Seeking Alpha
Macro, economy, long only
Profile| Send Message|
( followers)  
It was old news that the economy slowed by more than a little in the first quarter. In fact, it slowed by quite a bit more than initially thought.

The second of three updates on 1Q GDP was released on Thursday, and revealed that growth was only 0.6%. That's down from the earlier estimate of 1.3%, based on annualized, real rates of expansion. The notion that the economy expanded at a pace that was less than half as fast as the government previously said puts the idea of an interest rate cut back on the table. Or does it?

Nothing's quite so simple these days with monetary policy in connection with trying to second guess the path of least resistance in the dismal science. Recent economic data has suggested that maybe the economy's not as weak as some said.

For example, last week's report on April's new home sales showed a rise of nearly 11% over March, suggesting that the worst of the real estate fallout may be past. Meanwhile, April's durable goods update offered mild encouragement after stripping out the volatile aircraft orders. Another bright spot was industrial production for April, which was unambiguously buoyant last month.

Still, there's no shortage of things to worry about, starting with the upward bias in jobless claims and the opposite occurring in non-farm payrolls.

You can see anything you want in the sea of economic reports that routinely spill out on the digital plate of news and commentary. But by one influential guess on what's coming, the status quo on monetary policy looks set to continue. Fed funds futures continue to forecast a steady-as-she-goes outlook for the central bank: through November contracts, 5.25% remains the consensus prediction on the mother of all interest rates.

Thursday's GDP update certainly won't increase the pressure for hiking rates. Then again, given the mix of good and bad news in recent weeks, one could argue that keeping rates steady has a certain appeal until something more definite comes along.

But while the past offers clarity, it's the future that complicates the analysis, and it's the future that the central bank must focus on. By that reasoning, there's still plenty of room for play in what GDP in the 2Q will bring, to say nothing of the narrower reports that will precede it in the coming weeks.

"We're looking for a gradual firming in growth," Michael Feroli, an economist at JPMorgan Chase & Co., told Bloomberg News on Thursday. "The inventory situation is a lot more favorable, and the drag from housing will be reduced.'' And there's more who think like that. Lots more.

Indeed, if one steps back and considers the broader context, it's easy to conclude that in a world still awash in liquidity, without an overt, immediate threat to consumer spending and corporate profits, the economy will continue to chug along. It may not impress, but for the moment that's of no consequence, as all the bulls need to see is a modest expansion.

After all, the S&P 500 (SPX), hit an all-time high on Wednesday, and was up in early trading on Thursday, despite the GDP news. The 1Q is ancient history for traders eager to find reasons for why the first three months were an economic anomaly. In short, it's going to take a lot more than bad news in the rear-view mirror to bring a material change in Mr. Market's sunny disposition and derail the momentum.

Source: GDP Update Fails to Derail Market's Momentum