First-quarter GDP gets a C grade

By Richard Barrington

Give the U.S. economy a C for the first quarter of 2013, which at least is an improvement over the failing grade it earned in the fourth quarter of 2012.

Last Friday, the Bureau of Economic Analysis (BEA) released its advance estimate for the Gross Domestic Product (GDP) in the first quarter. The BEA found that real GDP grew at a 2.5 percent annual rate during the quarter. In the current environment, the growth rate of GDP can be evaluated as if it were an academic grade: 4.0 would be an A, anything above 3.0 a B, above 2.0 a C, and so on. Hence the C grade for the first quarter -- not terrible, but not particularly exciting either.

Highlights of the GDP release

Perhaps the best thing that can be said about the 2.5 percent growth rate for real GDP is that it is an improvement over the previous quarter's 0.4 percent. A positive highlight of the recent report is that exports posted a 2.9 percent gain in the first quarter, after having declined by 2.8 percent in the previous quarter. A negative highlight is that reduced government spending continues to act as a drag on the economy. The BEA reported that federal government spending declined by 8.4 percent in the first quarter.

The BEA will issue a revised estimate of first quarter GDP growth in about a month's time, at which point the picture of the economy in early 2013 should start to become more clear.

Implications for savings accounts

The rate of economic growth has a great deal to do with the level of interest rates on savings accounts and other deposits. A weak economy indicates there is little demand for capital, which means banks don't have much incentive to offer higher rates to attract deposits.

There is even more of a link between the weak economy and low interest rates in the current situation because of Federal Reserve monetary policy. The Fed has taken a series of measures to drive interest rates lower, and it plans to continue these policies until the unemployment rate dips below 6.5 percent. At 2.5 percent GDP growth, unemployment can be expected to more or less tread water around its current level of 7.6 percent.

It will take not only stronger growth, but also sustained growth to drive unemployment down below the 6.5 percent target. That means there may still be a long wait before interest rates are likely to start rising significantly.

Consumers who are tired of playing the waiting game can try to raise rates sooner by doing some shopping around. There is a wide variance in rates offered by different banks, so while rates are generally low everywhere, bank customers might do better by doing some comparison shopping.

Eventually, a strengthening economy could become the rising tide that floats all boats in terms of pushing bank rates higher. In the meantime though, consumers who want higher rates have to fend for themselves.

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