Prague Twin

Monday, April 30, 2007

Slowing Growth

First quarter advanced estimate of GDP growth in the U.S. came in at an anemic 1.3%. This was far less than the consensus 1.8% estimates, or the more pessimistic Briefing.com estimate of 1.5%. This is an advance number, so an upward revision is possible.

More troubling than the slowing growth is the ever increasing inflation pressures. The PCE chain deflater (which is the Fed's preferred measure of inflation) rose to 4.0% which, like the GDP figure, surprised most analysts.

Roger asks why European rates of growth are a concern. Well, first of all, this is not a European rate of growth whatsoever. The Euro area is outpacing U.S. growth currently (Q4) and with these numbers, the gap is sure to widen.

But more importantly, with the dollar weakening, and inflation pressures much stronger in the U.S. as a result, a slowing economy will create other problems, namely budgetary ones. Currently, the Public Debt in the U.S. is over $8.8 trillion and is growing at well over 5% per year, amounting to nearly 70% of GDP. The Bush tax plan seeks to spur economic growth by reducing the tax burden of the investor class. This growth, then, will increase tax revenue despite lower tax rates. Many, such as Alan Greenspan, suggest that there is no way to verify weather or not this tax plan is actually the catalyst for growth that the supply-siders claim. But more importantly, with reduced taxes, if the economy underperforms, the debt will be sent soaring. Likewise, if inflation outpaces economic growth, the benefits of that growth are erased.

In short, sub-European rates of growth in the U.S. are problematic because the budget is dependent on high rates of growth to sustain itself. Europe, with higher taxes, is less dependent on growth to meet their budget targets. Furthermore, inflation in the U.S. is outpacing inflation in the Euro zone by nearly 35%. This makes greater economic growth in the U.S. even more vital if we are to enjoy its benefits. Right now we may be seeing the beginning of the dreaded stagflation which has been at the doorstep for quite some time.

Finally, as markets continue to react overoptimistically, the potential for a much more disruptive correction which can cause a ripple effect around the world increases daily.

2 Comments:

  • Dow is headed for 14,000 despite the slowing growth and increasing inflation.

    When I turn CNBC on, the traders, the analysts, the commentators, all seem to say everything is fine.

    By Blogger reality-based educator, at 12:44 PM  

  • That is when you sell. It is just when everyone starts thinking one way that things go the other way.

    If there is one thing I have learned from trading.....

    By Blogger Praguetwin, at 1:40 PM  

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