It is no secret that a weak economy is largely to blame for today's low interest rates on savings accounts and other deposits. On the whole, things have not gotten any better so far in 2014. However, the most recent employment report suggests that things may be turning around for the economy. While that does not augur an immediate improvement in savings account rates, it does set the stage for rates to move higher eventually -- if the recent employment trend can continue.
Turning the economy around
The economy began 2014 on a sour note. Job growth in both December and January was sub-par, and real GDP growth turned negative in the first quarter, according to the most recent estimate from the Bureau of Labor Statistics (BLS). This raised the possibility that the economy might be slipping back into recession. However, the employment trend more recently suggests that the economy is growing again. On June 6, the BLS released its monthly jobs report for May. While job growth during the month did not represent a dramatic breakthrough, May was the fourth consecutive month in which net job creation exceeded 200,000. That might seem like a modest achievement, but the last time there have been so many months in a row with 200,000 or more new jobs, Bill Clinton was in the White House. This job creation figure is an especially significant economic indicator. For one thing, it is more meaningful than the percentage unemployment rate, because that is affected by how many people are officially looking for work. If job growth stays strong for long enough, the unemployment rate will take care of itself. Also, job creation is not just a sign of economic health and optimism, but it represents new fuel for the economy, in the form of paychecks for all those people going back to work.
Calming the Fed?
With the Federal Reserve's Open Market Committee meeting next week, it will be interesting to see if job growth and other economic data have been strong enough to calm a recent worry of both the Fed and the European Central Bank, which is deflation. For most of recent history, the Fed's concern has been with keeping a lid on inflation. Now, however, they are concerned that it is too low. Deflation is not only a sign of anemic pricing power, but it can also become part of an ugly spiral as consumers defer purchases in hopes that prices will be lower in the future. However, with rates on savings accounts near zero, the last thing depositors want is a campaign to artificially pump up inflation while the economy itself is still sputtering.
Hope for savings accounts?
If higher inflation with a weak economy represents the lose-lose scenario for savings accounts, the win-win would be faster growth with low inflation. The last time the U.S. saw that combination of conditions was in the late 1990s. Perhaps the recent stretch of 1990s-style job growth is a sign that this history can repeat itself.