It was a busy week globally, money just getting thrown around willy-nilly… not really, but I’ll try to briefly take us through a week that did see plenty of global activity.
US
GDP for the 1st quarter originally released as .1% was revised this week to -1% annualized. Much of the revision came at the expense of business investment in inventories. Here’s a look at the 2nd quarter and how various elements of GDP should do:
Consumption: This was the one bright spot in 1st quarter GDP and should continue to be strong as consumer sentiment had the weakest showing this week at 81.9, below the 82.5 estimate but up from last month’s reading of 81.8[1]. US Consumer attitudes also rose to 83.0 from 81.7 last month[2]. The important thing to remember is that consumption represents nearly 70% of GDP.
Government spending: This area is not likely to be a major contributor to GDP in coming months as they are currently slashing defense programs[3].
Business Investment: With the lack luster inventory buildup during 1st quarter, 2nd quarter could be a major time for this area to break out as was the case in the 3rd quarter of last year. Beyond inventories, we’ve been looking for business investment in capital goods to finally begin for a while. The cash is absolutely there for companies to start to dispense into growth ventures.
Housing: While housing suffered a lack luster 1st quarter, we should see a much better showing during the 2nd quarter due to the spring thaw, reduced interest rates, and slowing home price appreciation. Not a great showing, but good enough to contribute to growth.
Exports: Exports have been strong, but they should soften over the 2nd quarter. As the EU battles inflation the Euro is falling against the dollar making US Goods expensive in Europe.
Between prospects in business investments, housing, and a spring buy binge from the US consumer, GDP in the 2nd quarter should bounce back nicely. This doesn’t mean that we’ll go from a -1% pace to a 4% pace, but we could see a healthy 3.2% pace. This would put us right in line with how this recovery has performed thus far and target a 2.2% annual growth rate. Strong enough to not be worried about slowing momentum, but soft enough to continue to keep over heating at bay.
Eurozone
Next week is a large week for the EU as June 5th marks the European Central Bank (ECB) meeting. It’s widely expected that they will be introducing a stimulus package to help combat a deflationary cycle that looms ever closer. The package could be implemented in many ways, but the most popular concept seems to be purchasing financial institution fixed income assets. This would flood banks with cash freeing up lending to small business and spur on the economic landscape. There have been many dissenters to the policy, however the alternative to action at this point is not an option.
China
China continued to show commitment to its move to a more consumption based economy recently. In April they introduced a stimulus package aimed at cutting taxes for small companies, increased spending on low income housing, and increased lending for railroad expansion for rural areas. This week they improved lending conditions for small business and rural areas[4]. These adjustments allow cash to flow to consumers rather than past efforts to just build ghost cities to show factory production and employment.
Japan
On April 1st Japan increased their sales tax from 5% to 8%. We are now seeing the impact of that tax hike. Household spending in March was up 7.2% year over year (likely inflated as people took advantage of major purchases just before the hike) and April was -4.6% year over year. This should even out in coming months, but the desired increase to inflation also came through at 3.2%[5]. Granted much of that inflation comes from increased costs as a result of the tax hike…
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Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long term holding strategy is the best strategy in any market environment. Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.