The truth be­hind con­flict­ing US data

Financial Mirror (Cyprus) - - FRONT PAGE -

The world’s largest econ­omy has been giv­ing off mixed sig­nals over the last week or two. Amer­i­can gross do­mes­tic prod­uct con­tracted in the first quar­ter of 2014 but stocks are trad­ing at all-time highs and the num­ber of un­em­ploy­ment claims is in de­cline. How do we ex­plain these ap­par­ent con­tra­dic­tions and where does the truth re­ally lie?

On Thurs­day, the Com­merce Depart­ment slashed its es­ti­mate of GDP to in­di­cate that the econ­omy shrank in the first quar­ter of 2014 for the first time in three years, at a 1.0% an­nual rate. It was a big­ger drop than an­a­lysts were pre­dict­ing. At first glance this is bad news, but it’s worth delv­ing a lit­tle deeper. The GDP sank as in­ven­to­ries were down and the trade deficit was up. These facts do not re­flect a long-term trend, but show that the tem­po­rary hit to the econ­omy caused by the icy weather and bl­iz­zards at the end of 2013 had a deeper im­pact than econ­o­mists pre­vi­ously an­tic­i­pated.

Com­pa­nies were de­terred from re­stock­ing their in­ven­to­ries and cut back on in­vest­ments, but re­al­ity dic­tates that in­ven­to­ries can only sink so low. Given the im­per­ma­nent cause of the de­cline, an eco­nomic re­bound seems even more likely. Businesses will be look­ing to re­stock and in­vest again to make up for lost rev­enues.

In­deed, pos­i­tive monthly data al­ready points to a turn­around in the sec­ond quar­ter. Jobs data, which pro­vides a strong in­di­ca­tion of over­all eco­nomic health, was also re­leased last Thurs­day. The La­bor Depart­ment broke the news that ap­pli­ca­tions for un­em­ploy­ment ben­e­fits de­clined 27,000 to a near seven-year low at 300,000. Con­sider too that con­sumer spend­ing, a very sig­nif­i­cant con­trib­u­tor to eco­nomic ac­tiv­ity, grew at a rate of 3.1%, and it be­comes clear why in­vestors are bullish.

Thanks to op­ti­mistic traders, and the hes­i­tant re­sponses of bear­ish traders to the pos­i­tive data, the Dow and S&P 500 in­dices fin­ished Fri­day near record highs. The S&P500 gained 3.54 points to 1,923.57, mark­ing its fourth straight month of gains, and the Dow rose 18.43 points to 16,717.17, higher than its pre­vi­ous record close on May 13.

In­vestor sen­ti­ment, of­ten more so than mar­ket data, re­veals what’s hap­pen­ing in the minds of businesses and con­sumers. The Amer­i­can pub­lic seem to be con­fi­dent that their econ­omy is head­ing in the right di­rec­tion. The mar­kets will cer­tainly re­quire con­fir­ma­tion and fur­ther pos­i­tive eco­nomic data if the bullish trends are to con­tinue, but for now at least, it seems that the harsh win­ter and its im­pact on the start of the cal­en­dar year was an un­for­tu­nate blip that has al­ready passed.

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