Forex Trader Top 3: US 1st Quarter GDP, Inflation, and 2nd Quarter Outlook
Mark Whistler is the founder of www.WallStreetRockStar.com and is the author of multiple books on trading. Mark’s newest book, The Swing Trader’s Bible – co-authored with CNBC/Fox News regular guest Matt McCall – will be on shelves in late summer, 2008. In addition, Mark also writes regularly for TraderDaily.com and Investopedia.com.
Sign up for a free trial to Forex Force with Mark Whistler, a twice-daily alert service from professional trader Mark Whistler featuring intraday and swing trading setups. Click here to start your free trial.
1. The Hole in US GDP
The News:
Headlines will tell you GDP grew “faster than expected” in the 1st quarter. Come on guys! Get real.
The Breakdown:
During the 1st quarter of 2008, US GDP clocked in at 0.6%, versus the expected 0.5%. All morning, headlines have been touting the U.S. economy is growing. Here’s the thing though, healthy full year GDP growth for advanced economies is 2.0 to 2.5%.
In 2007, first quarter GDP growth also clocked in at 0.6%, but was able to recover to 3.8% and 4.9% in the second and third quarters, respectively. In the fourth quarter of 08, GDP growth declined to 0.6%, brining the full year average to 2.475%.
But there’s something else happening within the economy – two things actually.
First, the weak U.S. dollar is helping spur higher oil prices and commodity inflation overall, both items that drag on consumer spending and GDP growth. What’s more when inflation rears its head, central banks usually raise interest rates as a curb, which leads us to the second item – the GDP killer and why the FOMC is in a very, very tough position.
After looking at economic numbers all night, something just wasn’t sitting right. Then it showed up. Personal savings within America (from NIPAs) posted negative quarterly results for the first time – EVER, or at least since the Bureau of Economic analysis began keeping records in 1952 in 2005. And the numbers have been steadily getting worse ever since.
The Bottom Line:
The Fed is in trouble. It needs to cut rates again to stimulate liquidity, especially since Americans are growing more and more indebted. On the other hand, holding rates pat would help buoy the U.S. dollar and potentially take some premium off oil. However, given that LIBOR rates are still up significantly since 2006 and early 2007, banking liquidity just isn’t there. When banks are stingy to one another, they’re generally even worse to businesses and consumers who need cash. I’ve been a dollar bull for a while, but there could still be some more downside yet; the fundamental problems within America are deeper than most care to discuss.
Â
2. Producer Prices Show Inflation and Much More
The News:
In March, Producer Prices clocked in at 1.1% over February, due mostly to increases in food and energy prices.
The Breakdown:
Over the past year, producer prices have been on the rise, there’s no doubt about it. Core crude goods prices increased almost 17%, intermediate goods fired up 5.5%, while prices of total finished goods increased 6.9% year over year.
With producer prices increasing, demand for goods is slowing (as seen in first quarter GDP growth of 0.6%). What this means is that should the U.S. economy continue to wobble, while prices remain high, demand will continue to fall off even more, which will eventually contain inflation.
The Bottom Line:
The U.S. economy is in a vicious cycle of liquidity – demand – inflation – curbs – liquidity – demand etc. Only further banking reform and personal responsibility from consumers will save the day.Â
Â
3. Chicago PMI Shows Potential Second Quarter Trouble
The News:
Chicago PMI (a measurement of employment in the Midwest) shoed the employment index within the larger report, declined from 44.6 to 35.3 in April.
The Breakdown:
Contracting housing markets have clearly taken a toll on manufacturing in the United States. While manufacturing itself isn’t the big problem, the simple fact that manufacturers reduced hiring in April over March is.
First quarter GDP come in at 0.6%, and with Chicago PMI showing that the first month in the second quarter isn’t producing any better results, the FOMC will most likely not completely reverse any language regarding interest rates.
Fact is, the economy is walking a very thin line right now, and if second quarter results show anything similar to April Chicago PMI, we will surely be headed for a recession.
The Bottom Line:
The FOMC might surprise markets with a change in language today. Should the FOMC mention that it will hold rates steady, or need to increase in the future, the dollar will rebound even more in the days to come. However, with GDP still in danger territory, halting liquidity – or even alluding to doing such – also runs the risk of sending the U.S. spiraling downward into a recession.