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domo

Us Economy Spirals Toward Reccession

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The US economy has alreadys stalled, probably already contracting if US gov could add up (inflation figures) properly. And all this is before Chinese stock market implode, yen unwind, hedge fund unwind, unemployment increase, global real estate bubble crash, private equity collapse and all out TEOTWAWKI.

http://biz.yahoo.com/ap/070531/economy.html?.v=12

The economy nearly stalled in the first quarter with growth slowing to a pace of just 0.6 percent. That was the worst three-month showing in over four years.

The new reading on the gross domestic product, released by the Commerce Department Thursday, showed that economic growth in the January-through-March quarter was much weaker. Government statisticians slashed by more than half their first estimate of a 1.3 percent growth rate for the quarter.

The main culprits for the downgrade: the bloated trade deficit and businesses cutting investment in supplies of the goods they hold in inventories.

For nearly a year, the economy has been enduring a stretch of subpar economic growth due mostly to a sharp housing slump. That in turn has made some businesses act more cautiously in their spending and investing.

The economy's 0.6 percent growth rate in the opening quarter of this year marked a big loss of momentum from the 2.5 percent pace logged in the final quarter of last year.

Federal Reserve Chairman Ben Bernanke doesn't believe the economy will slide into recession this year, nor do Bush administration officials. But ex Fed chief Alan Greenspan has put the odds at one in three.

The first-quarter's performance was the weakest since the final quarter of 2002, when the economy recovering from a recession. At that time, GDP eked out a 0.2 percent growth rate. Economists were predicting the first-quarter performance this year would be downgraded, but not as much as it did. They were calling for a 0.8 percent growth rate pace.

GDP measures the value of all goods and services produced in the United States. It is considered the best measure of the country's economic fitness.

In more encouraging economic news, the Labor Department reported that fewer people signed up for unemployment benefits last week. New filings dropped by 4,000 to 310,000. That suggests the employment climate is weathering well the economy's sluggish spell.

Many economists believe the first quarter will be the low point for this year. They expect growth will improve but still be sluggish.

The National Association for Business Economics predicts the economy will expand at a 2.3 percent pace in the April-to-June quarter.

In the first quarter, there was a larger trade deficit than first thought. That ended up shaving a full percentage point from the GDP. Businesses cut back on inventory investment as they tried to make sure unsold stocks of goods didn't get out of whack with customer demand. That lopped off nearly a percentage point to first quarter GDP.

Those were the biggest factors behind the government slicing its initial GDP estimate released a month ago by as much as it did.

The sour housing market also restrained overall economic activity. Investment in home building was cut by 15.4 percent, on an annualized basis, in the first quarter. However, that wasn't as deep a cut as the 17 percent annualized drop initally estimated. And, it wasn't as severe as the 19.8 percent annualized drop seen in the final quarter of last year.

Even so, there is no doubt that troubled housing market is one of the biggest problems for the economy. Although some businesses tightened the belt in the first quarter, consumers did not. That helped to prevent the economy from stalling out altogether.

Consumers boosted their spending by a 4.4 percent growth rate in the first quarter, the most in a year. Consumer spending accounts for a major chunk of economic activity.

Some economists wonder how much interest consumers will have in continued brisk spending, however, given rising gasoline prices that have topped $3 a gallon in many markets. More money spent filling up the gas tank leaves less to spend on other things.

One of the reasons consumers have stayed so resilient even as the housing market has been stuck in a rut for a year is because the job market has been good.

However, there have been recent signs that the job market -- while still healthy -- is slowing a bit.

The unemployment rate edged up to 4.5 percent in April as payrolls grew by just 88,000, the fewest in more than two years.

An inflation gauge tied to the GDP report and closely watched by the Fed showed that core prices -- excluding food and energy -- rose at a rate of 2.2 percent in the first quarter. That was unchanged from its initial estimate but up from a 1.8 percent pace in the fourth quarter.

The Federal Reserve's key interest rate has been at 5.25 percent for nearly a year. Many economists predict the rate probably will stay right where it is through the rest of this year.

Edited by domo

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The markets expected a revision downwards in the GDP rate to 0.7% or 0.8%, so 0.6% is not a huge shock. In terms of where GDP is going to in quarter 2, there are some indicators that can be taken from today's report which point to expanded growth in quarter 2.

1) While exports disappointed, the big increase in imports in quarter 1 had a negative impact on GDP. With the dollar exchange rate so low right now, it will be a major surprise if trade does not contribute positively to GDP in quarter 2.

