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08:10 2007/04/30
US Q1 GDP disappoints
US: US Q1 GDP disappoints Q1 GDP was really weak. It came out at 1.3%, down from 2.5% in Q4 2006 and below consensus for a 1.8% increase. Only consumption was a real support, up 3.8%, slightly above the 3.5% expected. Business investment in equipment and software was up 2% following a decline in Q4 2006. However, while better than the durable orders report suggested, it remains a disappointing result. Residential investment continued as expected to shrink, down 17%. However, also net exports and inventories were a drag on growth. Given the higher energy prices and the ongoing drag on housing, we expect consumption to weaken and this might result in a still weaker Q2 2007 GDP growth. If this is the case, the Fed will be under pressure to cut rates. The Q1 GDP report showed however a 4% jump in the price deflator and while the more important core PCE deflator was up a more modest 2.2%, the higher inflation spooked the markets.
The final April Michigan consumer sentiment survey showed an improvement in the latter part of April. Indeed, the headline index rose to 87.1 from 85.3 in early April. Despite the improvement during the month, the index was down from 88.4 in March and the lowest since September 2006. Compared to March, the expectation index fell but the current situation index improved a bit. Near term inflation expectations at 3.3% are up from 3% in the previous months and the highest in quite some time.
Q1 Employment Cost index increased by 0.8% Q/Q and 3.5% Y/Y. While the headline figure was a tad below expectations, the yearly growth rate is strong. Also the composition was not very constructive from an inflation angle. Indeed, the wage and salary component jumped 1.1% M//M and 3.6% Y/Y, the highest in years, exceeding expectations and a sign that the tight labour market is creating upward wage pressures. The benefit component was unusual soft at 0.1% M/M and 3.1% Y/Y.
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