FX FUNDAMENTAL ANALYSIS Chart 1 - US GDP (quarterly in green and year on year in red
Predicting GDP is as difficult as ever, it seems. Te Atlanta Fed a few years ago developed a real time forecasting tool, and although this is extremely erratic during the quarter, the model seems to be as good as any as the quarter draws to a close. Currently, this model predicts that the US economy grew by 1.8% annualised in Q1 which would result in year on year growth of about 2.7% (the base effect was quite low in Q1 last year). Overall, this would seem to be ok. Not robust but also not recession like.
However, add on tax cuts and the boost
to Chart 2 - Outstanding consumer credit as a % of GDP the economy that this
is supposed to generate, and the resulting jump in the Government deficit, surely growth should be stronger? Furthermore, a 10% or so drop in the US Dollar in the last year should also have helped. Overall, we do not think that the US economy is performing that well given the boost that should have come from a
combination of weather related Chart 3 - US Retail sales “Control Group”
of current consumption. Tis is a more complex situation than simply looking at debt. Personal income excluding transfer payments from Government
(social security and
medical) is struggling, and a recent report shows that 42% of Americans can expect to retire on $10,000 or less. Te inequality in the US is hurting the economy, and we see no policies that are likely to improve this; in fact, they may make matters worse.
26 FX TRADER MAGAZINE April - June 2018
Given the recent tax cut and the extremely positive sentiment surveys and bullish start to the year for the equity market, it must surely come as a surprise that retail sales are not doing better. Chart 3 shows retail sales excluding volatile items like auto and gasoline sales which remains below the high seen in November. The year on year rate, having accelerated in the second half of last year, is softening now.
rebuilding, tax cuts and Government spending, the weak Dollar and the increase seen in consumer debt and record low savings rate.
Of course, we could be just being too bearish, and the US economy may just be about to accelerate. Perhaps the tax cuts are about to kick in with a lag of a quarter or two? Perhaps corporate profits, which are indeed rising quite strongly, are about to lead to a wave of capex and either job creation or wage growth which will alleviate the stretched condition of the average household and lead to a surge in
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