Ask a Trust Officer – State of the Economy

June 26, 2014

DEAR TRUST OFFICER:  Is the economy doing better?  Any chance that my CD rates will go up this year? —STILL WORRIED GRANDMA

DEAR STILL WORRIED: I’m afraid there isn’t much good news to report.  We had thought that the economy grew by an anemic 0.1% in the first quarter, well below expectations.  At the time, some observers thought that figure might be revised upward when more data became available. The data are now in, and the growth rate was revised downward to a loss of 1%.  One more quarter like that and we might be back in a recession.

As a parallel indicator, state tax revenues have been falling in many parts of the country, a total of 0.4% nationwide, the first such contraction since 2009.  California, for example, took in 12.9% less in the first quarter of 2014 than in the similar year-earlier period.  To some extent, this is just a return to normal.  States that tax capital gains saw an unusual revenue bump in late 2012 and early 2013, as wealthy taxpayers sought to lock in their gains before the big tax increases took effect. That phenomenon is over now.  Even though stock prices have continued to rise, the incentive to realize taxable gains has been reduced.

The contrary leading indicator is the stock market itself, which has been powering to new highs this year.  The S&P 500 grew 3% through May, following its 30% run-up last year.

The fact that the economy contracted in the first quarter suggests that the Fed is unlikely to move toward higher interest rates in the near term.  I’m afraid that your CD rates are not likely to improve.

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(June 2014)
© 2014 M.A. Co.  All rights reserved.

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