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Will Strengthening GDP Boost Bank Rates In 2013?





There have been several pieces of positive economic news lately, but perhaps the most significant was the upward revision of estimated third-quarter economic growth. Could this be an early sign that 2013 will bring higher bank rates?

The overarching context is that stronger economic growth is needed to support higher bank rates. It certainly helps that the Bureau of Economic Analysis increased its estimate of third quarter real GDP growth, from a 2.0 percent to a 2.7 percent annual rate. That revised rate is more than twice the second quarter's growth rate of 1.3 percent.

There are several events in the upcoming weeks that may help determine whether this GDP result was just a flash in the pan, or really the start of something good for the US economy:

  1. December 11 and 12, 2012: The Fed meets. The Fed is not likely to overreact to the improvement in third-quarter GDP, so expect it to maintain its current emphasis on low interest rates. Under the circumstances, the most positive outcome of this meeting would be a business-as-usual type of report, with no new cautions about the economy or the financial system.
  2. December 20, 2012: Third estimate of third-quarter GDP. Another upward revision is probably too much to hope for, but simply confirming the latest estimate of the third quarter's improvement would be a positive development.
  3. December 7, 2012 and January 4, 2013: Employment reports. There was some controversy about the positive employment report that came out just before the election, so it will be especially interesting to see if decent job growth can be sustained. The wild card, though, is that these will be the first monthly employment reports impacted by Hurricane Sandy.
  4. January 30, 2013: First estimate of fourth-quarter GDP. If the third-quarter estimate proves to be real, then it's a question of what the economy does next. Will it improve on that 2.7 percent growth rate in the fourth quarter -- or slip back down yet again?
  5. Ongoing: The fiscal cliff negotiations. Both sides may feel compelled to demonstrate some brinkmanship for political purposes, so don't be surprised if these negotiations go right up to the January 1 deadline -- or beyond. Once a deal is announced, watch the reaction of the stock and bond markets to see how credible investors consider the solution to be.

In recovering from the Great Recession, the economy has shown occasional flashes of promise, but has not been able to sustain a healthy rate of growth. Positive outcomes to all of the above milestones -- especially the fiscal cliff negotiations -- could be enough to give the economy some sustainable momentum.

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