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Latest GDP Revision Further Clouds The Economy

It's worse than they thought.

Late September brought the third Bureau of Economic Analysis (BEA) revision to its measure of U.S. Gross Domestic Product (GDP). The BEA now estimates that real GDP grew at just a 1.3 percent annual rate in the second quarter of this year, down from the 1.7 percent previously estimated. This emphatic signal of slow growth means a longer road ahead before rates on savings accounts and other deposits can begin to recover.

The GDP estimate

One unusual thing about this latest revision to the GDP estimate: Third revisions aren't usually that big. The BEA routinely issues three estimates of each quarter's GDP, with each estimate coming about a month apart. As one might expect, the first estimate is usually furthest off the mark, but then subsequent estimates are more accurate.

This time around, though, the revision from 1.7 percent to 1.3 percent is unusually large. Being a downward revision, it raises the question of whether even the experts are surprised by the considerable number of negative factors working against the economy right now.

Clouds of uncertainty

In the last three quarters, real GDP has slowed from 4.1 percent to 2.0 percent to 1.3 percent. In accounting for the slowdown in growth, the BEA noted decelerations in personal consumption, housing and business investment. In other words, people aren't buying consumer goods or spending on their homes. Meanwhile businesses aren't expanding or otherwise investing in the future. Take those elements out of the economy, and there isn't much left to drive growth.

Normally, an economic slowdown can be attributed to pessimism, but in this case it may be more uncertainty than actual pessimism. Clouds of uncertainty seem to be everywhere:
  1. The European crisis still threatens the euro zone.
  2. Unrest in the Middle East, from popular uprisings to the confrontation between Israel and Iran, threaten the world's oil supply.
  3. A closely contested presidential race in the U.S. could bring a sharp change in policy direction.
  4. The "fiscal cliff" planned as a draconian solution to the U.S. deficit problem could snuff out any remaining signs of economic growth.

Neither consumers nor business executives want to spend when they are so uncertain about what next year will bring.

Impact on savings account rates

The good news is that even a slowing economy is unlikely to drive savings account rates much lower. The bad news, of course, is that this is simply because those rates don't have much lower to go. Among deposit accounts, the real impact might show up in long-term CD rates. These have remained higher than savings and money market rates, but as the expectation grows that the low interest rate environment might stick around for the next few years, the gap between long and short-term deposit rates should continue to narrow.

In other words, until it's possible to see past those clouds of uncertainty, it is difficult to foresee a time when bank rates may start to recover.

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