Yesterday, data from the U.S government showed that the economy grew at a slower pace than expected. The data showed that in the fourth quarter, the country’s GDP expanded at an annual rate of 2.5 percent. This was slightly lower than the consensus estimate of 2.6 percent. This was also lower than the third quarter GDP growth of 3.2%.
The reason for the slow growth during the quarter was a build up on inventory among firms. With a lot of inventories, firms had less need for new purchases during the quarter. The data from the commerce department showed that the business investment grew by 6.6%, which is lower than last quarter’s growth of 6.8%.
The reduced investment, and use of inventory during the quarter could lead to an acceleration of growth in the first quarter. This could happen also because companies now have more money following the passage of Trump’s tax reform. However, this growth could be hindered by the prolonged snowfall in the quarter. Extended snowfall and other weather-related events tend to affect the growth of the economy.
The slow growth data came at a time of increased optimism about the economy. In a testimony to congress on Tuesday, the new Fed chair reaffirmed Janet Yellen’s thinking that the economy would continue improving throughout the year. He also reaffirmed that this growth could lead to a higher rate of inflation which could reach the Fed’s target by early next year. It will then flatten or fluctuate between these levels.
In his statement on Tuesday, Powell indicated that the Fed could in fact raise interest rates by up to four times this year. This was higher than what most analysts had expected. They had expected the Fed to raise by three times.
Still, there are concerns about the health of the United States economy. A clear indicator about this is the price of government bonds. Last month, the 10-year approached the 3.0% mark while the 30-year soared to above 3.2%. The rise in bonds is an indicator of the investors’ fear about inflation, the health of the economy, and the increased deficits.
The data released this month showed that other sectors of the economy were slowing down. Last month, retail sales, home sales, durable goods orders, and industrial production declined while the trade deficit, which Trump likes to measure the economy with widened as the exports fell. A strong dollar will not help the struggling export industry.
A silver lining was in the consumer confidence which soared to the highest level since 2000.
Last month, the dollar ended the losing streak with the dollar index rising by more than a percentage point. The recent rally came after the Fed chair sounded more hawkish than expected during the congressional testimony.
Last month, the dollar was up 2.25%, 4.49%, 1.51%, and 4.10% against the British Pound, Australian Dollar, Euro, and Canadian Dollar respectively. The rise ended a significant drop in January.
This month, traders will pay a close attention to economic data and try to align it with the thinking of the Federal Reserve. Increased optimism could prompt more hikes scenario while a disappointment could lead the dollar lower.