US Growth Disappoints, Dollar Pays Price

The US economy essentially stagnated in Q1, with the economy expanding 0.2% at an annualized rate.  The Bloomberg consensus was for a 1% expansion, but we warned of downside risks.  

The dollar, already under pressure, fell further.  The euro has took out the $1.1050 level and sterling has moved above $1.54.  The dollar failed to sustain gains above JPY119.00.  However, with debt market shrugged it off and the dollar stabilized at lower levels. 

It was a poor quarter across the board.  Consumption, which jumped 4.4% in Q4 14, slowed to 1.9%, which was slightly above expectations.  Investment fell 2.5%.  It is the biggest decline since the end of 2009.  It appears that no other sector has managed to pick up the slack created by the investment cuts in the energy sector.  Investment in oil and mining collapsed at a nearly 49% annualized pace.  

Government spending did not help.  State and local governments cut spending by 1.5% at an annualized pace.  Spending by the Federal government rose at a 0.3% pace.  Net exports were a drag, subtracting 1.25% off GDP, the largest in a year.  The trade deficit widened to $522 bln from $470 bln in Q4 14. Price pressures remained modest.  The core PCE deflator rose 0.9%, the smallest rise in five years.   

We would make three points.  First, the weakness in Q1 has been recognized by officials.  The first few months of the year have been notoriously weak.   It has not be reflective of the economic performance during rest of the year.  Second, the Federal Reserve has to be forward looking in setting policy, especially given the lag of monetary policy.  Third, ideas that the economy is recovering needs so data to support the view.  We look for another strong auto sales figure and anticipate that the economy created more than 200k jobs in April.