2) Inventories are included in the calculation of GDP and the erosion of inventories in quarter 1 had a negative GDP impact. Inventories are a funny one, because if you produce goods but don't sell them (locked away in the warehouse), you are helping GDP. Inventories are likely to be built up again (with the exception of housing) during quarter 2, so this too should have a positive impact on quarter 2 GDP.

3) Government spending contributed negatively to GDP in quarter one, which means public spending actually fell from the final quarter of 2006. If the Government wish to stimulate the economy in the short-term they can simply loosen fiscal policy and increase spending, thus helping to expand the economy in the second quarter. Government spending is generally a positive contributor to GDP, so it will be a major shock were the government to tighten the coffers further in quarter 2.

4) While overall GDP was revised down today, the positive contribution from consumer spending was revised upwards, even against a backdrop of economic uncertainty. This trend will be expected to continue into quarter 2.

5) Residential housing made a significant negative contribution to GDP in quarter 1, but the size of this negative contribution fell from the previous quarter (when GDP grew at 2.5%). So even if the housing sector continues to underperform at the dreadful levels seen in quarter 1, the wider economy is still capable of growing at a 2.5% rate or more.

Apart from the report itself, recent indicators point to employment and output in the manufacturing and non-manufacturing sectors as expanding in April and add to this the appetite for investment seen through the rise in the DOW and it points to a much healthier outlook for this quarter in the US.

Edited by Sebastian

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In 2Q oil prices picked up - what should add to trade deficit.

In 2Q, April, buildings permits, housing starts, completions are probably below March level (probably - as date can be revised).

In 2Q thre shouldbe more significant influence of crash in sub-prime sector

BTW, I would not be suprised if US stocks will jump up today. They hope that FED will cut interest rate ...

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BTW, I would not be suprised if US stocks will jump up today. They hope that FED will cut interest rate ...

That was the excuse for all the previous rises but yesterdays was on the back of the FED saying the US economy was stronger than expected (obviously did not see the revised GDP figures!) and that points towards the rates not being cut.

I have posted several times about the odd behaviour of the DOW but have now admitted defeat in trying to understand it at the moment.

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What complete and utter shite! Your persistent ramping of the US economy leaves very little to the imagination...

Please take a look at the following reputable market calendars and you will see what the expectations were for today's GDP number

http://www.briefing.com/Investor/Public/Ca...micCalendar.htm

http://www.todayfx.com/calendar.html

http://www.bloomberg.com/markets/ecalendar/index.html

And for your information, as I told you before I deal with the facts and I don't predict market or central bank moves on the basis of what I like to see. Take it or leave it. Your take has proven to be premature and wide of the mark, because the US dollar index is now back to the point where it started the day.

A significant downward revision of quarter 1 GDP was expected and priced into the markets. Remember this was the second print of the number, not the first.

Edited by Sebastian

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That was the excuse for all the previous rises but yesterdays was on the back of the FED saying the US economy was stronger than expected (obviously did not see the revised GDP figures!) and that points towards the rates not being cut.

I have posted several times about the odd behaviour of the DOW but have now admitted defeat in trying to understand it at the moment.

The Dow is difficult to understand right now. What we can say is that it is very difficult to stop a bullish gallop of this nature. The economic fundamentals don't back it up, but the appetite for risk out there is enormous right now, so the warnings are falling on deaf ears. The odd thing is that the US economy is most likely on the way back, so if this is the case, will the DOW continue to rise?

The most likely trigger for a near-term reversal will be a stock market crash, one sizeable enough that risk tolerance levels will be reduced for a prolonged period of time.

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interesting comments from a gold site...

http://goldnews.bullionvault.com/node/853

The Fed remains trapped between a collapse in real-estate prices and a rising cost of living, in other words.

Doing nothing remains the most likely Fed choice, says Neal Soss, chief economist at Credit Suisse in New York and a former advisor to Fed chairman Paul Volcker.

"If you don't quite understand how the economy's functioning, then there's a temptation to take the view that anything you do to interfere could turn out to be perverse," Soss told Bloomberg overnight.

But with inflation ticking higher, leaving interest rates on hold would in fact mean cutting the real rate of interest – and investors the world over would be likely to buy gold as a defense against the resulting loss of purchasing power. (Click here to read more...)

Edited by dnd

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What complete and utter shite! Your persistent ramping of the US economy leaves very little to the imagination...

Errr...I think what Sebastian wrote was actually pretty accurate. It's not particularly what I expect or would like to see but it does seem to be the case as far as the info goes at the moment.

