Savers are giving up $5 billion in annual income as concerns about the dampening recovery and increasing unemployment push the prudent to keep their money in cash and away from investments, new research shows.
Over the past year, consumers moved $542 billion from certificates of deposit to money market deposit accounts, according to Market Rates Insight, a San Anselmo, Calif.-based data provider. Representing about one-fifth of the $2.6 trillion savers have in CDs, the shift from investments that offer a fixed rate of return over a specific time period to near-zero-yielding money market accounts is a reflection of the dour economy and the fear and uncertainty that it breeds, analysts said.
The average CD yielded 1.15 percent in August. The average money market account yielded 0.31 percent, or about a quarter of the average CD, according to the California-based researcher. Applied to $542 billion, the difference in interest over the course of a year equals about $5 billion in lost annual income.
"The current economic uncertainty is causing some savers to make emotional rather than financial-based decisions," said Dan Geller, executive vice president at Market Rates Insight. The firm attributes the "reluctance" of savers to park their money in CDs, even for short periods, to the fact that "consumers are not confident about the prospects of economic recovery any time soon," according to a statement.
A leading index used to gauge consumer confidence dropped to an unexpected low on Tuesday. The Conference Board's index hit 48.5 this month. It was at 62.7 as recently as May.
Geller said consumers are keeping their money in money market funds -- cash, essentially -- because they want to have easily-accessible cash in case they're forced to deal with the unexpected, like a job loss.
"The need to satisfy or alleviate the fear of uncertainty is greater than the need to have a higher rate of return," he said.
Greg McBride, the senior financial analyst for Bankrate.com, said the new research is consistent with what he's seeing in Federal Reserve data. Overall, there's been a consistent decline in CDs and investments with a corresponding increase in savings account balances and other deposit accounts.
"The preference investors have for liquid cash is understandable at a time when unemployment is at 9.6 percent and more than 6 million people have been out of work for longer than six months," McBride said. "Investors are more than willing to give up rate of return now in exchange for safety and flexibility."
In a Wednesday speech in London, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said that "the lack of vitality in the U.S. labor market can only be termed disturbing." He added that he finds the behavior of unemployment -- the lack of new jobs, the number of workers falling out of the labor force -- "deeply troubling."
McBride added that the move was also a reflection of the low interest rate environment. Since the Federal Reserve's primary policy-making body lowered the main interest rate to a range of 0-0.25 percent in December 2008, there's been a steady decline in rates across the board. Savings accounts are yielding next to nothing; mortgage rates are at historic lows; and corporations are issuing debt at record-low rates.
The analyst said investors are loathe to lock in their cash for a substantial period of time in a low-rate investment like a CD. The highest yielding one-year CD is giving investors 1.48 percent interest, Bankrate.com data show. By comparison, the most generous money market account yields 1.35 percent.
"If you're an investor with a one-year CD that's maturing and you're looking -- 'What do I do with that cash now?' -- the yield isn't that much higher than what you'd get in a high-yield savings account," McBride said.
Though it's important to note that savers don't typically search for the highest-yielding accounts, and the average money market account is much, much lower than the most generous of them, the sentiment regarding keeping money in cash form remains: savers and investors are scared of the economic environment, and reluctant to park their money in low-yielding investments for fear of missing future opportunities.
"They have it in cash in event of emergency," McBride said. "Investors are still risk-averse and it's going to be some time before that risk-aversion subsidies. When it does, [that money] can be re-deployed to other investments.
"You don't want to be tied up for 3, 4, 5 years at a very low rate of return," he added.
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Shahien Nasiripour is the business reporter for the Huffington Post. You can send him an e-mail; bookmark his page; subscribe to his RSS feed; follow him on Twitter; friend him on Facebook; become a fan; and/or get e-mail alerts when he reports the latest news. He can be reached at 646-274-2455.