Thursday, May 1, 2014

US GDP and the Fed

There were no surprises from the FOMC today with a further $10 billion reduction in the pace of asset purchases to $45 billion per month.  The surprise was left to the March quarter GDP result, which despite the inbuilt expectations of weather-related weakness and a negative contribution from inventory investment, came in below expectations.

March quarter GDP came in at an annualised +0.1% rate.  The headline result was negatively impacted by a drop in inventories (expected) and large negative contribution from net exports (unexpected).  Together those factors detracted 1.4 percentage points from the quarterly result.

Exports and imports both fell over the quarter, but exports posted a large 7.6% decline.  The suggestion is that weather related disruptions to transport networks delayed the shipment of some goods – so I’d expect to see a reasonable bounce-back in the second quarter.

Domestic demand came in at a softer than expected 1.5%.  That’s despite consumer spending surprising on the upside at 3.0%.  Housing and business investment were the downside surprises.

March month activity indicators had already shown a degree of recovery from the weather-related weakness in the first two months of the quarter.  That gives us confidence we will see a strong recovery in growth in the second quarter.  I’ve bumped up my Q2 forecast to annualised +3.6%.  But with such a soft start for the year, my calendar year annual average GDP forecast now sits at 2.5%.

There were no surprises in the FOMC’s statement this morning.  There was no change to the Committee’s language regarding the economic or policy outlook.  Asset purchases were trimmed again and remain on track to be done-and-dusted by October.  The critical factor for markets now is the timing of the end of the FOMC’s zero interest rate policy.  We continue to expect that to mid next year with the critical question being just how much spare capacity there is in America…