The numbers are perplexing, but Fed is confident
While an unusually harsh winter is blamed for the near-collapse in US growth—after three good quarters, Q1 growth was at near stall-speed 0.1%—the numbers are perplexing. If the harsh winter affected investment and exports—the two biggest reasons for the collapse—why didn’t it dent consumer spending? Consumer spending, which accounts for two-thirds of the US GDP, continued to grow at a healthy 3%, on top of Q4’s 3.3%. Though this was buttressed by spending under Obama’s Affordable Care Act kicking in, such high spends were last seen 6-7 quarters ago. In other words, with huge deleveraging of household balance sheets over the last few years, the US consumption story is quite robust.
What is perplexing is the sharp 6.1% contraction in private investment—while residential investments have been contracting for two quarters now, commercial investments fell for the first time in four quarters. Half the fall in private investment—in terms of its contribution to GDP growth—took place due to a reduction in inventories. Once again, the weather could be the culprit, but it may be a good idea to wait for more data. The 7.6% contraction in exports is equally perplexing. This can be explained by a combination of congestion at the ports as well as the slow recovery in Europe and slowing growth in emerging markets. Private payrolls processor ADP, however, pointed to the US economy adding 220,000 private jobs in April—if the official payroll data, out Friday, confirm this trend of rising employment, it would suggest the Q1 data may be faulty. There are, it needs to be kept in mind, large variations in the US data. While the advance estimates for Q3 last year put growth at 2.8%, the final estimates put this at a much higher 4.1%—in Q4, by contrast, the numbers have been revised downwards, from 3.2% to 2.6%. The US Fed, going by its decision to continue to taper bond purchases by another $10 billion yesterday, clearly believes the economy remains in fine fettle and that the latest data is simply the result of freak weather. Let’s hope so.