GDP figure's impact will be limited

Thursday, April 28, 2005

Less than two hours ahead of the release of the mother of all lagging economic indicators, the US GDP figures for the first quarter of 2005, has already left its mark on the markets. With the Dow Future falling 25 points in European trading and similar retreats of the S&P 500 and the Nasdaq futures it seems as if market participants have already focused on the the expected weakening economic trend in the current second quarter. Any positive impact from the figure will be limited therefore.
With first quarter GDP expected to have slowed to nominally 3.5 (previous quarter 3.8) percent, any higher figure could send both stock and bond markets tumbling as this would imply that the FOMC will have good reason to hike the Fed Funds rate on May 3 because of still solid growth on the one hand and the need to keep oil-induced inflation in check. A lower figure though could heal the wounds on the bond market and result in a further flattening of the yield curve. The administration and the Fed cannot afford to further suffocate an ailing economy by burdening it with higher interest rates.
By the way, and don't forget the deflator (i.e. inflation): While a Bloomberg survey results in a consensus number of 2.2 (2.3) percent, I doubt it will be that low, given the huge rise of crude oil and gasoline prices in March.
Beware of a number below expectations though. As consumers have to set aside an ever bigger portion of their wallets contents for 2.20 dollar gasoline (per gallon) as commuting will not stop just becauser of higher pump prices, personal spending may have come down recently. This will pull share markets lower, consumers being the mainstay of the US economy - the other part the defense sector. Capital investments will not have helped to shore up the economy either as yesterdays shocking reversal in durable goods orders has shown.
Never get fooled by core figures (ex energy) in price indices. Oil is not only the stuff you fill into your tank. Oil is plastic, oil is pharmaceuticals, oil is the bitumen road you are travelling on. Oil is a good part of your car parts. Discarding energy from prices is a trick coming out of the magic hats of statisticians who like to please inflation-weary politicians. Or do you still drive a car with a metal dashboard? The well-televised shoulder-rubbing between George W. Bush and Saudi Arabia's Crown Prince Abdullah may have calmed markets on Tuesday, but promises to ratch up Saudi oil production capacity to 12.5 million barrels per day by 2009 from a current upstream rate of 9.5 million rate leaves the Prudent Investor wondering why they do not use their capacities at a higher rate rate already.
In order to underpin the growth rate, jobless claims would have to continue last weeks downward trend. But all surveys see the number growing by around 30,000. The problems are here to stay.


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