Consider Deposits an ‘Economic Ballot Box’

Keeping deposits liquid indicates a lack of consumer confidence.

April 11, 2011

It’s a known fact that consumers “vote with their money” when it comes to their preference for products and services. But are consumers also using financial institution deposits as a ballot box to express their confidence (or lack thereof) in the economy?

The numbers speak for themselves, as can be seen from the latest analysis by Market Rates Insight (pdf).

March 2011 was a record-breaking month for Federal Deposit Insurance Corp. (FDIC)-insured deposits—not so much in terms of the total amount of deposits, but rather the type of accounts that are growing in balances and their proportion to other types of accounts.

As of March, nearly $6 trillion was sitting idle in domestic liquid accounts (i.e., checking, savings, and money markets) earning, on average, less than 0.5% in interest. As a point of reference, the annual inflation rate in February 2011 was 2.1%, nearly five times the average yield on these accounts.

Never before in the history of U.S. banking has such a large amount of money been held in liquid accounts.

Some of the increase in these account balances is attributed to growth in new deposit money. But more importantly, some of the increase is attributed to money that has moved from maturing certificates to checking, savings, and money market accounts (MMA).

Liquid money now makes up a record 75% ($5.9 trillion) of domestic deposit balances in FDIC-insured institutions. In the last three years (March 2009 to March 2011), nearly 13% of total deposits shifted from term accounts, such as certificates, to checking, savings and MMAs.

In March 2009, during the last recession, liquid accounts balances made up only 62.2% of total deposits. By March of 2011, liquid accounts balances, as percentage of total balances, reached the 75% mark.

Why would consumers keep more of their money than ever before in liquid accounts knowing they could earn greater returns in certificates? Lack of economic confidence.

Consumers don’t appear confident enough in the prospects of economic recovery to commit their money to accounts that removes quick and easy access to their money in case of a financial crisis.

Although the various consumer confidence indexes show a relative improvement in the level of consumer confidence since the last recession, the ultimate test is what people do, not what they say.

Both indexes—the Conference Board’s Consumer Confidence Index and the University of Michigan’s Consumer Sentiment Index—are subjective because they use questionnaires to measure how consumers feel about the economy. That’s not the same as an objective measurement of what consumers ultimately do with their money.

All in all, consumers are casting their economic confidence ballot by staying liquid. As long as balances in liquid accounts grows and the proportion of liquid vs. term account balances increase, we know consumers are casting a no-confidence vote in the prospects of economic recovery.

Dr. DAN GELLER is executive vice president of Market Rates Insight, San Anselmo, Calif., where he oversees the company’s research and analytics services.