I have to say I think the whole thing is a sham anyway - economists were forecasting something like 1.7 or 1.8% growth for Q1 when the 1st lot of results came out IIRC so 0.6 should be a huge issue...but no, they don't actually care. Money is still floating around out there so why worry.

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Do we need a world recession to ensure that china learns its lesson about selling us all that lovely cheap tat?

Oh hang on its us who need to learn the lesson about buying cheap tat at the expense of our own manufacturing base.

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The Dow is difficult to understand right now. What we can say is that it is very difficult to stop a bullish gallop of this nature. The economic fundamentals don't back it up, but the appetite for risk out there is enormous right now, so the warnings are falling on deaf ears. The odd thing is that the US economy is most likely on the way back, so if this is the case, will the DOW continue to rise?

The most likely trigger for a near-term reversal will be a stock market crash, one sizeable enough that risk tolerance levels will be reduced for a prolonged period of time.

this reminds me of 1929 when the economy was in reccession before the pig even crashed

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...

Apart from the report itself, recent indicators point to employment and output in the manufacturing and non-manufacturing sectors as expanding in April and add to this the appetite for investment seen through the rise in the DOW and it points to a much healthier outlook for this quarter in the US.

I have recently read an article that the US employment numbers should be treated with caution, since certain projection and smoothing

methods are to produce them (no surprise, of course). The article claimed something like rather than the recently claimed 80,000

more jobs the non-adjusted number would have been 300,000 jobs less.

Unfortunately, I can not recall where I read this. Moneyweek, possibly? Anyway, could we be in for a surprise to the downside on the

US job market anytime soon (once the real numbers find their ways through the statistics)?

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Errr...I think what Sebastian wrote was actually pretty accurate. It's not particularly what I expect or would like to see but it does seem to be the case as far as the info goes at the moment.

I have to say I think the whole thing is a sham anyway - economists were forecasting something like 1.7 or 1.8% growth for Q1 when the 1st lot of results came out IIRC so 0.6 should be a huge issue...but no, they don't actually care. Money is still floating around out there so why worry.

While the dollar declined, the DOW continued to rise. Much of the DOW rise was owing to expectations for probable interest rate cuts down the line, but as time has progressed these expectations have been dampened, yet the DOW has not retreated. It is worth keeping an eye on currency markets right now because the dollar is very close to a multi-year high against the (global-market-funding) yen, which beggars belief when you consider how the US currency is close to 30 year lows against several other currencies. The Canadian dollar has appreciated almost 16% against the yen since the beginning of March alone. While the Canadian economy has risen impressively in recent months, dramatic currency movements could prove to be its downfall because it is very much an export-oriented economy. A 16% rise in one currency over another in a year would normally be deemed unusual and excessive, let alone in a couple of months. Speculation is at a scary level across all financial markets at the moment and unless we see an orderly retreat soon, we could be facing into the abyss (major crash).

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I have recently read an article that the US employment numbers should be treated with caution, since certain projection and smoothing

methods are to produce them (no surprise, of course). The article claimed something like rather than the recently claimed 80,000

more jobs the non-adjusted number would have been 300,000 jobs less.

Unfortunately, I can not recall where I read this. Moneyweek, possibly? Anyway, could we be in for a surprise to the downside on the

US job market anytime soon (once the real numbers find their ways through the statistics)?

The number of new jobs being added this year has slowed significantly against the same period last year, obviously because of an economic slowdown but it is worth noting also that the unemployment rate has recently been running at historically low levels of 4.4% to 4.5%. If jobs were actually in decline and they were not being picked up by the official measure, we would surely know because the unemployment rate would be on the way up. The number of new jobs previously reported is revised all the time and each month the figures come out, we not only get the jobs total for the previous month, but also revisions to the number for the two prior months.

As a rule of thumb, it is said that the US needs to create an average of 150,000 new jobs every month if it is to grow at its potential average growth rate. The average this year is well below that, which is consistent with the stumbling growth figures we have seen. There are separate employment indicators from each of the industrial sectors in the US, reported on a monthly basis, and these indicators are what the market uses as a guide when calculating the expected number of new jobs that will come from the official print. They can be wrong of course and for that reason the only number that is taken as gospel by the markets is the official nonfarm number, which as a consequence is the most important market indicator of the month.

Edited by Sebastian

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Couldn't have put it better myself: the whole thing is a sham so there's no point in debating the spin and deceit being put forward by the FED or Wall St. IMO.

