US recovery 'made of sterner stuff' this year

The US GDP probably advanced by at least 3% in the first quarter this year, despite higher taxes and a hike in gasoline prices, Paul Dales, an analyst with Capital Economics, noted.

"It is already becoming clear, however, that growth will not be as impressive in the second quarter as the US appears to be heading into a spring slowdown for the fourth consecutive year," Dales said in a market note.

Growth in emerging markets is still closely tied to that of the world's biggest economy so any slowdown in the US is likely to resonate in developing countries.

US stocks fell last Friday when non-farm payrolls posted much smaller growth than expected, at 88,000, for March. The S&P 500 had its worst week this year as economists had forecast that the US economy would create 200,000 jobs last month.

Dales called the March figure "worrying," stressing that it represented a third of the size of February's rise in job creation and "the smallest gain since June last year."

But overall, the US economy held up remarkably well in the first quarter, said Dales, who admitted that he initially thought that growth of just 2% or 1% "seemed a distinct possibility."

"Given the obvious headwinds households have had to deal with, the biggest surprise has been the recent strength of consumption," he added.

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Real personal spending rose by 0.3% month-on-month in February, which means that even if it was flat in March, consumption as a whole will still have risen at an annualized rate of 3.2% in the first quarter, the fastest since 2010.

Another factor pointing to a stronger US economy this year is the fact that "there are very few signs that the housing recovery has come off the boil," according to Dales.

DON'T GET NEGATIVE

The big differences this year compared to previous years, besides the housing markets recovery being well entrenched now, are the fact that households have made much more progress in cutting debt and lending by banks to both households and businesses is increasing "at a decent rate," Dales said.

"This suggests that the economic recovery is made of sterner stuff than in recent years," he added.

Jim O'Sullivan, chief economist for the US at High Frequency Economics, says that investors should not get negative on the outlook of the US recovery, although he will be "watching jobless claims closely following their surge in the last two weeks."

"We believe the surge mainly reflects seasonal adjustment challenges, rather than the start of an uptrend," he wrote in a market note.

On non-farm payrolls, O'Sullivan believes the slowdown in March is "mainly due to exaggerated strength earlier" and that "the trend is still at least 150,000 per month – probably higher – which is more than enough to keep unemployment declining."

High Frequency Economics forecasts that US GDP expanded by 3.5% in the first quarter and that it would slow down to 2.5% in the second.

The US Bureau of Economic Analysis will release an advance estimate of first-quarter GDP on April 26.

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