Uncertainty Around The US Economy


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What's going on?

The good news: data on Friday showed that the US economy grew faster in the first quarter than initially reported. The bad news: another piece of data helped dampen expectations for growth this quarter.

What does this mean?

The estimate of first quarter growth was revised up from 0.7% to 1.2%, which is modestly encouraging although it’s still much weaker than the average growth rate of the past few years. Part of the issue is that there is likely a problem with the collection of the data: for years, first quarter growth has been underestimated.

So the question is whether economic growth is weakening or not. Some recent indicators, including a weaker-than-expected reading on Friday for “durable goods” orders (big things like fridges and lawn mowers), suggest that growth is weakening and will not bounce back strongly in the second quarter, as it has in previous years.

Why should I care?

For markets: The US Federal Reserve (“the Fed”) looks set to increase interest rates anyway.

So far, the Fed has said that it thinks weak first-quarter growth is “transitory”, meaning that it expects a rebound to occur. This is important because the Fed is unlikely to increase interest rates if it felt the economy was slowing down materially (remember, higher interest rates create somewhat of a headwind for the economy). Partly because the Fed says it views the economy as doing fine, most investors expect the Fed to raise its target interest rate at its meeting in two weeks time (and markets are already reflecting this).

The bigger picture: It’s usually better to look at a holistic picture of the economy.

It’s the nature of markets to react to short-term news and often to over- or underreact by doing so. For longer-term investors, it’s usually more instructive to step back a bit. On the whole, economic data so far this year suggests that economic growth isn’t quite as strong as it was late last year, but it’s too early to say that it’s fallen significantly below the average of recent years.

Originally posted as part of the Finimize daily email.

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