US economy improving?

During the last months we have pointed out that we believe in a stabilisation of the US economy to a low growth trajectory. Our expectation has been met. The recently announced GDP growth figure for the US economy in Q1 with an annualised QoQ rate of 1.8% was below market expectations. Tax hikes in the US and the sequester have been the reason for this low growth rate as previously predicted.

However, we argued that the housing sector is very important for the US economy. The S&P Case-Shiller Home Price Index was published with a 12.05% increase YoY change which was above expectations. This is an additional sign that the housing sector is improving significantly. The housing sector together with the fracking industry revolution are important sectors for job creation in the US.

Other indicators have been published like durable goods new orders and the consumer confidence Index. These indicators came out better than expected and both have improved further. Consumer confidence is very important because consumption is the biggest component of US GDP. The recently published ISM (Purchasing Manager Index) has been the only indicator which has been disappointing and indicates contraction rather than expansion in the economy. Therefore we have to watch the next ISM very closely, which comes out on 1 July.

We could argue that the GDP figure for Q1 was backward looking while all other indicators that we have mentioned give us an indication of future economic activity.

If the ISM can potentially improve again, we should consider that this is a sign of further improvement in US GDP growth rather than a stabilisation, with all the consequences of the Fed policy, especially earlier tapering and as a result higher yields in the US. The US equity market and gold should not benefit from this scenario.

MIG Bank