U.S. and U.K. GDP slowed very sharply in first quarter of 2015. Latest data confirms the rapid slowdown despite stock markets booming in the UK, U.S. and globally.
This highlights the major disconnect between the real economy and a financial sector intoxicated by easy money.
U.S. GDP figures fell sharply from last quarter when the economy grew at 2.2%. GDP for the first three months of this year fell to 0.2% with some analysts suggesting the real figure should be in negative territory.
The news of a slowing U.S. economy had a negative impact on sentiment in the export dependent Asian economies and indeed on vulnerable EU economies.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.1 percent with South Korean, Australian, Chinese and Hong Kong shares suffering losses as did European indices.
The abysmal U.S. GDP figure was buoyed by the biggest inventory build in history. GDP grew by $6.3 billion in Q1 2015 whereas unsold inventories increased by a phenomenal $121.9 billion.
The impact of poor weather on Q1 activity has been greatly exaggerated. It appears that the strength of the USD was more important as exports dropped more than 7 percent.
Investment rose 2% driven by inventories and residential investment, the latter up 1.3 percent. Non-residential investment, however, dropped 3.4 percent.
If inventories had remained flat U.S. GDP would have come in at below -2 percent. A massive buildup in private sector inventories added 0.74 percent to the GDP number. Companies kept on stockpiling wares, as the consumption of goods only added 0.05 to GDP. The rest went to inventories, and will eventually have to be sold which is a negative for GDP.
Why does the selling of inventories actually subtract from GDP? The product has already been produced, and if it’s sold, it takes away consumption from products which may have been produced instead. Also, it can only be counted once as a positive, not twice.
Cycles in inventory buildup are normal, but just over the last three years, the United States has racked up $1.1 trillion in inventories, or 6.2 percent of GDP. If the other parts of the economy don’t pick up the slack, the destocking process is likely to be very painful indeed.
However the inventories scenario plays out it is clear that the “recovery” which has not been felt by the “man in the street” and the real economy is now once again on the ropes.
The statement of the Fed’s FOMC meeting which concluded yesterday was notable in that the heretofore panglossian narrative has shifted with acknowledgement that the U.S. labour market is not as robust as previously believed.
Reuter’s quote a Rabobank note to it’s clients,
“All in all, the FOMC statement gave a balanced assessment of the current economic slowdown and the Committee remains very much in a data-dependent mode. However, the balanced and cautious tone in the statement is a far cry from the optimism and (over) confidence that we have seen in previous statements.”
It would appear that the much anticipated hike in interest rates will not occur in June.
As Bloomberg reports,
“Traders have set back bets for when U.S. policy makers will raise borrowing costs as officials such as Atlanta Fed President Dennis Lockhart and Fed Bank of Boston President Eric Rosengren said this month policy should stay accommodative.”
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