US Q1 GDP revised sharply downwards
While markets across the world continue to behave as if the Fed is certain to start rolling back its monthly $85 billion bond purchases by the end of the year, the news from the US suggests this may take a while longer than expected. While it is true that both the Standard & Poor’s and the IMF review of the US economy suggested that the Bernanke 6.5% unemployment target wouldn’t be reached for another 10 months or more, the strong US growth estimates made it appear the market-men had read it right. Data suggested the US economy had grown 2.4% in the face of a 4.9% contraction in government expenditure—in other words, private sector consumption and investment had stepped up to take up the slack in government expenditure.
Turns out, based on data out Wednesday, the US economy grew much slower, by just 1.8% in Q1, a number significantly lower than first estimated. The biggest fall was in consumer spending, the growth in which was revised down to 2.6% from 3.4% earlier. Investment by businesses also saw growth numbers being scaled down, from 2.2% in the earlier estimate to a much lower 0.4% now. None of this means the US is not growing, it just means the growth is much weaker than believed earlier and therefore more vulnerable to short-term fluctuations and the impact of, for instance, the sequester will be much greater than earlier estimated—the poor quality of new jobs being created, for instance, puts a natural ceiling to growth in consumption expenditure. In the event, unemployment rates falling to the level the US Fed will start reducing bond purchases will take longer than most market participants expect. While the Fed scare has kept FII flows to India at minus $200 million in the current quarter, some more rationality in the coming weeks may just see a reversal.