Q2 American Economy: Riding On The Back Of Surging Private Investment

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Monday, May 07, 2018 / 9:45AM / Proshare Research 

Slacks produce negative shocks to productivity, eventually affecting government revenue for the period under view. Moreover, when such slack are rooted in climatic factors, there are limit to how much policy recalibration can overturn such slides in productivity. Thus it is significant to see productivity defile such exogenous risks. 

Such was exemplified in the American economy at the end of the first quarter of 2018; powered on to grow by 2.3% beating consensus estimates of 1.9%, however lower than the previous quarter growth of 2.9%. 

 

Fig 1: American GDP

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Source: Bureau of Economic Analyses 

 

Personal Consumption

Personal consumption expenditure (PCE) grew at a more decelerated pace of 1.1%, largely due to the plunge in house hold demand for durable to 0.26%. Evidently a far cry from 1.67% growth witnessed in the previous quarter, though the demand for services in the same quarter slipped by 0.09% to grow at 0.97%. 

The health of PCE was as a result of the high base accompanied in the usual fourth quarter, which can be attributed to the Christmas celebration and new shopping. More importantly PCE was not entirely immune from structural shocks such as climatic factors, even though disposal income grew from $ 136 billion in the previous quarter to $222.1 in the quarter under view.         

 

Fig 2:  Private Investment in the United States    

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Source: Bureau of Economic Analysis

 

Private Investment 

On the other hand private investment rose astronomically by 7.3%, thus offsetting the weakness in PCE.  Private investment rose on the back of strong fixed investment, non-residential investment and structures. Thus, the tight labor condition, with the labor market nearing full employment is not far-fetched from the on-going strong private investment. 

The current dynamic pinpoints to the fact that the well- being of the labor market can best be influenced by positive private investment.

 

Government Spending (US) 

 Fig 3: The American Government Spending

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Source:  Bureau of Economic Analysis

 

Government expenditure in the first quarter slowed down from 3.2% in the last quarter of 2017 to 1.7% in the first quarter of 2018.  The slowdown in government streamed across board, except non-defense spending. The underbelly performance was more evident in the federal and national defense spending, as both components experienced a sharp decline from earlier 3.2% and 5.5% in the previous quarter to 1.7% and 1.8% in the first quarter of 2017, respectively. However, non- defense spending rose by 1.6% creeping out of the negative experienced in the last quarter of 2017. 

The risk off and risk on emanating from the budget tussle in Capitol Hill (Congress) have affected growth in federal government spending and slowed down the pace of defense spending too.      


Net Export

The Bureau of Economic Analysis has not made available the complete net export picture in its recent publication.  There was a deceleration in import from a high base of 14.1% growth position in the last quarter to just 2.1%, coupled with mild growth in export of 4.3% in the first quarter in 2018 compared to 7% at the end of the last quarter of  2017.

 

Fig 4: American External trade

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Source:  Bureau of Economic Analysis

 

Certainly the current fog hovering around global trade at this point is missed, given the blurry picture of net export. However early data suggests a pruning in trade deficit.    The American economy accounts for 20% of GDP and the Dollar still remain the dominant exchange rate anchor as it accounts for 20.3% of exchange rate frame.  

Obviously, it will be interesting to see how the current policy choices will impact the global economy. More interestingly with the policy targeted at eroding trade deficit and accommodating more expansionary spending at the same time. 

Even though the on-going  improvement in the well-being of the nation remain bold, the jilters in global trade, possibility of inflation deviating and concerns surrounding the 10 year American risk- free instrument will linger on for some time. Certainly, there are no easy choices in economics any longer.  

 

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