Friday, April 28, 2006

First Quarter U.S. Growth Number Strong-But Weakness Lies Ahead

Today, the "advance" estimate of first quarter U.S. growth was released. The 4.8% growth number were somewhat stronger than I thought, although it was marginally lower than the number Wall Street had betted on.

The specifics are fairly solid with no real negatives apart from a rising burden of government spending and a rising trade deficit. The trade deficit is however assumed to fall in March compared to February, which I find unlikely given how trade surpluses in China and most others who have already reported on March trade have risen sharply. This is likely to contribute to a possible downward revision. Somewhat curious is also how the price index for investment goods is assumed to be rising more slowly, which is puzzling given how the prices of industrial commodities have soared in recent months. This too could be a source of downward revision of the real number, although it could also take effect in the second quarter numbers

Even if the numbers are downwardly revised, it will still be very strong, especially considering that America's terms of trade improved slightly for the first time in several years (something which reflected the temporary decline in oil prices late last year).

However, we should keep in mind that this strong number was largely a bounce back from the weak fourth quarter number. Growth for the last two quarters were 3.25% at an annual rate, which is lower than the previous six months.

Moreover, the fact that prices of oil and other imported commodities are soaring will reduce American purchasing power in the months ahead. And with interest rates rising rapidly it will become increasingly difficult for Americans to keep up spending by borrowing ever more. It therefore seems like a sure bet that growth in the quarters ahead will be a lot weaker. Just how much weaker remains to be seen.


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