It used to be that you had to have a stake in the stock market
to have your financial condition hang so heavily on month-to-month
economic developments. Now, even depositors in savings and money
market accounts need to cast a wary eye at the economic news, and
developments on that front were not very encouraging in May.
What has raised the stakes for depositors in recent years is
having savings account interest rates fall persistently below the
rate of inflation. Until savings account rates once again top
inflation, depositors are consistently losing purchasing power.
When will this end? That's the key question, and one that
explains why savings account holders need to follow economic
developments more closely than in the past.
A series of setbacks in May
The following are some examples of the ugliness that dominated
the financial news pages during May:
-
Europe lurches from crisis to crisis.
Every few weeks seems to bring a new crisis point for the euro.
There never seems to be an actual solution to any of these
crises, just some form of stopgap that prolongs the agony until
the next crisis.
-
U.S. economic growth is confirmed to be slowing.
May began on the heels of a GDP estimate that had real economic
growth in the U.S. slowing to 2.2 percent in the first quarter.
The month ended with the news that the economy was even weaker
than previously thought, as this estimate was
revised downward
to 1.9 percent.
-
Stocks take a beating.
The deteriorating economic outlook was reflected in the
performance of the stock market. The S&P 500 actually began
May with a strong first day -- and then proceeded to lose money
in 11 of the next 13 trading days.
-
Facebook flops.
It may be just one stock, but when hype turns so quickly to
disappointment, as it did with the Facebook IPO, it signals a
seriously sour investment environment. This brings back bad
memories of how the dot-com crash in 2000 heralded a bear market
and recession.
-
Bond yields plunge to new depths.
A significant bellwether for interest rates, 10-year Treasury
yields, fell to new lows in May. They spent the early part of
2012 fighting to stay above 2 percent, but by late May they had
plunged to around 1.6 percent.
Depositors are not likely to see substantially higher interest
rates until the economy develops some consistent, positive
momentum. The way the economy got bogged down in May seems to
indicate those
higher savings and CD rates
may still be a long way off.
Was there a bright spot?
There are so many different aspects of the economy that in any
situation there is bound to be a positive development or two, and
in the case of this past May the positive news involved inflation.
In mid-May came the news that the
Consumer Price Index was flat for the month of
April
, largely due to falling energy prices. With oil prices continuing
to fall in May, there's a good chance that inflation will again be
flat, or even turn negative.
A lack of inflation takes some of the sting out of
chronically low interest rates
, but not enough for the "merry month of May" to have lived up to
its name.