What's going on?
The US economy’s growth in the first quarter of the year looked like a Cinderella story: data on Friday showed that it far surpassed expectations. But investors didn’t turn up to the ball…
What does this mean?
Last quarter, the US economy grew 3.2% larger than the same time last year – economists had forecast just 2% growth. It was a turbulent time for America, beginning with the government shutdown – at one point analysts thought the economy wouldn’t grow at all. The US reported a buildup of inventories, partly as foreign demand slowed while the country negotiated a trade agreement with China. And, thanks to fewer imports than a year ago, the US also reported an improved “trade balance”.
On the surface, better-than-expected economic growth suggests a strong America. But beneath the water, things weren’t so strong: consumer spending slowed – including on things like autos. And the growth of sales to private domestic buyers – which effectively tracks real American demand – fell to its slowest since 2013 (tweet this).
Why should I care?
For markets: Holding on for a wild ride.
Some investors are skeptical of the stock market’s rise because it’s been predominantly driven by companies buying back their own shares, as opposed to demand from unrelated investors. But the rise has also been spurred on recently by the US Federal Reserve’s decision to stop increasing interest rates, which makes stocks more attractive than bonds (whose potential returns will remain low). Investors may be ignoring the Fed’s veiled warning that there are rising risks of weak economic growth on the horizon. Cynics, meanwhile, may feel somewhat vindicated.
The bigger picture: A trade war resolution can help give products a forever home.
Inventory levels in the US probably won’t keep rising unless demand for products shoots up. Potential triggers for that might be a resolution to the ongoing US-China trade talks and America avoiding an escalation of a brewing trade war with Europe, thereby lowering cross-border buying friction.