GDP report sends chills through the economy

Like one of those unpleasant turns in April weather, the worsening of the economy was in the wind last week. Last Friday's report on Gross Domestic Product (GDP) simply confirmed the chill that has been evident for several weeks now.

The Bureau of Economic Analysis' advance estimate of first-quarter GDP indicated that GDP grew at an annual rate of just 2.2 percent after inflation during the first three months of this year. That would be viewed as fairly anemic growth under any circumstances, but it is especially discouraging after GDP growth rose to 3.0 percent in the fourth quarter of 2011.

Just a few months ago, the general impression was that the economy was gaining momentum. In contrast, this latest GDP report now suggests that the economy is losing steam.

GDP growth slows again

There seemed to be an inevitability to this disappointing GDP report since it followed a series of reports from less comprehensive economic indicators that pointed to a slowing economy. Employment growth -- perhaps the most pivotal factor in this recovery -- slowed sharply in March, as did durable goods orders.

One of the factors cited in the GDP report was a decrease in nonresidential fixed investment. This, along with the slowdown in job growth, suggests that the business sector is becoming more cautious. That is bad news for the economy as a whole, since the business sector has been thought to be in healthier shape than either the consumer or governmental sectors of the economy.

What's next for GDP?

It's not just the disappointing growth rate in the first quarter that is worrying. The fact that GDP growth fell off so sharply raises a concern about what will come next. It should be noted that advance estimates of GDP growth are often significantly off from the final figures, but that simply means that while the news might turn out to be better than initially reported, it could also be worse.

As for what comes next, the April employment report, due out in early May, will provide one of the first meaningful clues. If you want to point to an encouraging sign, there is the fact that oil prices have stabilized over the past two months. Rising oil prices were frequently cited as a potential drag on the economy, so any easing of that problem should help. However, the damage to the economy's momentum may already be done.

The outlook for savings account rates

The good news about savings account interest rates is that they are not likely to get any lower as a result of this slowdown in the economy. The bad news is that this is only because they have already fallen about as far as they can possibly go.

The slowing economy won't make savings account rates any worse, but it could prolong the era of sub-1 percent deposit rates. For one thing, the fall-off in GDP growth will reinforce the Federal Reserve's commitment to low interest rates for at least the next two years. For another thing, weak demand for capital in a slow economy will give banks little incentive to offer higher rates.

In short, the outlook for savings account rates just got a little chillier.

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