Personal Finance Blog By MoneyRates - December 2012

Inflation gives savings accounts a break -- for now

December 20, 2012

| MoneyRates.com Senior Financial Analyst, CFA

Consumer prices generally declined during the month of November, giving the purchasing power of U.S. savings accounts a rare boost. This was an encouraging development, but it's not likely to be a long-term solution for getting more value from savings accounts.

Last Friday, the Bureau of Labor Statistics announced that the Consumer Price Index (CPI) declined by 0.3 percent during November. This episode of deflation represents a reversal of a trend from just a few months ago, when inflation seemed to be getting out of hand. However, some additional details from the CPI report suggest that you should not expect falling prices to become the norm.

Getting gasoline prices under control

Gasoline prices have been volatile in recent years, and have tended to lead the way for inflation in general. In this case, the overall decline in prices was largely due to gasoline prices getting back under control after a late summer flare-up.

The CPI is composed of prices on a range of goods and services intended to represent a typical consumer's buying experiences. One of these components is gasoline, and this part of CPI declined by 7.4 percent in November. However, that decline is just the flip-side of the sharp rise in gas prices that pushed inflation up by 0.6 percent a month in August and September.

This is fairly typical of the course that inflation tends to chart. Month-to-month figures can be quite erratic, and an unusual increase one month is often cancelled out by a decline a month or two later. For example, over the past 12 months prices have neither soared nor declined, but instead have risen at by a moderate 1.8 percent.

A brief respite for savings accounts

According to the FDIC, the average interest rate for savings accounts these days is just 0.07 percent. Compared to that rate of interest, even 1.8 percent of inflation is a problem. It means that the purchasing power of savings accounts has declined over the past year, which has been the trend generally since the Great Recession.

Therefore, depositors in savings accounts can welcome November's decline in prices as a brief respite from this loss of value, but they should not consider it a long-term solution for two reasons:

  1. Episodes of deflation tend to be short-lived. More often than not, a month or two of deflation is simply a correction of a previous over-increase in prices, as was the case recently with gasoline.
  2. Deflation, when it does take hold, can be indicative of a weak economy. For savings account rates to rise from their current levels, the economy will need to strengthen. An improving economy with moderate inflation would be the best outcome for savings accounts in the long run.

Assuming the government successfully avoids the fiscal cliff, the delicate balance between growth and inflation could become one of the most important economic stories for the U.S. in 2013.

Posted in: Savings Accounts

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Weak job growth darkens outlook for savers

December 14, 2012

| MoneyRates.com Senior Financial Analyst, CFA

Last Friday's report on November employment gave a mixed message on the state of the economy. That seems appropriate given the way 2012 has been, but it clouds the outlook for savings accounts and other deposits in 2013.

A strengthening economy would be a potential boost for interest rates on savings accounts and money market accounts, which have largely been near zero in 2012. In recent weeks, the economy seemed to be gathering momentum as it headed towards the new year, but this employment report paints a less optimistic picture.

What to make of job growth?

The Bureau of Labor Statistics announced that U.S. employment grew by 146,000 jobs in November. That's a solid if not spectacular number, but disappointing in the context of previous reports, which showed 148,000 new jobs in September and 171,000 in October.

What's worse is that those prior figures were revised downward significantly -- September's from 148,000 to 132,000 and October's from 171,000 to 138,000. That's a total of 49,000 fewer new jobs than previously thought. Subtract those downward revisions from November's figure, and the latest report actually represented an increase in overall employment of less than 100,000 new jobs.

To put this in context, here is a scorecard you can use to evaluate the strength of these monthly employment reports in the current economy:

  • Negative job growth = slipping towards recession
  • Less than 100,000 new jobs = anemic growth
  • Between 100,000 and 200,000 = mildly encouraging
  • Between 200,000 and 300,000 = a clear step in the right direction
  • Over 300,000 new jobs = an economy running full steam ahead

The weakness of the November job report may not square with something you might have heard about that same report, which was that the unemployment rate dropped from 7.9 percent to 7.7 percent. However, that corresponds almost exactly with a 0.2 percent drop in the labor participation rate, meaning that a smaller portion of the population was active in the labor force last month (i.e., either working or actively looking or a job). When people drop out of the labor force, it is often a sign that they are discouraged about the job market.

One other oddity about the recent report was that it reported no material impact from Hurricane Sandy. Given the number of businesses that have been closed by the storm's damage, this may seem difficult to believe. However, the muted impact might be explained by the fact that people who miss some time, but not the entire pay period, due to workplace disruptions are still considered employed. It will be interesting to view the regional and state employment figures, due to be released December 21, for more insights on how the storm may have impacted employment.

For now, November's employment numbers may not look bad on the surface, but they suggest a loss of the momentum the economy had appeared to be gathering. This suddenly makes the economic outlook for 2013 a little less encouraging.

Posted in: Savings Accounts

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Could economic growth withstand a fiscal cliff plunge?

December 7, 2012

| MoneyRates.com Senior Financial Analyst, CFA

Last week's upward revision of the official estimate of GDP growth raises an intriguing question: Could the economy actually survive a fall off the fiscal cliff?

It's a question worth asking since this week's news from Washington has brought more posturing than progress on budget negotiations. Failing a deal, the package of spending cuts and tax increases due to begin on January 1 is thought certain to have a dampening effect on the economy.

GDP revision shows new momentum

Late last week, the Bureau of Economic Analysis issued a revised estimate of economic growth in the third quarter. The new estimate is that real GDP grew at an annual rate of 2.7 percent last quarter.

That 2.7 percent represents a sharp increase from the original estimate of 2.0 percent. It is almost twice the growth rate of the prior quarter, which was 1.3 percent. These healthy improvements create a distinct impression of an economy gaining momentum.

Placed in the context of the fiscal cliff negotiations, the question becomes one of whether that economic momentum is so strong that the economy could sail off that cliff and simply keep going.

Sailing off the fiscal cliff

Surviving the fiscal cliff is not unthinkable. For example, the Bush income tax cuts and the Obama payroll tax cuts were both supposed to be temporary measures -- and neither was necessary for the strong economic growth of the late 1990s. It's also worth remembering that the point of the fiscal cliff is deficit reduction, which remains a necessary goal. After all, debt is ultimately a case of pay-now-or-pay-later. The U.S. will have to settle that debt at some point.

Unfortunately, while the economy may have gained some momentum in recent weeks, it does not yet appear to have the strength to survive the full extent of the fiscal cliff's tax increases and spending cuts. The Economic Policy Institute has estimated the full economic impact of the fiscal cliff as a 3.7 percent drag on GDP. At the recent 2.7 percent growth rate, that would leave the economy next year at -1.0 percent, which means in recession.

In short, keeping the economy moving still requires doing something to smooth out the fiscal cliff, ideally without abandoning the goal of deficit reduction.

Interest rates in the balance

The nature of the solution will go a long way toward determining what kind of year 2013 is for interest rates. Falling off the fiscal cliff and into recession would almost guarantee another year of dismal interest rates for savings accounts, money market accounts, and other deposits. Mortgage and refinance rates would remain low, though in a recession loan approval would be harder to come by.

On the other hand, a fiscal solution that allows the economy to sustain its recent momentum could allow interest rates to turn upward by the end of 2013. In short, borrowers are unlikely to see a better year than 2012, but depositors just might.

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