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View the article online at http://citywire.co.uk/wealth-manager/article/a753739

US GDP tumbles to surprise 1% fall in Q1

by David Campbell on May 29, 2014 at 15:06

US GDP tumbles to surprise 1% fall in Q1

US GDP took an unexpectedly severe tumble in the first quarter according to the second and more complete cut of the data, falling 1% over the period, a much steeper fall than the initial estimate of a 0.1% gain.

While the slide was also much deeper than the median forecast of a 0.5% fall, markets were happy to ascribe the difference to one-off factors, with the S&P 500 climbing 0.27% in early trading.

‘The downward revision is almost entirely because inventories were a much bigger drag on growth than previously thought,’ said Paul Ashworth, chief US economist at Capital Economics.  

‘Inventories subtracted 1.6% from overall GDP growth in the second estimate, compared with a more modest 0.6% in the first estimate. But that bigger first quarter drag means that we are likely to see a bigger bounce back in the second quarter.’

Having moved out over the course of the morning, benchmark US treasuries were marginally tighter, with the 10-year down from a day high of 2.44% to 2.43%.

Following one of the bitterest winters on record in the US and much more positive recent data, Capital Economics said its forecast of second quarter US GDP growth of around 3.5% remained unchanged.

Markit chief economist Chris Williamson added: 'The likely rebound in the economy in the second quarter will fuel expectations that the Fed may start to raise interest rates earlier than the current widespread expectation of a June-July hike. However, the true acid test of the resilience of the economy to the taper so far, and its ability to cope with higher interest rates, will be how the economic data flow settles after the second quarter rebound.

'That’s something which won’t become clear until the fall.'

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