The FED are indeed stuck and IRs will probably remain on hold, but keep your eyes on the US gov't bond markets, especially on the long end, as this is where they'll do most of the fiddling.

Spot on, the US economy's already in a major recession though you wouldn't know it judging by the lies and spin.

My God, with M3 now running above 15% if you include all forms of credit, GDP of 0.6% is pitiful to say the least, and to those who think this is the turning point, think again 'cos you ain't seen nothing yet.

There will be no soft-landing, the world's economy is heading for depression and at a rate that will shock most of Wall St. into capitulation. Paper assets will turn to dust and Western property markets will go into meltdown...

Where is the evidence of a US recession? We are entering the final month of quarter 2, so current data is a more accurate barometer right now than quarter 1 GDP, even though GDP expanded in quarter 1, albeit marginally. In a number of months this same Fed may well be taking the plaudits for how they managed the US out of economic slowdown during a period of rising inflation. And just whom is going to fiddle the bond markets?

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Yep, I'll vouch for that as it was widely reported that the BIRTH - DEATH model added a staggering 312,000 non-existent jobs to the figures.

Please study what's going on here as there's a very serious situation brewing over in the States and whatever you do, do not take the official line from the US FED and Treasury at face value. They're bluffing through their teeth and it isn't difficult to imagine why either if you care to dig a lot deeper than what the likes of CNBC are willing to tell you...

http://www.shadowstats.com says the US economy is already in recession. Elaine Supkis' blog, found by an HPC poster, http://elainemeinelsupkis.typepad.com/money_matters - is brilliant this week, and has many parallels to the UK.

Edit: Shadow Government Stats data: http://www.shadowstats.com/cgi-bin/sgs/data

sgs-gdp.gif

Edited by LargelyIgnorant

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http://www.shadowstats.com says the US economy is already in recession. Elaine Supkis' blog, found by an HPC poster, http://elainemeinelsupkis.typepad.com/money_matters - is brilliant this week, and has many parallels to the UK.

Bloody hell - she makes Peter Schiff seem bullish.

http://www.dissidentvoice.org/2007/05/are-...reat-depression

The second half is when the stocks collapse like they did in 1974.

Then we see a 5 year bear market.

Housing markets ALWAYS take 5+ years to recover from a bubble.

But this last bubble launched by 1% Fed interest rates will take 20 years to recovery in most places.

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Where is the evidence of a US recession? We are entering the final month of quarter 2, so current data is a more accurate barometer right now than quarter 1 GDP, even though GDP expanded in quarter 1, albeit marginally. In a number of months this same Fed may well be taking the plaudits for how they managed the US out of economic slowdown during a period of rising inflation. And just whom is going to fiddle the bond markets?

with the US putting in 0.6% and sub 3% growth over a whole year its not pie in the sky to expect a US reccession soon. Reccessions are a regular occurance that allow the economy to breath, and with growth so week before anything significantly bad happening (apart from the early stages of a RE bubble burst) prognosis looks really really bad IMO.

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with the US putting in 0.6% and sub 3% growth over a whole year its not pie in the sky to expect a US reccession soon. Reccessions are a regular occurance that allow the economy to breath, and with growth so week before anything significantly bad happening (apart from the early stages of a RE bubble burst) prognosis looks really really bad IMO.

hi domo,

I suppose coming off the back of a pathetic 0.6% growth rate in quarter one, the signs would not seem to be encouraging.

But over the past month or so, the economy is beginning to see some promising signs, away from the troubled housing sector.

1) The manufacturing sector grew at its fastest pace in 11 months in April. Tomorrow we will learn how it performed in May, when the ISM index is released. The services sector is also expanding at a faster pace.

2) The labour market has remained tight, even during the recent slowdown, so people have not been losing their jobs. If an economic slowdown was to lead to a recession, we would now be seeing evidence of it in the labour market. Again, recent business indicators point to increased orders for firms and thus greater prospects for employment.

3) Personal income is increasing at as fast a rate as ever. That again points to a tightening labour market, where employees can demand higher wages. If the economy was in reverse and headed for a recession, we would see income being capped more easily by companies.

As an aside, the weaker dollar makes US industry far more competitive right now, both for meeting domestic and international demand. The fact that they are still recording a massive trade deficit points to an economy that has not yet adjusted and does not seem to be in a hurry to do so. Were a recession upon us, you can be sure US companies would be looking elsewhere to sell their products or providing substitutes for the more expensive imports US consumers are currently buying - thus taking advantage of the exchange rate.

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