US Economy: Out of the Rut?

Most traders are probably sitting on the edge of their seats in anticipation for the release of the US advanced GDP report on Thursday. But before we get down to the nitty-gritty, you might be wondering “Why all the fuss about the US GDP?”

Well, since the GDP measures the total market value of goods and services produced in an economy, it is considered an indicator of a country’s overall economic activity. This indicator is also used to gauge whether the country has fallen into a recession or not. Two or more consecutive quarters of negative GDP qualifies for a technical recession – which is the current predicament of the US economy.

The US economy has posted negative economic growth for the past four quarters, with a tremendous 6.1% contraction in the first quarter of 2009. This time around, analysts are optimistic that the US will finally climb out of the rut and record 3.1% GDP growth. If the actual figure meets the consensus, it would mark its strongest increase in almost two years, indicating that an economic recovery is now underway.

But don’t pop the champagne just yet. Let’s get our gloves on, dig a little deeper, and check out whether the underlying figures support a 3.1% GDP growth…

Lately, we’ve been seeing signs from different sectors of the economy suggesting that things have indeed improved. Business confidence has improved, with both the manufacturing and service PMI reports now hovering above 50.0, indicating that businesses are expanding.

The housing industry also appears to have picked up as existing home sales rose in the past few months. The current annualized rate of existing home sales now stands at 5.57 million this September, after it landed at 4.89 million in July. In addition, new home sales have also picked up, with the annualized figure increasing from 384,000 in June to 429,000 in August.

Most importantly of all, consumer spending, which composes 70% of the county’s GDP, has perked up. If you were able to read my write-up on the “Cash for Clunkers” program, you would’ve seen that core retail sales picked up this past month by 0.5% even when retail sales dropped. This means that while consumers aren’t spending as much on big ticket items like cars, they are still spending on other basic goods and services.

Now that the manufacturing, service, and housing industries all show signs of improvement and consumers are actually opening their wallets a little more, could it be farfetched to think that the US economy actually grew during the 3rd quarter? Or was this expansion merely a result of the massive stimulus being injected by the US government? With government stimulus coming to an end soon, could we be in for some disappointing news next quarter?

It will be interesting to see how the US fares in the fourth quarter without the help of government stimulus programs. The “Cash for Clunkers” program, which gave buyers rebates if they trade in their old vehicles for new ones, definitely lifted consumption as evidenced by the recent retail sales figures. In August, headline sales rose by 2.2%. When the program ended last August 24, the account posted a 1.5% decline.

Another stimulus program worth noting is the $8,000 subsidy for first-time home buyers. The program’s objective was to boost the market for first-time home buyers, which accounted for about 33% of all home re-sales in May. Demand for new home sales indeed picked up, as I mentioned earlier. Unfortunately, this program will expire by December. As realtors anticipate the program’s deadline, the number of building permits issued already fell from 580,000 to 570,000 in September while housing starts stayed flat at 590,000.

Even with a sizeable GDP growth in the third quarter, it is unlikely that the US economy could sustain this expansion for the remaining months of the year without the stimulus programs. But before we get ahead of ourselves, let’s turn our attention back to the upcoming GDP report…

Using fundamental analysis as basis, an on-target or a better-than-expected figure would provide some support for the already dying dollar. Remember, the major reasons investors used to diversify out of the dollar were the US’s growing budget deficit, huge quantitative easing program, and risk appetite. Given the highly oversold dollar, the optimistic GDP forecast, and low inflation figures, the possibility of investors pouring back to their hard-earned money back to the dollar – albeit small – is definitely there.

However, current trading conditions point otherwise. In these past few weeks… no, months… we have seen how investors use any reason to buy up higher-yielding currencies. More often than not, better-than-expected figures on economic reports have been used as a sign to sell the dollar. It didn’t matter what the figures flashing on the television meant – as long as they were green, they were good enough.

Although there were times that this kind of relationship did not hold, the moments were far too few and hardly convincing. Risk sentiment is King and we have yet to see him truly be dethroned. Come GDP day, if risk sentiment continues to dominate the markets, I will pledge my allegiance to the King and hope to be rewarded with a few gold coins!

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