us gdp accelerates above 7%

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    Back on 22/10, I made some comments concerning the likely future direction of the AUD /USD particularly in the period following the release of the US GDP results.

    Those results are now out. However, whereas on 22/10, I was anticipating a 5.5-6% growth spurt in Q3 GDP (the highest since late 1999), the actual results that came in overnight far exceeded even my own expectations.

    To place this all into the appropriate context:
    1)
    GDP (whether USA or anywhere else, for that matter) is driven by a complex inter-action of factors which are determined by reference to behaviour, personality, choice, intervention, Government activity, natural events, etc;
    2)
    regardless of the levers driving GDP, it is a question of just how is the GDP performing and what this may mean for the overall well-being of the economy;
    3)
    in the USA case, I was expecting 5.5-6%, what I got, however, was 7.2%, the highest in 19 years (ie: since 1984 - in the midst of the Reagan years);
    4)
    the increase in current (ie: today's) dollars (unadjusted for inflation, or the implicit price deflator) was 9%;
    5)
    Final sales of domestic product grew 7.8%, the best in 25 years (ie: since 1978);
    6)
    Real disposable income increased 7.2%;
    7)
    Consumer spending increased 6.6%, the best since 1998;
    8)
    purchases of durable goods rose 26.9%, the best since 1988;
    9)
    spending on non-durable goods rose 7.9%, the best since 1976;
    10)
    investments in equipment and software rose 15.4% - "the biggest swing in capital spending since the first quarter of 2000. It's the fifth increase in capital spending in the past six quarters following six straight quarters of declines";
    11)
    Inventories fell $35.8 billion, "subtracting about 0.7 percentage points from growth";
    12)
    exports rose 9.3%, imports rose 0.1% and the trading gap closed with "net exports add(ing) about 0.8 percentage points to growth";
    13)
    Government spending increased 1.3% whilst "(d)efense spending was flat";
    14)
    inflation accelerated, with "(t)he gross domestic purchases index r(ising) at a 1.9% annual rate after rising 0.4% in the second;
    15)
    the "core" inflation rate "accelerated to 1.5% from 0.8%; and
    16)
    bond prices fell and 10-year bond yields increased.

    The next move in US interest rates will, therefore, be up, with the strong impression now that both USA and UK official rates will now rise in November.

    USA rates are also now likely to rise rapidly in order to return the USA to a neutral rates setting (potentially, at a lower neutral level than was previously envisaged by most commentators).

    The real challenge for the RoW and, in particular, Europe, is whether they will now be able to match the acceleration in USA economic activity, along with the stirring murmours of Asia.

    For Australia, the concern will be just how quick the AUD will become volatile in the months ahead.

    Whilst the AUD has gone further than what I had originally expected it is nonetheless rather fragile and it will not take much of a pricking of the bubble to drop the AUD 4-5 cents in value.

    After peaking out @71c overnight, the AUD is currently trading @70.38c.

    I am, therefore, sticking with my 3-6 month currency range.

    -----------------------------------------------------
    Subject re: 70c-what a horror story!
    Posted 22/10/03 09:09 - 110 reads
    Posted by Grant62
    Post #36684 - in reply to msg. #36683 - splitview

    Hi Dave,

    US interest rates will rise a lot further than Australian interest rates, and may well rise a lot sooner than most people suspect.

    The timing to the next upleg in the US$ (downleg in the A$) is likely around 30/10 (31/10, our time) when the US will report 5.5 - 6% Q3 GDP (highest since 1999), and an acceleration in the underlying momentum.

    All the best,
    Grant62


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    CBS MARKETWATCH REPORT
    ECONOMIC REPORT

    GDP surges 7.2%, fastest in 19 years

    By Rex Nutting, CBS.MarketWatch.com
    Last Update: 1:08 PM ET Oct. 30, 2003


    WASHINGTON (CBS.MW) -- Powered by tax cuts and low interest rates, the U.S. economy expanded at a 7.2 percent annual rate in the third quarter, the fastest growth in more than 19 years, the Commerce Department said Thursday.

    The first estimate of real gross domestic product was considerably stronger than the 6 percent consensus forecast. The economy grew 3.3 percent in the second quarter. Read the full release.

    The growth rate is a testament to the power of monetary and fiscal stimulus to boost final demand. Final sales of domestic product grew 7.8 percent, the best in 25 years. Real disposable income increased 7.2 percent.

