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U.S. Economy Improvement in the Second Quarter?

Sequester Effects May Kick In

Written by Swagato Chakravorty
Posted April 2, 2013

We’re heading into the second quarter now, and a major question seems to be whether the stock market and the larger economy are going to keep doing as well as they did over the first quarter.

Major central bank meetings in Japan and Europe, as well as fresh figures from jobs, automotive sectors, and manufacturing should all present plenty of material for analysis.

CNBC reports:

"Through the first quarter, there was the dual support of renewed liquidity, in addition to growing optimism that economic growth would improve throughout the year," said Gina Martin Adams, institutional equities strategist at Wells Fargo Securities. "Liquidity is still there, and it's still supportive on the growth side…but the growth story gets a little more questionable."

As April gets underway, it’s clear that both the Dow and the S&P 500 are riding high—record highs, in fact. The latter was up 0.8 percent over last week, and it is up 10 percent overall for Q1.

As for the Dow, it was up 11.2 percent, which is its best performance since 1998. Even the Nasdaq gained 8.2 percent over Q1.

However, all good things must come to a close. That’s why analysts are raising questions over just how long this bull run can last. Moreover, as the Fed continues its stimulus program, the question that appears to loom large is: how many of these fantastic figures are the consequence of a genuine and systemic economic improvement, and how much of it is a side effect of the Fed’s money printing spree?

As far as jobs are concerned, the expectation is that unemployment will remain around 7.7 percent, with some 197,000 jobs projected to have been added over March to nonfarm payrolls, according to Thomson Reuters.

That’s a bit lower than February’s 236,000, but we’re open to surprises. Moody’s, via Mark Zandi, suggests an addition of 205,000 jobs and an unemployment rate of 7.8 percent. From CNBC:

"For the payroll numbers, we're at a two-handle so it feels good and would be consistent with the jobs gains we've been getting over the past three to six months. That's strong enough growth, and if sustained would push the employment number lower," Zandi said.

Bear in mind, though, that the effects of the recent sequester have yet to really be reflected in these figures. That’s exactly why Zandi has a gloomier outlook, with federal spending projected to decrease by more than $40 billion over the course of the current fiscal year.

Jobless claims are quite likely to continue rising, and all things considered, those effects won’t really be seen until later this year—think June-August. Thus, Zandi sees Q2 growth averaging around 1.5 percent after Q1’s near-2.4 percent rate.

Meanwhile, Bloomberg reports that U.S. consumer spending shot up over February by the most in five months, leading to a rise in consumer confidence over March. In terms of numbers, purchases rose 0.7 percent while consumer sentiment went up to its highest in four months.

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It appears that the buoyant stock prices, rising home values, and other forces are combining to help households recover from the aftermath of the recession. Certainly, given the increase in the payroll tax (by 2 percentage points) and the recent sequester, something is helping consumers withstand the buffeting.

Bloomberg reports:

“Consumers discounted the administration’s warning about economic catastrophe following the cuts in federal spending, and consumers have renewed their expectations that job gains will accelerate in the months ahead,” Richard Curtin, the sentiment survey’s chief economist, said in a statement.

All of this is good news for the global economy in general. Last Friday, Asian stock markets crept up, while the much-battered euro experienced some stability after banks in Cyprus reopened normally.

The Easter weekend saw several markets closed, including those in Australia, Hong Kong, and Singapore, which kept trading volumes low. However, there is a general sense of optimism after a decent Q1 performance, and key to this sentiment is the ongoing U.S. recovery.

From Reuters:

"The basic scenario for the second quarter will be for the U.S. to maintain its economic recovery trend, which is key to sustaining hopes for improvement in global growth," said Junya Tanase, chief FX strategist at JPMorgan Chase Bank in Tokyo.

Of course, the U.S. tends to weaken somewhat in Q2, and that will no doubt be a focus for all markets. Generally speaking, though, all markets will be watching the forthcoming data closely.

 

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