Is the US slowing or is it just a strong dollar ?

Schwaben S

Schwaben Blog


May 1, 2015


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The US economy stalled in the first quarter with Gross Domestic Product (GDP) increasing at an annual rate of only 0.2%. That was a big drop from last quarter’s 2.2% growth and the weakest growth in last one year. A survey of 86 economists by Bloomberg had a median forecast of economic growth of 1%.   While harsh weather dampened the consumer spending, it was a stronger dollar that further weakened the economic growth. The dollar’s more than 4.5% gain against US’s main trade partners in the first quarter led to in an increase in trade deficit from $471.4 Billion to $522.1 Billion. This subtracted 1.25% points from the first quarter growth. What many economists and analysts have not considered though is that a rise in U$ against other currencies will suppress reported earnings of foreign subsidiaries and hence understate the “real” operating earnings that companies have earned. In other words lower corporate earnings are a result of currency losses rather than lower corporate earnings. Diane Swonk, chief economist at Mesirow Financial in Chicago said, “ The US economy has yet to demonstrate the self-sustaining resilience that the Fed wants to see before raising the interest rates”.  The Fed officials met on Wednesday and noted for the fist time that non-energy imports were keeping inflation below its target of 2%, which indirectly implies the impact of a stronger dollar. The Fed clearly stated its intention to be data-driven while deciding for hiking the interest rates. This will be the first time since 2006, if the Fed decides to raise the interest rates. It means that from now on rates could be hiked in any of the Fed’s meeting. During previous meetings of the Fed, financial commentators and economists interpreted that interest rates could be increased in June or September but with the recent announcement, Fed has cleared the rumours regarding rate hike.

Meanwhile the US job markets showed signs of improvement as the wages for private sector employees increased by 0.7% in the first quarter and were up 2.8% in the last twelve months. This is the biggest gain in more than six years. The Labor department also reported that the number of claims for job less benefits fell to the lowest level since 2000. The number was 262,000 versus a consensus estimate of 290,000, well below the 300,000 mark that economists have been using as a benchmark. While this shows that the US economy is improving well but the slow growth in GDP tells a different story. This confused sentiment has led to an increased volatility in equity markets and fear amongst investors.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch


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