As the U.S. consumer goes, so goes bank certificate of deposit rates. That very well could be the case, and it also could be very good news for investors looking for more bang for their buck in the sluggish CD market.
The evidence comes from the U.S. Commerce Department, which reported that U.S. consumer spending hit a five-month high (at 0.6%). The Commerce Department also reports that average incomes rose for workers in March — that’s the first gain for incomes in 2010. Equally telling, the average U.S. savings rate fell to 2.7%, signaling that consumers are dipping into savings to spend money — a sign that they are growing increasingly confident about the U.S. economy.
The hope is that history repeats itself, and consumer spending lifts the U.S. out of its three-year-long ditch. When consumers spend, economists point out, employers hire more staff to meet heightened demand for their goods and services.
Economists routinely peg household spending as comprising 70% of the U.S. economy. “Consumers are resilient and they’re going to do what they’ve continued to do over many business cycles,” Ward McCarthy, chief financial economist at New York City-based Jefferies & Co. told Bloomberg News yesterday. “As soon as they have the means, they will spend it. Consumer spending will support economic activity.”
With consumer spending on the rise, the Federal Reserve will no doubt keep a sharp eye on potentially rising inflation (as spending rises, the prices of goods and services rise, too). There’s a school of thought out there in economic papers and on blogs that if the inflation rate rose to 2.5%, then the Federal Reserve would feel compelled to step in and hike interest rates.
Another factor impacting bank CD rates in a positive way is the stock market. Yesterday, the Dow Jones Industrial Average rose 143 points, its biggest gain since February. Now, one day does not a tsunami make, but there seems to be a general consensus that the economy is improving, which will add further fuel to a rising stock market, and lead return-hungry bank deposit investors to stocks, and cause banks to lift CD rates to stay competitive.