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Personal Finance Blog By MoneyRates - July 2012

Small news headlines reflect big economic problems

July 27, 2012

| MoneyRates.com Senior Financial Analyst, CFA

A forecast of rain and a bad earnings report for an automaker.

These may not be the kind of news items that get much play on the nightly news, or even on social media. However, each is an indicator of important economic trends playing out right now.

Sometimes a mosaic of small news items will define the economic landscape more accurately than any single event. In this case, the forecast of rain and bad earnings report happen to be typical parts of an emerging pattern -- one that doesn't bode well for the economy as a whole.

Cloudy weather

Given the drought conditions that have taken hold over much of the country this summer, a forecast of rain should be welcome. Unfortunately, though, in this case it may be too little too late.

Forecasted rain in the Midwest may save what's left of this year's corn crop, but by now not much of it may be healthy enough to be salvaged. The U.S. Department of Agriculture reported that the percentage of the corn crop characterized as being in good to excellent condition dropped to 26 percent, down from 31 percent just last week. 50 percent of that crop is now characterized as being poor or very poor, up from 38 percent last week.

The economic effect is that a poor crop decreases the food supply, which causes upward pressure on prices. Fragile economies are easily disrupted by inflation threats, and price increases are especially tough on consumers with holding in savings accounts and other deposits, given today's low interest rates.

Inflation had been easing in recent months, largely because of a decline in the price of oil. However, a rise in food prices could negate the decline in oil, and send general inflation rising again. As a final twist, the ethanol component of gasoline -- which was mandated to reduce U.S. exposure to volatile oil prices - is dependent upon corn production, and thus could push the overall price of fuel upward.

Slow-moving cars

Another telling piece of the economic mosaic came in the form of Ford's latest earnings report. The automaker reported its second-quarter profits were down 57 percent, despite good figures from North America. The problem? Slumping performance in Europe and Asia.

For months now, there have been warnings that slowing global growth could hurt the U.S. by depressing exports. Ford's sharp drop in earnings is a dramatic example of how this is happening.

This is more bad news for savings accounts, since a slow economy will help keep interest rates low. If inflation starts to rise because of higher food prices, this means savings accounts will be caught in a squeeze between low rates and high inflation.

While new headlines will soon bury this rain forecast and earnings setback, the key to understanding those new events may too lie in the stories that surround them.

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How long will the inflation holiday last?

July 24, 2012

| MoneyRates.com Senior Financial Analyst, CFA

Something happened in the second quarter of 2012 that hadn't happened in two years: Savings accounts actually made money.

More specifically, this was the first time since the second quarter of 2010 that inflation dropped below the rate of interest on savings accounts. A small victory, perhaps, but depositors who've seen their savings accounts steadily eroded by inflation will take any respite they can get.

This only happened because price increases took a break during the last quarter. The question is, how long will this inflation holiday last?

A low threshold for pain

According to the FDIC, savings account interest rates now average just 0.09 percent. This gives savings accounts a very low threshold for pain as far as inflation is concerned. Any inflation in excess of 0.09 percent a year will cause savings accounts to lose ground to inflation. To put that in perspective, inflation generally exceeds 0.09 percent in a normal month, let alone a full year.

In recent years, the effect of inflation on artificially low interest rates has been devastating. MoneyRates.com calculated earlier this year that U.S. bank depositors have lost more than $500 billion in purchasing power over the past three years because interest rates have been below inflation during most of that period.

The second quarter of 2012 was different not because deposit rates suddenly recovered, but because inflation took a step back. According to the Bureau of Labor Statistics, the Consumer Price Index actually declined by 0.21 percent during the quarter, on a seasonally-adjusted basis. This was the first quarterly decline in consumer prices since the second quarter of 2010, which is why that was the last time that savings accounts came out ahead of inflation.

Soothing oil, summer heat

This inflation relief comes from an unlikely source. Energy prices declined in each of the past three months, largely because of a sustained decline in oil prices. The energy component of the Consumer Price Index is now down by 3.9 percent over the past year.

In theory, the retreat in oil prices could not have come at a better time. Earlier in the year, the concern was that rising oil prices would act as a drag on the U.S. economy. Conversely, falling oil prices could have a stimulative effect, but it doesn't look like it's going to work out that way.

For one thing, oil prices are falling in part because of concerns over slowing economic growth globally, especially in Europe. That could be an even more pervasive drag on U.S. growth than inflation.

For another thing, inflation may have taken a holiday in the second quarter, but don't expect it to be done for the year. A brutally hot and dry summer throughout much of the U.S. has caused widespread drought conditions. Ruined crops are likely to lead to higher grain prices, and in turn higher meat and dairy prices.

In short, scorching weather conditions are threatening to heat up price increases again, which could make the inflation holiday a short-lived phenomenon.

Posted in: Savings Accounts

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2012: Half-full or half-empty?

July 11, 2012

| MoneyRates.com Senior Financial Analyst, CFA

It wasn't a recession, but it sure didn't feel like a recovery. So what exactly should one make of the first half of 2012?

Lately, there seems to have been a great deal of bad news, but there were also some positive signs mixed in during the first half of this year. The following recaps the often contradictory course of economic events over the past six months. Decide for yourself whether these events make the glass look half-full or half-empty.

The empty half of the glass

  1. The European soap opera. Greece, Spain, Italy -- each with a different set of problems, but each caught up in a dangerous mix of a slow economy and fiscal insolvency. The way troubled nations lined up like dominoes, one can't help but wonder which nation will be next.
  2. U.S. growth slows. After reaching an encouraging 3.0 percent growth rate at the end of last year, the U.S. economy grew at a real annual rate of just 1.9 percent in the first quarter of 2012. Momentum matters greatly in economics, and the U.S. just can't seem to find any.
  3. Employment drops off. The year started with a couple of months of decent employment growth, but then new jobs just seemed to evaporate. Job growth is the best hope for putting some fresh muscle behind the economic recovery.
  4. The Fed is running out of options. The Fed recently announced it was prolonging what has become known as "Operation Twist," its effort to bring long-term interest rates down. So far, this tactic has only worked to a degree -- it has helped make long rates extremely low, but it doesn't seem to have stimulated the economy. Why doesn't the Fed try something else? Having done everything it can to bring down interest rates over the past three years, the Fed seems to be running out of ideas.

The full half of the glass

  1. A crisis may focus European negotiations. Europe's leaders face tough choices politically. Debtor nations need to follow fiscally responsible policies that aren't popular with their people. Rich nations, like Germany, have to risk some of their wealth and security to bail struggling nations out. It seems only a crisis will bring Europe's leaders and their people to agree on the necessity of compromise.
  2. Inflation eases. Year-over-year inflation had fallen to 1.7 percent by the end of May -- nearly 2 percent lower than a year earlier.
  3. Unemployment is down. Even though job growth is slowing, there has been just enough of it to lower the unemployment rate. Through the end of May, it had dropped from 8.5 percent to 8.2 percent since year end.
  4. The Fed was forced to respond. Stimulus junkies actually took heart from the weak economic news, expecting it would spur the Fed to further action. Ultimately, though, this bad-news-is-good-news philosophy doesn't help the economy.

You may detect that some notes of pessimism creep into even the optimistic side of this argument. The glass may be half-full, but the water isn't especially clear.

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