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GDP shrinkage: Another setback for savings accounts

The economy suffered another setback late last month when the Bureau of Economic Analysis (BEA) released its estimate that the economy shrunk by an annual rate of 1 percent in the first quarter.

This was the BEA's second estimate of first-quarter growth, and the negative turn in real GDP represents a downward revision from a previous estimate of a 0.1 percent growth rate. The -1 percent growth rate is the economy's worst showing since a -1.3 percent figure in the first quarter of 2011.

While this is not the BEA's last word on first-quarter growth, changes from the second to the third estimate are usually much smaller than changes from the first to second estimate. In other words, it looks like the U.S. is likely stuck with a negative growth rate for the first quarter of 2014.

Negative growth, negative interest rates?

A weak economy often causes interest rates to fall. However, with average rates on savings accounts, money market accounts and short-term CDs all below 0.10 percent already, do they really have anywhere to fall? Could they actually drop into negative territory?

In theory, this is possible. Since banks are not particularly hungry for deposits right now, they could decide to charge interest in return for providing record keeping, custody of deposits and FDIC insurance. That effectively would be a negative interest rate. More likely, banks could start charging fees on smaller deposits that would exceed any interest those deposits could earn. Again, this would amount to negative interest.

In real terms, interest rates are already negative. With savings accounts, money market accounts and most CDs earning considerably less than the current 2 percent inflation rate, most of the money on deposit today is shrinking rather than growing in value.

Is the worst in the rear-view mirror?

The GDP announcement is certainly bad news, but at this point the first quarter is a couple months back in the rear-view mirror.

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