Although the US expanded, they still see it sluggish and this is where I beg to differ!! At a time where they're facing the worst housing slump in 26 years and the first decline in final domestic sales in 17 years, the growth rate seen now isn't that bad. Growth in the fourth quarter was 0.6% and the first estimate of the first quarter was the same before inching up to 0.9 percent.
But note dear reader that there is still a final reading where everything will become clearer! According to the Commerce Department, growth in the economy was due to larger exports as the dollar sank, war spending and a small change in inventories and NOT to domestic consumption and spending. In the first estimate, it was believed that business investment and spending was stronger supporting the expansion in the US.
Business investments fell 0.2% on a yearly basis compared to the first estimate showing a 2.5% drop. Investments in equipment and software fell 0.9% while investments in structures rose 1.1%. As a result, business investment negatively impacted growth.
Concerning residential investments, it dropped at an annual rate of 25.5% marking the fastest drop since 1981 as investments in homes declined for the ninth consecutive quarters taking away 1.2 percentage points from the final growth
Incomes rose at a faster pace than spending pushing personal savings rate up to 0.6% in the first quarter from the previous 0.2 percent rise in the fourth quarter. As a result, final domestic sales fell 0.1% marking the first decline since 1991. Real disposable incomes jumped 1.8% in the first quarter from the originally reported 1.4% rise as supervisors' pay, bonus payments among other factors helped incline after tax inflation adjusted incomes to rise 0.9% in the fourth quarter rather than 0.1%.
So technically speaking, with more money in consumers hands you'd think they'd spend! However who would spend in an economy that they see no hope in or at least not for the time being? This is just for the first quarter, who knows how bad the second quarter spending might be as consumer confidence sunk to hit a 16 year low?!!
Real consumer spending was up 1 percent unchanged from the previous estimate contributing 0.7 percentage points to growth. However, as said before with no confidence, durable good wouldn't be purchased and that is exactly what was seen as spending on durable goods fell 6.2% but not as steep as the fall in non-durables which was reported at 0.3%. Consumers felt more comfortable spending on services which rose 3%.
Exports, which many are thankful for its contribution, added 0.8 percentage points to growth as imports fell 2.6% just a hair more than the originally reported 2.5% drop. As for exports, they slowed to 2.8% in the first quarter rather than the 5.5 percent reported a month ago. Although the trade balance was in favor to exports, yet we see that the declining imports are still a sign to slowing domestic demand.
Government spending inclined 2 percent contributing 0.4 percentage points to growth with 0.3 percentage points coming from the Pentagon alone as they spent 5/6 percent in national defense.
In a different report, the Labor Department released its initial claims for the week ending May 24 showing that 4000 more people filed for first time financial aids taking the total number to 372,000. Unemployment benefits remain at a level not seen in four years. As for the four-week average of initial claims, it fell 2,500 to 370,500. The four week moving average is used to determine the unemployment trends.
With the US releasing what it had for the day, markets didn't have the chance to enjoy the upward revised growth rate. The dollar inched higher at the release of the report yet the negative impact from the jobless claims offset the joy and happiness immersed from the GDP data as the dollar index fell after rising 0.3 percent.
It's a harsh time for the dollar as it still fluctuates up and down with data showing improvement and on the other hand other data showing further deterioration. Data is contradictory and the trend of the dollar is mixed. GDP and durable good orders yesterday were good but it shouldn't be taken for granted as it is still subject to revisions later on.
Personal consumption is one of the Fed's favorite inflation measures and it seems that it is close to the banks target. However, we still shouldn't ignore what was said by Dallas Fed's President Mr. Richard Fisher that there is a possibility of hiking rates only if consumers feel that inflation will continue to rise.
He also highlighted that this was not only of his concern but many other members are concerned about the same thing. This gave the dollar support for the fourth day against majors in the markets such as they Yen but all before the set of fundamentals that was released!
As we see the exterior was upbeat but the interior components of the reading were far from upbeat! Market players seemed a bit optimistic about the dollar but we see now the greenback falling once again in these jittery markets. Will Mr. Paulson be right about the US crawling out of a recession in the second half of this year? Time will only tell yet I personally believe the US still has more to see and that the worse has yet to come.
Confidence and spending go hand in hand and the more people feel 'comforted' the more they will spend. The second quarter doesn't seem bright for the world's largest economy but if there's one thing we learned in these markets is that they are full of surprises whether good or bad! So stay tuned and watch closely whether the dollar will continue its short-term rise or will it continue to get hammered until the worse housing slump ends