1% Drop in US GDP in Q1 Maybe an Indicator of a Weaker Economy
The following from Ambrose Evans-Pritchard at the UK Telegraph is an interesting view on the recent announcement that the GDP for the US economy declined 1% in Q1 2014. Many are blaming the slowdown on the weather and this probably contributed to the weak economy. However, a number are stating that the weather is not to blame for all the weakness, that the economy itself is not that strong. We will see.
From the UK Telegraph:
The US economy contracted sharply in the first quarter and bond yields have been falling at the fastest rate since the recession scare two years ago, in signs that bond tapering by the Federal Reserve is biting more than anticipated.
The slowdown comes as a key indicator of the US money supply flashes slowdown warnings, though the picture remains murky after extreme weather conditions over the winter.
Output fell at an annual rate of 1pc, led by a 7.5pc fall in business spending following the expiry of tax concessions. The tax rules had brought forward investment in 2012 and 2013, leading to a cliff-edge drop this year.
“We think there is more to this than just weather. Our leading indicators were already weakening late last year,” said Lakshman Achuthan, from the Economic Cycle Research Institute (ECRI).
“We may get a snap-back in the second quarter but I don’t see us reaching escape velocity. The economy is below stall-speed, according to the Fed’s own model,” he said.
Chris Williamson, from Markit, said the GDP investment data are volatile and can be distorted by shifts in the oil and gas industry. He said the US manufacturing and services PMI index rose at the fastest pace for three years in May while unemployment claims have fallen to the lowest since 2007, pointing to a solid recovery. “The acid test of economic resilience will be how the data settle after the second quarter,” he said.
ECRI said the housing recovery has rolled over and is now in a “cyclical downswing”, with the building permits for single-family homes falling to a three-year low. There will be less “fiscal drag” this year as austerity fades but this is more than offset by the drag of excess inventory.
Mr Achuthan said the economy may muddle through, but recoveries have been getting weaker with each cycle for the past 40 years. The US now seems caught in a Japan-style trap, endlessly masking the effect by stealing a little extra growth from the future with artificial stimulus.
Data from the Centre for Financial Stability in New York show that growth of the “Divisia M4” money supply slowed abruptly to 1.6pc in April, down from 6pc in early 2013.
Divisia M4 is a dynamic measure that aims to capture shifting uses of money. It is has been one of the best weather vanes over recent years, signalling economic health a few months ahead.
Professor William Barnett, a former Fed official now at the University of Kansas, said the weak M4 figures are a sign that the US is not recovering properly, leaving the Fed with a grim choice as it tries to wean the economy off emergency policies that are themselves causing havoc. “The Fed faces a 'Catch 22' decision. I am glad I am no longer on the Board's staff,” he said.
The Fed has cut its bond purchases from $85bn to $45bn a month, and is expected to halt quantitative easing altogether by October as it pares back $10bn at each meeting. The taper is clearly chipping away at a key prop of the economy. The stock of narrow M1 money has not grown for four months, and M1 velocity has fallen to an all-time low of 6.3.
John Hathaway, from the Tocqueville Gold Fund, said the Fed may find it cannot extricate itself from QE without aborting the recovery. “The US economy is quite anaemic. There's a good chance that they may have to reverse their course on tapering,” he told CNBC.
US Treasuries have fallen to an 11-month low of 2.41pc, dropping 60 basis points since January in a pattern that would normally signal a slowdown.
Jan Loeys, from JP Morgan, said the strange action in the bond markets is causing a “growing unease among investors that something is not right about the world economy”, but it may merely be the result of very low inflation and therefore benign.
Former Fed chairman Ben Bernanke said recently that long-term yields would never reach 4pc again in his lifetime, portraying a changed world where nothing returns to normal.
The concern is that this recovery may die of old age after five years, even though it has been the weakest expansion since the Second World War, failing to close the output gap or bring the long-term unemployed back into the workforce. The Fed fears it has exhausted its arsenal. “It is too awful to think about what will happen in the next recession, so nobody does,” said Mr Achuthan.