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The yin and yang economy

April 25, 2013

| MoneyRates.com Senior Financial Analyst, CFA

The price of a barrel of oil recently dipped below $90, which on the surface seems like good news for consumers and depositors in savings accounts. However, the context of the slide in oil prices is yet another example of the yin and yang nature of today's U.S. economy.

Just as yin and yang represent the good and the dark sides of life, the decline in oil prices over the past couple weeks has a kind of positive and negative duality. Cheaper oil prices are welcomed by most Americans, but what they say about the strength of the economy is troubling.

The dip in oil prices

Oil has had an up-and-down year so far in 2013. On a few occasions, the price of a barrel of oil has peaked at just over $97, only to slip back. Oil was up to that level again as recently as the first couple days of April, but by April 22 the price had fallen to $88.76, a low point for the year and a drop of about 9 percent.

Nobody who drives a car has to be told why lower oil prices are good news. Even away from the gasoline pump, lower oil prices benefit consumers in general because oil tends to set the tone for inflation in general. In particular, lower inflation -- or even a roll-back in prices -- would be a relief to people with savings accounts and other deposits, who have seen their purchasing power steadily eroded in recent years as bank rates have failed to keep up with inflation.

Broader context

The broader context for the decline in oil prices reveals the dark side of this news: Oil prices tend to fall when the economy is weakening, and economic news lately has been full of signs of weakness.

The latest example was the release of existing home sales figures on April 22. The National Association of Realtors (NAR) announced that completed sales of single-family homes declined by 0.6 percent in March. A recovery in real estate had been one of the economy's few consistent bright spots over the past year, so a cooling off in home sales is reason for pause. While the NAR dismissed the lower sales figure as being due to inventory constraints, the fact that the total inventory and the length of housing supply both increased in March suggests the drop-off may be due to weakening demand.

The bottom line for savings accounts

With the decline in oil prices representing both inflation relief and economic weakness, what's the bottom line for savings accounts?

Depositors might think of falling oil prices as the type of relief that addresses a symptom without curing the disease. In an era of low interest rates, keeping inflation down limits the damage done to the purchasing power of savings accounts. However, the real cure for depositors would be a return of interest rates to a more normal level, and that isn't likely to happen until the economy strengthens.

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