Where have all the good (economic) times gone?
July 05, 2013
In the words of an old song by The Kinks: Where have all the good times gone?
A month ago, the economy seemed on track for the ideal growth-with-low-inflation goal. Today, both components of that ideal seem to be in jeopardy.
A setback for growth
Every calendar quarter, the Bureau of Economic Analysis (BEA) makes three estimates of U.S. Gross Domestic Product (GDP) for the prior quarter: an advance estimate, a second estimate and a third estimate.
The advance estimate of real GDP for the first quarter was 2.5 percent. That's not a robust rate of growth, but as an improvement over the 0.4 percent rate for the last quarter of 2012, it was a strong move in the right direction.
The second estimate contained only a slight revision, down to 2.4 percent. However, when the third estimate came out last week, real GDP growth for the first quarter was revised all the way down to 1.8 percent. This is still an improvement over the prior quarter, but indicates progress at a much more sluggish rate. Especially given the start-and-stop nature of the recovery since the Great Recession, this tepid growth rate suggests the economy may be stuck in the same rut.
The threat of inflation
Inflation has been nicely under control in recent months. As of the end of May, the Consumer Price Index (CPI) had risen only 1.4 percent for the prior 12 months, and had registered just two monthly increases in the past seven months.
A key to this has been stable energy prices. Time and time again, oil in particular has proven to be a catalyst for broader inflationary trends. As of the end of May, a barrel of oil was selling for $91.97, and hadn't been above $100 in over a year. That has now changed. Oil began rising in June, and then climbed more steeply in early July to cross the $100 mark by the second day of the month.
This trend in oil prices may be too recent to have much of an impact on the CPI numbers for June that will be released in mid-July. But watch for inflation to perk up in the next couple months if oil prices don't start to subside.
The impact on savings accounts
The type of growth-with-low-inflation environment that the U.S. economy achieved in the second half of the 1990s is considered ideal for both businesses and consumers, and it also plays well for savings accounts and other deposits. Stronger growth would eventually push short-term rates to follow long-term rates higher, so CD, savings and money market rates would start to rise. At the same time, keeping a lid on inflation would allow those interest rates to get ahead of rising prices.
The sudden reversal into a state of disappointing growth and threatening inflation probably won't be the last twist in this convoluted economic recovery. For the time being though, it is enough to count as a setback for savings accounts.