A new chapter for the economy?
November 15, 2013
It seemed as though the narrative for 2013's economy had already been written: Signs of promise in the first half of the year were choked off by fiscal dysfunction in Washington. Last week though, two pieces of economic news suggested there might still be time for another chapter to the story in 2013 -- a chapter that reads less like it was written by Stephen King.
Notes for cautious optimism
Last week, the Bureau of Economic Analysis announced that Gross Domestic Product grew at a real annual rate of 2.8 percent in the third quarter. That's a somewhat middling pace, but it represents the third consecutive quarterly improvement in GDP. The economy has had such a chronic problem with sustaining momentum that the last time GDP improved for three consecutive quarters was in 2003.
Also last week, the Bureau of Labor Statistics announced the creation of 204,000 new jobs in October. That beats the average for the prior 12 months, and means that job creation has now topped 200,000 jobs in two out of the last three months.
Any optimism about these figures should be tempered by the fact that they are still more like isolated data points than part of a sustained trend. However, isolated or not, these data points are surprisingly positive.
What comes next
A big concern for the economy has been what will happen when the next showdowns on the budget and the debt ceiling occur, which will happen in early 2014. That still threatens to be disruptive, but in light of recent economic news, one factor may take on even more importance than usual: holiday shopping.
Holiday shopping is always important economically, as it is central to the profitability of retailers. This year though, the special significance is that it will take place in the shadow of those looming fiscal showdowns. Recent GDP and employment numbers suggest that businesses and consumers might just be showing enough strength to shake off the efforts of politicians to disrupt the economy. An especially strong holiday shopping season might confirm that notion -- especially if it is backed up by continued strength in the employment numbers. These will be the key stories to watch as the rest of 2013 plays out.
Impact on interest rates
If the economy really is gaining momentum, expect interest rates on savings accounts and mortgages to follow the same drill they followed earlier this year. Mortgage rates should rise first, as lenders act to protect their long-term revenue streams. Savings accounts and other deposits will follow more cautiously, once bankers are convinced it is worthwhile to pay more to attract deposits.
That leaves 2013's story ending with something of a cliff-hanger. Current mortgage rates are already higher than they began the year, but savings account rates haven't budged. Will the economic momentum last long enough for savings accounts to benefit? That chapter won't be written until 2014.