U.S. GDP and the Fate of the Greenback

Did the U.S. economy step on the gas and accelerate its economic growth for the third quarter? The second quarter GDP report printed a 2.4% increase at first, which was later on revised to show a 1.7% expansion. A faster pace of growth is projected for the succeeding quarter, with a market consensus of a 2.1% increase.

Now this particular GDP report could be a “make or break” situation for the U.S. dollar since the Fed is keeping a close eye on the economy to see whether it needs an extra boost. Let’s take a look at the recent data to see whether the actual GDP could disappoint or not.

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The primary reason behind the giddiness that we’re seeing for the third quarter GDP report is the uptick in consumer spending. If you remember, last Friday the Commerce Department reported that retail sales surged to an annual rate of 7.0% in the past three months with the reading for September higher by 0.1% than the forecast at 0.6%. The figure for August was also revised up to 0.7% from 0.4%.

Ah, it looks like American consumers got more swagger to open their wallets. But you know who else were flaunting their money bags? Businesses! With wholesale inventories showing a 0.8% gain and manufacturing inventories picking up by 0.1%, the optimistic GDP forecast reflects businesses spending their moolah to fill up their shelves.

Then we have the country’s trade balance report. Yeah, the 46.3 billion USD trade deficit that the U.S. economy posted for August doesn’t look good for the GDP at first glance, but digging a little deeper we see that exports rose to their highest level since August 2008 during the month! So it ain’t all bad.

A few economic gurus are saying that consumer spending could’ve been higher if it wasn’t for the 9.6% unemployment rate. Speaking of unemployment, analysts are bracing to see government spending to have had a lesser contribution to growth thanks to the 83,000 jobs that budget-strapped state and local governments shed in September.

Business investment in equipment and software is also anticipated to have had a softer effect on GDP after hustling strongly for three straight quarters.

Many believe that economic activity remained tame in the third quarter, and so we probably won’t get drastic results that will reduce expectations of a second round of quantitative easing.

Still, the timing and severity of the Fed’s stimulus program could vary depending on tomorrow’s GDP figures. Even though the Fed has expressed willingness to stimulate the economy, the house is still divided over timing issues. Some members believe the economy is already begging for stimulus as it is, while others are less pessimistic and want to see worsening conditions before pulling the QE trigger.

Seeing as the dollar has been plummeting in response to weak U.S. economic data, I’m inclined to think that positive results from this report will give the dollar a much-needed lift. Maybe the economy isn’t doing that badly, right?

On the other hand, if growth falls to the weak end of the spectrum, the Fed may be pushed to act sooner rather than later and may consider upsizing its stimulus package. In turn, this could mean that the USD will have to spend more time down in the dumps. But on the bright side, bearish moves will probably be limited as it seems like the markets have already largely priced in a second round of easing.

No matter the results, you can expect a lot of action on the charts when this much-awaited report comes out. As of now, it looks like it could be anyone’s game between the bulls and bears. The question is, who will you be siding with come crunch time?