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Optimism Rises For Q1 GDP Growth Expansion

 March 16, 2012 01:32 PM


A run of positive economic news has been driving the markets to levels higher than prior to the credit crisis of 2008. The spate of news has raised hopes of gross domestic product growth rate expansion for the first quarter.

The optimism for the first quarter GDP growth rate expansion comes on the back of consumer price index coming in line with economists' predictions. Earlier this week, Government retail sales data for February also came in line with expectations. This apart, there has been marked improvements in job market.

More than the February retail sales, markets were a bit surprised by the upwards revision in January retail sales. Both the data supported optimists' view for strong momentum in first quarter spending. Auto sales reclaimed lost ground in February, also boosting optimism level. The rebound follows a fall in of the same magnitude in January. Although automobile and consumer durable goods provide small contributions to GDP, their contribution assumes importance in the current economic moderation.

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Yet, there are concerns that could potentially have an unfavorable impact on GDP. Higher gasoline prices will remain a concern for household spending. Trade deficits could be a drag for real GDP growth rate for the first quarter. However, business fixed investment and consumer spending are likely to offset more than the drag to record growth.

The real GDP for the past 10 straight quarters has been positive. In the fourth quarter of 2011, three percent GDP was recorded. Given the current situation, no one has any second thoughts about the first quarter GDP growth rate falling below the fourth quarter. But optimism for an expansion is gaining ground on positive indicators. The current expectation is for GDP to grow at 1.5 percent for the first quarter. The expansion for GDP is seen from this level.

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For three straight months, nonfarm payrolls have increased over 200K. In a research note to clients, Wells Fargo projects the rate of expansion to remain moderate. Though household financial leverage is seen receding, Wells Fargo analysts see continued efforts to repair battered balance sheets will limit growth in consumer spending in the near future.

Inflation remained in check as PPI and CPI rates have retreated during the last few months, But gasoline prices are likely to keep inflation rates elevated longer.

The Federal Reserve comments on growth also assume significance. The Fed is not averse to keeping the funds rate at exceptionally low levels at least until late 2014. The comments come on the heels of modest growth and relatively benign inflation. While there are hurdles for a third round of Quantitative Easing or QE3, the Fed engaging in another round of QE cannot be ruled out if the economy needs.

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