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Prospects daily: U.S. GDP eased to 3.2% in Q1-2010 from 5.6% in Q4-2009

Global Macroeconomics Team's picture

Important developments today:

1. EU, IMF and Greececontinue negotiations towards a fiancial aid package

2. U.S. GDP growth eased to 3.2% in the first quarter of 2010

3. Japanese industrial output rises, but unemployment and deflation worsen



Greece aid negotiations continue…; contagion risks appear to lessen. Aid package negotiations continue apace between Greece and the European Union/IMF. Spreads between 2-year Greek debt and German bunds compressed slightly from highs of 1,532 basis points (bps) on Tuesday to 1,202 on Thursday¯as markets perceived progress in necessary budget adjustments. The measures currently being negotiated include increases in Greece's VAT, freezes in public sector pay and hiring, elimination of public sector bonuses, and a dramatic overhaul of the state's existing (generous) pension system. Signs of stronger commitment from the Greek authorities also sparked a rally in equity markets, with the benchmark ASE-General up by 7% over the past three days.

In spite of ratings downgrades for Spain and Portugal this week, concerns over possible contagion effects are also beginning to subside. CDS spreads on Portuguese, Irish, and Spanish paper have all fallen from highs early this week, and the euro has rallied---gaining about half a percentage point against the dollar to $1.3320---along with improvements in risky assets overall. This opening of a window of opportunity offers EU policymakers an chance to act expeditiously and definitively in order to address lingering fiscal and sovereign debt issues in the Euro-zone and to re-assert calm in the markets.

U.S. GDP growth eased to 3.2% in first quarter of 2010. Today’s Commerce Department release of preliminary data covering GDP for the first 3 months of 2010, highlighted a step-down in overall growth from 5.6% recorded in the final quarter of 2009 to 3.2% (saar). The figures should be regarded as fairly upbeat, however, potentially constituting a movement toward “cruising speed” for the economy, while reflecting shifts in several factors tied to the bounce-back from the “great recession” of 2008-2009 [see chart on].

Growth of U.S. trade slowed dramatically, as foreign demand for capital goods eases, and the need to rebuild inventories on a global basis is nearing a close. U.S. exports dropped from torrid gains of 22.8% in the final quarter of 2009 to 5.8% (saar) in the first of 2010; similarly, import U.S. demand nearly halved from 15.8% to 8.9% in the quarter. The contribution of trade to GDP returned to negative ground (-0.6 points) from a boost of 0.4 points in 2009-Q4.

Inventories, which were drawn down sharply across the globe to serve as a buffer for sales during the recession, have now been almost fully replenished. In the United States, where the cycle was much more pronounced than in other OECD economies, inventories continued to build in the quarter, but at a much slower pace, such that the contribution to growth diminished from a full 3.8 points in the fourth quarter to 1.6 points during the first of 2010.

Consumer spending increased at an improved 3.2% rate during the quarter, contrasted with a 1.6% gain in the previous period—this against a background of severe winter weather across a good portion of the country. Increasingly, household outlays appear to be more sustainable, as job cuts ease, wealth losses from the equity-and housing market crash are partially restored, and activity in both manufacturing and the services sector shows continued signs of accelerating. “It was a very strong quarter for the consumer,” notes Nigel Gault of IHS Global Insight in London, “but the important thing in coming months is seeing employment start to come back to give some income support.”

The 4% pick-up in business investment in the quarter was disappointing (at least for this analyst), as increasingly favorable fundamentals—demand, profits, borrowing costs—would suggest stronger capital spending. Residential investment (homebuilding) dropped once more, tied in large measure to the inclement weather conditions around the country.

In Japan…unemployment unexpectedly climbed up in March to 5% of the labor force, the first increase in the unemployment rate in five months, underscoring the uneven economic recovery in the country. The new unemployment rate, up from 4.9% in the first two months of the year, translates into 3.5 million unemployed during the year. In contrast, the ratio of job offers to applicants increased by 0.02 to 0.49, improving for a third month in a sign that employment conditions are indeed recovering.

In a separate report from the Ministry of Internal Affairs, consumer prices fell for a 13th straight month, sliding 1.2% from a year ago in March. The core CPI, which excludes food and energy, has been demonstrating a strengthening deflationary trend in the Japanese economy, despite the sustained nature of the recovery in manufacturing. While consumer spending has been rising in the last two months according to positive retail sales data, deflation threatens the recovery as it raises real borrowing costs, and prompts households to put off purchases in the short term.

Japanese industrial production gains once more. Industrial production grew modestly in March by 0.4% (m/m) after registering an unexpected 0.6% decline in the previous month. Output in Japan has increased in 12 of the last 13 months; however, the index remains 14% below its reading in January 2008, indicating how far the economy still has to recover before reaching pre-crisis production levels. According to the Ministry of Trade, Economy and Industry (METI) demand for electrical machinery, transport equipment and steel products led total factory output, while shipments abroad increased by 1.6%, indicating that the recovery in Japan’s manufacturing sector is still largely export led. Momentum growth in the industrial recovery (3m/3m, saar) has slowed recently, to 29.6% in March from 34% in the previous month, but points to strong growth in the sector.