A winter chill settles over the economy

January 02, 2013

| MoneyRates.com Senior Financial Analyst, CFA

Late last month, the official estimate of economic growth for the fourth quarter was revised upward. Does this signal a strong finish for 2012 -- or simply set the economy up for yet another disappointment?

Unfortunately, new figures on retail sales suggest the latter might be the case. If so, it would mark the third time since the Great Recession that the U.S. economy has revved its engines, only to do little more than spin its wheels.

Economic data remains mixed

On December 20, the U.S. Bureau of Economic Analysis announced that real Gross Domestic Product (GDP) grew at a 3.1 percent rate in the third quarter of 2012. This marks a healthy increase over the previous estimate of 2.7 percent growth, and a considerable increase over the initial estimate of 2.0 percent. Since that first estimate was made in late October, this measurement of economic growth has transitioned from mediocre to very promising.

A 3.1 percent growth rate represents a significant improvement over the second quarter's growth rate of 1.3 percent, and would be easily the best quarter for economic growth so far in 2012. However, in recent years the economy has shown flashes of growth before without being able to follow through. The fourth quarters of both 2009 and 2011 had GDP growth rates in excess of 4 percent, only to see the next quarter's growth slow by about half.

In order to really put a dent in unemployment, economic growth needs to be sustained over a period of several quarters. Unfortunately, the U.S. economy hasn't been able to string together back-to-back quarters of 3 percent or better growth since 2007.

A new snapshot of retail spending suggests that the end of 2012 won't be any different. The MasterCard Advisors SpendingPulse estimate of holiday spending found that buying activity over the two months preceding Christmas was up only 0.7 percent over the prior year. This was the slowest growth rate for holiday spending since 2008, and represents a big disappointment against analyst estimates of 3-4 percent for this year.

The shadow of the cliff

Why did the economy suddenly put on the brakes in the fourth quarter? There are a few possible explanations, but a likely culprit seems to be concern over the fiscal cliff. The prospect of take-home pay suddenly dropping might not only have prompted consumers to be more conservative about holiday spending, but it also may have influenced businesses to rein in their expansion and hiring plans.

Outlook for savings accounts

Slow economic growth dampens the outlook for interest rates on savings accounts. These rates are already near zero, and are unlikely to rise unless sustained growth gives banks more incentive to attract deposits.

Based on the latest economic data, bank customers may expect no relief from low interest rates early in 2013. The only way to improve those rates at the moment is to actively shop for better rates, rather than waiting for rates to rise across the board.

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