US GDP Disappoints, Jobless Claims Rising

Published by Filipe R. Costa on Thu, 26/05/2011 - 15:44
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The Bureau of Economic Analysis reported today that US GDP grew at an annual rate of 1.8% in the 1Q. The rate was unrevised and disappointed investors that were expecting a 2.1% growth. Initial jobless claims  were reported at 424k following last week 414k value. The market was expecting initial claims to fall to 400k. The Department of Commerce said that after-tax corporate profits fell at a rate of 0.9% in the 1Q after rising 3.3% in the last quarter of 2010. This was the first drop in two years.

The reported data shows that the US economy is cooling a little. GDP is growing at a slow rate, although some expect it to pick up to 3 - 3.5% in the second half. Jobless claims have been constantly disappointing and above 400k, and corporate profits may be suffering because of material cost increase and lack of consumer spending. Companies are not hiring enough and oil and other basic material prices have been quite high this year, smashing company profits.

In recent days we have been assisting to range trading in equities, with a lack of direction. In fact that has been the case so far this year. Equities rise for a while but at a certain point there is a lack of value to keep the bulls in the market. Basically company fundamentals have not changed much in the last six months and economic conditions are not picking up at the expected pace. After being up 10% a few days ago, it is understandable that the Dow may drop some of the gains. In order to assist to a new rally in equities an surpass the 13,000 level we need to assist to a good array of 2Q corporate profits and see employment data showing a real improvement.

If commodities ease a little, business in general can benefit, otherwise the FED may be in a difficult situation like the BoE: to rise or not interest rates. That is a difficult call when growth rates are not good enough but inflation surpasses 2%.