    The performance is even more remarkable considering that fewer Americans were employed in September than in June. Since World War II, the economy has never grown this fast without job growth.

    Real GDP is adjusted for price charges. In current dollars, nominal GDP increased 9 percent to $11.04 trillion.

    U.S. stock prices bounced a bit higher on the report. See Market Snapshot. Bonds fell, with the 10-year yield rising to 4.37 percent from 4.26 percent Wednesday. See Bond Report.

    In separate reports, the Labor Department said employment costs rose 1 percent in the third quarter, including a 1.5 percent increase in benefit costs. Higher health care costs are drag on job creation.

    Meanwhile, the Labor Department said the average number of initial claims for unemployment benefits over the past four weeks fell by 4,750 to 388,750, the lowest since February. See full story.

    Growth was balanced in the quarter, with strong contributions from consumers and businesses, spending and investment. Government spending and net exports also added to growth. The only negative forces were inventory accumulation and investments in business structures.

    Fiscal and monetary stimulus peaked in the quarter. Tax rebate checks and lower tax withholding increased disposable incomes, while 40-year low interest rates reduced borrowing costs and fueled cash-out refinancings, healthy increases in auto sales and record home sales.

    The question now is how sustainable the growth is. Will job growth resume to give consumers more income to replace the temporary boost from tax cuts and mortgage refinancings? Will capital spending keep expanding at a rapid rate? Will higher interest rates choke off the recovery? Will the weakening dollar reduce the large current account deficit and bring more production back to the United States?

    "These worries can now be put to rest," said Ken McCarthy, chief economist for vFinance Investments.

    "The reality that the economy is back and demand is now firing on all cylinders," said Brian Nottage, an economist for Economy.com. "Absent another debilitating shock, the fundamentals of the U.S. economy suggest that a self-sustaining recovery is underway."

    "The American economy is headed in the right direction thanks to President Bush's jobs and growth agenda," said Commerce Secretary Don Evans.

    "Mr. President, where are the jobs?" wondered House Democratic Leader Nancy Pelosi, D-Calif.

    "Economic growth without jobs is no help for the unemployed," said Rep. Pete Stark, D-Calif., the ranking Democrat on the Joint Economic Committee.

    "The stage is set for another sharp gain in the fourth quarter," said Steve Stanley, an economist for RBS Greenwich Capital. "The acceleration in spending on equipment and software is a particularly significant development and bodes well for future gains in employment, as firms are apparently feeling increasingly confident about their business prospects.

    Consumer spending surged ahead 6.6 percent, the best in more than five years. Led by strong auto sales, purchases of durable goods rose 26.9 percent, the best in 15 years. Spending on non-durable goods rose 7.9 percent, the best in 27 years. Spending on services increased 2.2 percent.

    Consumers also increased their investments in residences by 20.4 percent, thanks to record low mortgage rates during the summer months that boosted housing starts by more than 30 percent.

    Businesses did their part, as well. Investments in equipment and software rose 15.4 percent, the biggest swing in capital spending since the first quarter of 2000. It's the fifth increase in capital spending in the past six quarters following six straight quarters of declines.

    Investments in business structures fell 2.4 percent, the seventh decline in the past eight quarters. In all, nonresidential investment rose 11.1 percent.

    Businesses remain cautious, however. Inventories were reduced by $35.8 billion, subtracting about 0.7 percentage points from growth. Once businesses decide to replenish their stocks, production and employment should rise, economists say.

    The nation continued to run a large trade deficit with foreign economies. But the gap shrank in the third quarter, so net exports added about 0.8 percentage points to growth. Exports rose 9.3 percent while imports increased 0.1 percent.

    Government spending increased 1.3 percent, with equal contributions from the federal government and state and local governments. Defense spending was flat.

    Inflation accelerated slightly during the quarter. The gross domestic purchases index rose at a 1.9 percent annual rate after rising 0.4 percent in the second. Energy prices accounted for much of the increase, but even the core rate accelerated to 1.5 percent from 0.8 percent. The personal consumption expenditure index rose 2.4 percent with the core PCE index up 1.8 percent.

    Rex Nutting is Washington bureau chief of CBS.MarketWatch.com.

    CBS MARKETWATCH REPORT
 
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