LAKE FOREST, Ill.—Checking balances are becoming a barometer of economic activity, reflecting pressure from other influences such as gas prices, according to one economist who also cautions that checking business could be on the move soon.
“Checking’s barometric influence also registers with fees, such as overdrafts. If gas prices go up, the consumer squirrels away more money in checking, which in turn reduces overdraft revenue for financial institutions,” said Michael Moebs, economist and CEO at Moebs $ervices. “If gas prices go down the consumer can start spending some of the checking dollars, which increases overdrafts.”
Today’s consumer has stashed $1,704 billion in interest-bearing and non-interest demand deposit accounts (DDA) according to the latest Federal Reserve reports.
“That’s almost 200% more than the $600 billion held in DDA accounts prior to the Great Recession,” said Moebs. “Balances are being held in DDAs because the consumer has nowhere to put cash and earn a reasonable level of interest.”
Since the start of the Great Recession in 2008, DDA balances grew from about $600 billion to a high of $1.731 trillion in the first quarter of 2015.
“Likewise, average checking balances grew from an average of about $2,000 to a high of $5,616 in the first quarter of 2015, and are now $5,475. These are historic highs since the Fed started tracking these numbers more than 60 years ago,” Moebs said.
Since the first quarter of 2015 these numbers have fallen for two quarters in a row. Checking Money Stock is down 1.62%, and average checking balances are down 2.51%. This signals consumers are starting to use the stockpile of money they have in checking, explained Moebs.
“These changes have far reaching implications to the economy as well as to overdrafts and other services at financial institutions,” he said.
“Lower gas prices. Lower checking balances. More OD need,” continued Moebs. “According to the Petroleum Institute the average American uses on average 34 gallons of gasoline a month. The price of gasoline has fallen about $1 in the past year. With less being paid out of the household budget for gas, more can be used for other purchases. This foreshadows a meaningful change in consumer behavior, one that astute financial institutions are taking note of. Often depositories do not take into account the financial behavior of customers and members until it’s too late.”
If consumers make the assumption that lower gasoline prices will last, they will start buying other important items, said Moebs.
“When purchase behavior increases as the reduction in average checking balances indicates, then OD need increases. Since consumer financial behavior dominates over 70% of the economy, this change in spending behavior will be significant,” Moebs explained.
Financial institutions need to assess both the risks and opportunities, advised Moebs.
“Is the movement of money within the checking account or could the entire checking account move? Checking is in a transition ranging from mobile use to many more electronic transactions,” said Moebs. “This move could affect only balances as we enter into this new phase of checking, but what are the implications for overdrafts, and even the checking account leaving the financial institution?”