series of positive big-picture signals, from decent fourth-quarter GDP growth to encouraging employment results. The unanswered question is whether these broadly positive signs will translate into actual earnings momentum for U.S. companies. A somewhat disappointing March jobs report has cast a new shadow over the macroeconomic mood, and the initial look at first-quarter GDP won't be available until the end of this month.
  2. What will be the ripple effects of a setback in stocks? As stock prices have fallen, they've pulled 10-year bond yields back below 2 percent. That's a discouraging sign for CDs, savings accounts, and money market accounts. Deposit rates may not fall again because they never got the chance to rally, but don't expect them to rise if stock earnings disappoint.

There can be a fair amount of hype -- both positive and negative -- associated with stock price movements. However, as the release of earnings reports draws nearer, the whispers and the rumors tend to move closer to the truth. That's why the recent pullback in stocks seems so ominous -- it has the feel of harsh reality about it.

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Despite fewer closures, changes in banking continue

April 6, 2012

| MoneyRates.com Senior Financial Analyst, CFA

Bank closings continued to slow in the first quarter of 2012, a welcome sign that the industry is getting stronger. However, this does not mean that customer banking relationships are necessarily going to be more calm and settled in the months ahead. A rising tide of bank mergers and acquisitions is replacing bank failures as an agent of change in the industry.

This will affect many customers -- both in positive and negative ways.

Bank closing and merger activity

According to the FDIC, bank closures slowed from 157 in 2010 to 92 in 2011, and this trend continued in the first quarter of 2012. There were 16 bank closures in the first quarter, which would project to 64 for the year. This would be the lowest number of bank closings since 2008.

Meanwhile, though, American Banker reports that there were 50 bank mergers and acquisitions announced in the first quarter. This would project to 200 over the course of a full year, up from 173 last year.

What these changes mean for customers

While perhaps more orderly than closures, mergers and acquisitions still mean change for customers. Here are some examples:

  1. Different policies may mean more fees. When banks merge, policies at one or both institutions involved may change, and this can result in new fees. Bank customers need to be vigilant in checking their statements for unusual charges, especially in the months following a merger.
  2. Personal service will decline at many banks. Banks continue to grapple with their cost structures, and in particular merging banks will look to eliminate overlap. On a local level, this may mean fewer branches available.
  3. Online banking's appeal should rise. With even branch-based institutions looking to cut back on their locations, the idea of online banking may become less of a leap into an impersonal relationship. MoneyRates.com studies have found that online banks often offer lower checking account fees and higher rates on savings and money market accounts, so at least you can get something in exchange for giving up a local banking relationship.
  4. Efficiencies could mean higher rates on savings accounts. If online banks are able to offer better account terms because of lower overhead, then it is possible that as traditional banks find efficiencies by closing branches, the result might be higher interest on savings accounts, or fewer charges on checking accounts.
  5. ATM locations will become a key in choosing a bank. As more banking can be done online, and as local branches become more scarce, ATM locations should be a bigger consideration than the branch network when choosing a bank.

The bad news is that this era of change makes it difficult for a customer to settle into a long-term relationship with a bank. The good news is that customers have more information than ever about banks available to them, so they can use this information to find the best deals on checking accounts and the highest rates on savings accounts.

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