Higher oil and food prices, a falling dollar, weakening government spending and now US economic growth has come in on the downside of comfortable.
For many economists the initial reading for first quarter US growth is always the hardest because of the incompleteness of the information, so the 1.8% annual rate reported overnight Thursday is seen as being "transitory" to use the current buzz word.
But if this current rate of growth continues into the year, watch for more talk about ‘stagflation’ and a return to the 1970’s.
Shares rose on the GDP numbers, but US bond yields again fell; the 10-year U.S. Treasury yielding 3.30%.
That’s down from 3.62% a little more than three weeks ago. Bond markets remain cool about the lingering impact of inflation and higher oil prices, while many others in the markets don’t.
The US dollar continued to weaken and the Australian dollar traded over $US1.09 during the night and then pulled back under that level.
But there were plenty of valid reasons why the slowdown happened from the solid 3.1% final reading for the 4th quarter of 2010.
The bad winter weather in January and February, oil above $US100 a barrel (around $US113 overnight) took its toll, cutting consumer spending in half in the quarter, high food prices, higher imports, no growth in income during the quarter for many people, continuing weak consumer confidence and a bigger than expected fall in government spending.
Without a sharp rise in unsold stocks in the quarter- understandable with the impact of higher oil prices and weaker consumer spending – the economy would have grown at less than 1% annual in the quarter.
On the plus side the quarter at least saw some growth in employment, although a nasty spike in US jobless claims back over 400,000 over Easter came as a shock to analysts, while business investment was higher.
The slowdown in the US recovery reported by the commerce department was widely seen as most economists commenting on the news as temporary, a breather before the economy resumes growing strongly later in the year.
At this stage there’s no reason to doubt that analysis, the US Federal Reserve is a believer, as chairman Ben Bernanke showed at his first every press conference on Wednesday.
And if the second reading shows a higher annual rate in a month’s time then this thesis will be seen as gospel by US analysts and investors using the rosiest of rose coloured glasses through which to view any bit of news from the economy, and ignoring the inconvenient or surprise data that is contrary to what the herd believes.
Inflation is rising, the key indicator in the US GDP figures (The personal consumption expenditures index which is favoured by the Fed), rose at an annual rate of 1.5% in the quarter, the fastest rate since 2008 as the impact of higher food and oil and petrol prices drove up prices by 3.8% in the quarter which cut disposable income and slowed growth in consumer spending to an annual rate of 2.7% from the 4% in the 4th quarter of 2010.
Federal government spending sank 7.9%, much faster than the 0.3%, defence spending fell at an annual rate of 11.7%, the biggest since 2005 and overall spending by the Federal Government suffered its biggest drop in 11 years.
That’s a dress rehearsal for what the US faces later in the year and in coming years if agreement can be reached on cutting the budget and deficits.
Local and state government spending fell 3.3%, up from the 2.6% fall in the final quarter of last year as states across the country sack workers, cut outlays and try to balance budgets.
Residential construction fell at a 4.1 percent rate, while the trade deficit subtracted 0.1 percentage point from GDP.
(That doesn’t include the March trade figures and another big import bill boosted by higher oil costs could see the overall growth rate cut further).
A bright spot was spending on equipment and software which rose at an 11.6% annual rate last quarter, up from 7.7% the previous three months.
But much of that is improving existing operations, not expanding them and hiring more staff.
Inventories rose at a $US43.8 billion pace, compared with a $US16.2 billion rate in the fourth quarter of last year.
Excluding this rise in inventories, the economy grew by less than half the headline rate in the quarter, 0.8% annual, the slowest since the third quarter of 2009.
No wonder there’s a lingering fear that the economy could slow to a very weak level of growth while inflation is driven higher by rising oil and food costs.
The first estimate of US economic growth is always the least accurate of the three because it is issued before trade and personal spending data for the final month of the quarter are compiled.
But it is clear there’s a slowing in activity, so the questions are: what’s the impact on inflation, jobs growth and the speed of the recovery later in the year.
In its latest forecasts this week the Fed seemed to be having a bit each way.
And the US central bank sees the economy growing slowly over the next three years as the unemployment rate gradually falls to its long-run level of between 5% and 6%.
"Progress toward a more-normal unemployment rate is likely to be slow," Mr Bernanke said after the Fed’s meeting this week.
The meeting saw the Fed lift its inflation forecast and cut its economic growth view, but that didn’t see the unemployment rate pushed higher.
The Fed now sees the US economy growing between 3.1% and 3.3% this year, down from a prior pro
